coronavirus

CORONAVIRUS: Le Royaume-Uni fera face à Débâcle

4:41 PM

L’« immunité collective », stratégie risquée du Royaume-Uni pour lutter contre le coronavirus

Royaume-Uni: que est-ce que le gouvernement Britannique faire face au virus?

Depuis le début de la crise, Boris Johnson a choisi une approche calme et «décontractée» face au coronavirus.

Cliquez pour en savoir plus en en français: Matthew Feargrieve

As the World Health Organization (WHO) criticizes the UK government for burying its head in the sand, worrying signs increasingly come from the UK government, led by Prime Minister Boris Johnson.

We ask whether the UK's handling of the rapid spread of CORONAVIRUS is based on political posturing, rather than hard medical science.

The WHO estimates a mortality rate of 3.5%: this equates to 210,000 people in the UK who will die of the virus. And this is just a minimum figure.

Today, as the UK government seems to turn its back on global medial advice, more and more people join the demand for self-imposed social distancing and self-isolating.

Does this mean that the UK will ignore the lessons being learned about the virus in Italy and in China?

British Stiff Upper Lip

The UK government seems determined to carry on as normal. Schools, universities and places of work — including Parliament — will remain open. Trains and buses will stick to their schedules. Under no circumstances will cities be closed off and their populations quarantined in their homes. The UK populace is being told to wash their hands frequently and for at least 20 seconds on each occasion. They are told to blow their noses into tissue and bin it. They are told not to touch their faces. They are told to stay at home if they are unwell. These steps are minimal, non-interventionist ones, designed to delay the inevitable spread of the virus.

Normality is to be preserved, no matter what. People in the UK are being told by the government that the mortality rate will be less than 1%, a figure based on the expectation that there are many more people with the virus than reported. On the other hand, the figure given by the World Health Organization (WHO) is 3.5%, a number that is holding up not just in China but in other major outbreaks around the world. Indeed, the WHO has urged governments around the world to spare no effort in taking pro-active measures to contain the spread of the virus.

Les autorités médicales font face au bouleversement du virus

“Negligent” and “ridiculous” is how many doctors have described the UK government’s response to COVID-19. There are insufficient beds and health workers in Britain's hospitals, even at the best of times, and beds for the critically ill and ventilators are in even shorter supply. As the UK Chancellor Stands up today in the House of Commons, the eyes of the UK population - and the world - will be on how the UK administration copes with Coronavirus from both a political, and a medical perspective. The indications at the moment, though, are not encouraging. It is to be hoped that the British government can get the balance between political robustness and the welfare of the population of the UK right.

WHO: Europe now the"hub" of the virus

We know that Iran has dug pits for the dead that are visible from space. We do not yet know how long the virus will hold Italy and the rest of Europe in its grasp. And China, despite what the so-called experts tell us, is not done yet. Thousands more deaths are expected.

WE ARE NOT READY

Look at Italy. One week after it hit 320 cases, the country reported 2,036; a week later, nearly 10,000; next week that number will likely rise to 50,000 or more. There’s nothing In the UK, the NHS has around 4,000 intensive care unit (ICU) beds in England, 80% of which are already full. If we follow the same trajectory as Italy, with 10% of coronavirus patients needing ICU treatment, we will need 200 beds next week, 1,000 the week after. That’s already the entire ICU capacity. Every two days after that, we will need twice the number of beds again. No wonder the breaking news today is that the NHS is spending millions in order to rent beds from private hospitals.

WORST CASE SCENARIO

Unabated, we could see a million coronavirus cases or more in a month’s time. The Italian mortality rate seems much higher than China's (around 7%, versus 4%), a fact mostly explained by how Italian local healthcare has been pushed to breaking point. Reading the accounts of Italian doctors dealing with their outbreak reads like a warzone. Hospitals diverting all clinical staff to the care of ventilated patients. This is not healthcare but “catastrophe medicine”, of the kind one usually encounters on the battlefield.

The virus is on the brink of making the UK look like a a war-afflicted, third-world country.

Read more of Matthew Feargrieve's blogs on coronavirus and what it means for the UK here: https://matthewfeargrieve.blogspot.com/

coronavirus

CORONAVIRUS: WHY THE UK IS LOSING THE FIGHT

4:05 PM

IS THE UK TAKING COVID-19 SERIOUSLY?

Into unknown territory: the UK's cities; millions of people, and a virulent global pandemic

As the World Health Organization (WHO) criticizes the UK government for burying its head in the sand, worrying signs increasingly come from the UK government, led by Prime Minister Boris Johnson.

We ask whether the UK's handling of the rapid spread of CORONAVIRUS is based on political posturing, rather than hard medical science.

The WHO estimates a mortality rate of 3.5%: this equates to 210,000 people in the UK who will die of the virus. And this is just a minimum figure.

Today, as the UK government seems to turn its back on global medial advice, more and more people join the demand for self-imposed social distancing and self-isolating.

Does this mean that the UK will ignore the lessons being learned about the virus in Italy and in China?

NHS has had to rent 14,000 beds from private hospitals

British Stiff Upper Lip

The UK is ignoring its elderly

WHO: Europe now the"hub" of the virus

WE ARE NOT READY

WORST CASE SCENARIO

The virus is on the brink of making the UK look like a a war-afflicted, third-world country.

Read more of Matthew Feargrieve's blogs on coronavirus and what it means for the UK here: https://matthewfeargrieve.blogspot.com/

Matthew Feargrieve

MATTHEW FEARGRIEVE: Is Vanguard the Vessel bringing Private Equity to the People?

4:38 PM

Matthew Feargrieve
12 February 2020

Readers of this blog will be aware that Vanguard, the USD5trillion-plus mutual fund operator, announced last week its JV with HarbourVest, the USD45billion private equity house. Both partners in this mega-venture are behemoths of the asset management industry, and the tie-up seems to herald a new era of innovation and disruption in the mutual fund sector, not just the closed-ended space hitherto occupied by traditional private equity funds.

We have been told that the joint offering will initially be made available to institutional investors, notably pension funds. But the real allure of the proposition being tabled by HarbourVest and Vanguard lies in the latter’s status not simply as the senior partner in the JV but as a mainstay of the passive investment world. So when @CityWire reports Vanguard’s CEO Tim Buckley as saying things like “private equity will complement our leading index and actively-managed funds, as we seek to broaden access to this asset class [for] individual investors“, we naturally sit up and listen.

https://citywire.co.uk/wealth-manager/news/vanguard-strikes-private-equity-partnership-deal/a1321246

It can be no coincidence that this venture comes at a time of record underperformance (should that “continuing” underperformance? Or “record continuing” underperformance?) for so-called “active” mutual funds. You know, the kind of funds that charge a minimum of 1%, excluding broker fees and transactional costs, ostensibly to outperform the market but that in reality are confined to using long-only techniques and are legally prohibited from using true leverage, and so ultimately track the index or, very often, under-perform it.

In this climate of diminishing returns for investors seeking alpha (or even just reasonable returns) in actively-managed, long-only funds, a great amount of pressure has come to bear on the managers of this type of retail product. Take Neil Woodford, who overcame the inhibitive effect of UCITS liquidity rules simply by ignoring them, making significant allocations to small-cap and unlisted companies that were well outside the received universe of stocks available to the conventional active manager, only to come to grief when two things came to pass: (1) institutional investors invoking the daily liquidity afforded (or supposed to be afforded) by UCITS funds, and (2) the wisdom of his unlisted investments proving to be fundamentally lacking, many of them turning out to be (at worse) a shot-to-nothing or (at best) a long-term bet that was hopelessly — and ruinously, for his investors — incompatible with the supposed daily liquidity of the UCITS regime.

And yet at the heart of the collapse of Woodford’s funds was arguably (very arguably, perhaps) his need to source investments outside the much-plundered universe routinely accessed by his peer group, a need driven and, who knows, encouraged by his institutional investors. True alpha has for some time been impossible to find in the long-only space, particularly during a sustained US bull market. Institutional and retail investors alike are questioning the sanity of paying upwards of 1% per year (excluding costs) to a so-called “active” manager who does nothing but place long-only bets in rising markets on mid- to large- cap stocks. Are investors in active, long-only funds getting enough bang for their buck?

Since the financial crisis of 2008, buy-and-hold has been a central part in the strategy of many hedge funds. Many were found to be invested in hopelessly illiquid positions, which had to be sidepocketed and managed as discrete investments requiring discrete investment strategies. The expertise of hedge fund managers in managing private equity-style investments has accordingly been built up for more than a decade. The “alternative” investment space of yesteryear has embraced buy-and-hold and has made a success of it.

Investors these days have in essence three investment choices: true alternative (hedge); private equity; and long-only (retail/mutual). Given its historic underperformance and the fees it charges, the “active” retail space is in sore need of disruption. This is the need that Vanguard has very successfully satisfied with its index funds. Now it seeks to expand its value proposition by moving into buy-and-hold mode.

In the aftermath of the closure of the Woodford funds, some commentators have asked whether the daily liquidity required by the UCITS model should be subjected to some sort of qualification. Our view is that a viable alternative to the inhibitions of the UCITS model and, looking ahead, the model of choice for Vanguard’s “retail private equity” offering may be found in the UK in the non-UCITS (NURs) regime. These illiquid or semi-liquid investment funds have traditionally mainly been used for real estate portfolios, but the regulatory framework is capable of revision and expansion to accommodate investors with the appetite and risk tolerance for some — deliberate — illiquidity in a fund’s portfolio, and who understands the liquidity profile of his shares, which may be redeemable monthly or quarterly, as opposed to daily.

Had the NURs model been sufficiently evolved in this regard from the version that was available to Neil Woodford at the time when he had his illiquid investments in mind, the fund product duly structured and sold to investors would have been a lot better suited to his investment style and strategy. In this sense, then, the UK’s investment fund regime, and its legal and regulatory parameters, have failed both Woodford and his investors.

It will be interesting to see when Vanguard rolls out its private equity products to retail investors, first (presumably) in the US and then here in the UK, and what legal form those funds will take in the UK. A greater source of fascination will be the competitive effect that the availability of such products, enjoying as they will the whole support and promotion of the vast Vanguard machine, will have on the universe of active funds structured as UCITS and currently available to retail investors.

Matthew Feargrieve is an investment funds consultant and blogger. You can read more of his blogs here: https://medium.com/@matthewfeargrieve

And see his YouTube channel here:

https://www.youtube.com/channel/UCTgBcrcxZGxzzcGj3OnMq_A

Alternative Asset Management in Switzerland

8:01 PM

By Matthew Feargrieve

Switzerland is the third largest global centre of alternative asset management, after North America and the United Kingdom. Around three times the size of Connecticut, the small, central European country boasts approximately 15% of global assets under management. This blog examines the composition of the Swiss alternative asset management market, focusing on single managers and managers of funds of hedge funds (FoHFs); reviews the current and prospective regulatory environment in Switzerland for each type of manager; and assesses the country’s future generally as a centre of alternative asset management against the backdrop of economic austerity and regulatory zeal in Europe.

https://www.pwc.ch/en/events/sustainable-finance-conference.html

At a Glance Switzerland is the largest centre in continental Europe for managers of alternative assets, with France coming second and Germany and the Netherlands a joint third.

The main financial centres in Switzerland are Zurich, Geneva and Lugano.
There is approximately US$7 trillion of assets under management by banks in Switzerland, approximately 60% of which are booked in Zurich, 30% in Geneva and 10% in Lugano.
There is approximately US$100 billion of alternative assets under management in Switzerland held in single manager funds.
There is approximately US$300 billion of assets under management in Switzerland held in FoHFs.
Single Managers Switzerland has an approximate 5% share of the global single manager market.
The country is home to 10 of the world’s 30 largest single managers, together with around 500 smaller managers.
There is approximately US$100 billion of alternative assets managed in Switzerland by single managers, around half of which is managed in Zurich with the balance split between Geneva and Lugano. Of that US$100 billion:

- 60% is held in Cayman Islands domiciled investment funds;

- 15% is held in British Virgin Islands funds;

- 10% is held in Luxembourg funds; and

- 5% is held in Guernsey funds.

Swiss single managers, operating largely outside the EU regulatory framework, have a demonstrable preference to house their assets in the leading “offshore” financial centres (principally the Cayman Islands) and, to a lesser extent, EU fund domiciles like Luxembourg.

FoHF Managers There is approximately US$300 billion of assets under management in Switzerland and held in funds of hedge funds. Although having been hit hard by redemption pressures, illiquidity of underlying funds and the Madoff fraud during the past few years, Swiss FoHF managers control one-third of global FoHF assets. Switzerland is home to 6 of the world’s 15 largest FoHF managers, the majority of which are in Zurich. Around 75% of Swiss FoHF assets are managed in Zurich, the balance in Geneva. Swiss FoHFs attract three-quarters of their assets from European investors, mainly institutional allocators, and this goes some way to explain the domicile choice for the FoHFs. Of FoHF assets of US$300 billion:

43% is held in Swiss domiciled investment funds;
29% is held in Luxembourg funds; and
the remainder is held in Jersey and Guernsey funds.

In contrast to the domicile preferences of single managers, Swiss managers of FoHFs prefer “onshore” to “offshore” domiciles. The high level of allocations from EU institutional investors, such as pension funds, is the key driver behind their choice of EU fund domiciles over non-EU domiciles.

The Regulatory Landscape Switzerland The Swiss government and financial regulatory authorities have historically had a benign approach to the oversight of hedge fund managers. Only those managers selling fund products to the retail public in Switzerland are required to be licensed by FINMA, the Swiss Financial Market Supervisory Authority. The majority of single and FoHF managers take advantage of a provision in the Swiss Collective Investment Schemes Act (CISA) that effectively exempts managers selling to “qualified investors,” broadly supervised financial institutions and their clients.

Investment funds domiciled outside Switzerland are not subject to any supervision by FINMA. Advisers to hedge funds are not subject to regulatory oversight or licensing requirements in Switzerland as long as they do not participate in the running of the fund and do not engage in brokerage activities. The Swiss Federal Banking Commission (SFBC) is considered to have sufficient oversight of the hedge fund industry through its supervision of the banks in Switzerland, which usually hold the assets and act as prime brokers, albeit primarily through their London and New York operations.

To date, the SFBC’s view has been that this kind of indirect regulation of the Swiss asset management industry is an adequate means of ensuring an appropriate level of macro prudential oversight.

Take up of UCITS As an EU regulated investment product, UCITS can be sold throughout the EU to both institutional and retail investors. In addition to being attractive, fully regulated investment products for EU pension funds, UCITS open up to managers a previously forbidden client base: retail investors. A significant portion of Swiss FoHF managers domicile their funds within the EU, increasingly in Luxembourg, in order to maintain their leading position in the European FoHF market. Dedicated Swiss FoHFs Harcourt, Man Investments/RMF and GAM have all launched UCITS FoHFs, as have several Swiss-based private banks such as Credit Suisse, Pictet, 3A (Bank Syz), Clariden Leu and EFG.

It should be noted that the UCITS framework does not provide for direct translation of portfolios of traditionally structured hedge funds into a UCITS compliant format; however hedge fund index replication techniques remain one option to provide investors with quasi-FoHFs exposure through a UCITS fund. Given the increasing number of hedge fund strategies being operated within UCITS-compliant structures, there appears to be an increasing opportunity for growth of a nascent Fund of UCITS Funds market driven by managers in Switzerland.

On the other hand, the greater pressure to generate higher performance returns experienced by Swiss single managers (in line with single managers the world over) makes the majority of them skeptical about UCITS. They point to the significant restrictions the UCITS regime imposes on use of leverage, shorting and derivatives, and the knock-on impact that has on returns (not to mention fees). For single managers, this is a serious downside of UCITS. The problem of lower returns and lower fees is compounded for investors and managers alike by the higher organizational costs involved with UCITS which are sky-high compared to the traditional Cayman private fund model. The slow and burdensome regulatory approval process, conservatively taking two to six months, is also a major turn-off for most single managers.

The majority of Swiss single firms manage non-EU, non-UCITS funds. If they want to sell those funds into the EU, they have a number of choices: continue to market their funds on a private placement basis (and comply with the new regulatory requirements imposed by the AIFM Directive); adopt full compliance with the AIFM Directive and obtain a “passport”; or go the UCITS route, either in alternative or addition to the traditional offshore products.

Conclusion In line with their peers in the United Kingdom and, to a similar extent, the U.S., managers in Switzerland have faced a fourfold challenge in the post-AIFMD world: (1) increased prudential supervision; (2) amendment of local laws designed to ensure access to EU markets under the AIFM Directive; (3) increasing scrutiny by regulators and tax authorities of the “substance” of offshore structures; and (4) a heightened interest by regulators and investors in the corporate governance of hedge funds. These industry developments were handled with confidence by managers in the world’s third largest centre of alternative asset management.

Matthew Feargrieve is a financial services consultant and blogger.

THE NEIL WOODFORD SAGA Part III

5:20 PM

THE NEIL WOODFORD SAGA:

PART III

Matthew Feargrieve

8 February 2020

Neil Woodford's flagship UCITS fund, Woodford Equity Income Fund ("WEIF"), was placed into liquidation in October 2019. This followed the suspension of redemptions authorised in June 2019 by the fund's ACD, Link Fund Solutions ("Link"). Readers of this blog will recall that we were pessimistic about the prospects of substantial value recovery for Woodford's investors. It turns out we were right to be.

Link indicated in late January 2020 that just over 70% of the aggregate value of what remains of WEIF's portfolio value has been raised from the sale of more liquid investments, mainly consisting of large- and mid- cap equities.

The ambulance chasers circling Woodford's benighted investors, namely law firms Slater & Gordon and Leigh Day, cry piously and loudly about how Link's apparent inability to dispose of the remaining portfolio assets is evidence of the extent to which Woodford exceeded the maximum illiquid allowance of 10% permitted by UCITS rules.

https://www.theguardian.com/business/2020/jan/28/neil-woodford-investors-loss-payouts

One notable characteristic of said law firms, aside from the celerity with which they mobilise after various ambulances, is the conspicuous absence of any legal talent that can reasonably be said to have more than a passing acquaintance with the laws and regulations pertaining to UCITS investment funds or, indeed, the asset management industry in general. Have a look at the "Team" pages on their websites and have a go at finding any lawyers who profess "investment fund" or "financial services" expertise.

The truth behind the apparent illiquidity of the remnants of the WEIF portfolio is that it is a dog. Not just a dog, but a dog that is on fire. No one wants this unlisted rubbish, particularly not at any kind of price. Link would do well to realise what value it can from as expeditious sale as is possible, and put the 2,500 Woodford investors out of their misery.

Adding to their continuing misery, one suspects, are the calls they will be receiving from Leigh Day and Slater & Gordon about how they may sue the chief superannuated pusher of Neil Woodford's bullshit, Hargreaves Lansdown. What the ambulance chasers lack in legal talent, they more than make up for in their ability to isolate and reach for the lowest hanging fruit. Slater & Gordon says that it is examining whether Hargreaves was aware of the problems at WEIF while it continued to push the fund on its now infamous "best buy" list of superstar managers.

Hargreaves removed WEIF off its Wealth 50 buy list only after it suspended investors' redemption requests in June 2019. Other law firms are said to be looking at how Link Asset Services (the fund's administrator) monitored the liquidity profile of the portfolio and Woodford's management of it.

https://www.proactiveinvestors.co.uk/companies/news/912241/law-firms-probe-hargreaves-lansdown-as-part-of-woodford-challenge-912241.html

A spokesman for Leigh Day has said: "if there is some wrongdoing the aim would be to try and get investors back to zero. So if they've put £10 in and got £6 back we'd look to get the other £4 back.” So WEIF could prove to be an investment fund in which investors' capital was not at risk. Not at any risk at all, in fact. Readers of this blog could be forgiven for thinking that this breathless claim will come back to haunt Leigh Day, and it is to be hoped that the expectations of the long-suffering Woodford investors are not being hiked on such a rash representation. For it overlooks the fact that capital is rightly at risk in any pooled investment vehicle; that the majority of WEIF's portfolio assets were not improperly illiquid; that the remaining assets are distressed and accordingly harder to sell; that Hargreaves Lansdown were neither the fund's manager, nor its ACD nor its administrator, having in fact no functionality or capacity whatsoever with WEIF or its management; and that the only contract that Woodford investors can sue on is the one they have with WEIF, by virtue of being shareholders in it, not any ancillary customer agreement they may have had with Hargreaves Lansdown.

True it is that the ambulance chasers are offering much-needed solace to Neil Woodford's investors, which is more than the man himself is prepared to do. And we won't waste any time here on the FCA's inability to do anything for them. But they would be well advised not to hope too highly for any meaningful kind of recompense.

Matthew Feargrieve is a financial services consultant with more than twenty years' experience of advising managers of investment funds.

Cybersecurity

Matthew Feargrieve: Is Online Trading Secure?

3:23 PM

Matthew Feargrieve Shares How to Keep Your Financial Information Secure Online

Welcome to the Matthew Feargrieve blog. Matthew Feargrieve is a qualified financial service lawyer in the UK. Protecting investment accounts from hackers is critical. Here are tips on how to keep your online investment accounts safe.

Choosing Your Broker Wisely

When it comes to many things, from client support to security practices, all investment houses are not equal. Be sure to pay as much attention to security practices. Before signing up with an apparently-safe institution, make the effort to learn all you can about their protection methods. When you log in, do they periodically require two-factor identification (typically requiring a password, followed by entering a code that they send to your phone) If they permit you to send sensitive information via email, for example, it could be a sign that they are not following the rules that are there to protect you.

Protecting Your Devices

Never expect a broker to take full responsibility for keeping your data and transactions safe. Install malware protection software on every device that you use. You might want to consider signing up with a reputable identity theft protection company.

Monitor Your Accounts Regularly

you should never ignore the monthly statements that you receive from your broker. In fact, it’s probably a good idea to review balances and transactions more frequently. Make sure that you can identify a justifiable reason behind any unexpected investment balance changes. If you notice anything that seems incorrect, call the institution immediately to discuss it.

Use Secure Passwords

The key to staving off this type of attack is to ensure the password is not just a single word. Alternatively, you can also use password manager does all the remembering for you, except for one thing — the master password which grants you access to your password manager. The password manager itself will remember all the other passwords to all your other accounts. Moreover, it can generate super-complicated, extra-long passwords that are infinitely more difficult to crack than any passwords a human might come up with.

Never Take Security for Granted

If you’re an investor, then you’ve probably heard many times that “past performance is no guarantee of future results.” While that saying pertains to the predictability of investment results, it can apply to security risks as well. The right security protection choices and actions are just as important as your buy and sell activities while you pursue your personal investment journey.

Check back for more!

Matthew Feargrieve is a qualified financial services lawyer in the UK and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Learn more about Matthew Feargrieve on his website here. You can also join Matthew Feargrieve's professional network by connecting on his Crunchbase page here. Alternatively, you can watch the Matthew Feargrieve video here

Watch Matthew Feargrieve video here

Hedge Funds

Matthew Feargrieve: Regulatory Overview Hedge Funds Part II

3:19 PM

Welcome back to the Matthew Feargrieve blog. In the first part of this two-part blog post, we looked at the market overview, legislation and regulation and marketing for Hedge Funds regulatory overview. In this, the second part, we offer some further overview for managers and operators, restrictions and requirements, tax; private placement rules and upcoming reform. We start with a consideration of the role of the managers and operators

Investment restrictions

6. Are there any restrictions on local investors investing in a hedge fund?

There are no such explicit restrictions imposed on Swiss investors under CISA (other than the distribution requirements referred to in Question 4). However, Swiss pension funds, for example, are subject to the Swiss Federal Act on Old Age and Survivors Insurance (OASI) that sets out certain investment principles and restrictions for Swiss pension funds if they intend to invest in (alternative) collective investments schemes, such as hedge funds.

Matthew Feargrieve

Assets portfolio

7. Who holds the portfolio of assets? What regulations are in place for its protection?

For domestic funds (such as FCPs) and SICAVs, the CISA requires the portfolio of assets to be held by a separate local custodian on deposit. The custodian bank must be both:

A Swiss bank (that is, must hold a banking licence pursuant to the Swiss Federal Act on Banks and Savings Institutions and have an appropriate organisational structure to act as a custodian bank for such funds).
Authorised by FINMA to act as custodian bank pursuant to CISA.

A custodian bank may delegate its safekeeping task to regulated third party (sub-)custodians and securities depositories in Switzerland or abroad. Such delegation must, however, be appropriate. Should the fund go bankrupt, the assets held by the custodian on deposit will be segregated from the bankruptcy estate in favour of the investors. For foreign funds, the respective foreign provisions apply.

Requirements

8. What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund?

Investors

For Swiss funds, the following must be published in an appropriate publication media:

All facts subject to a disclosure requirement (in relation to which investors are entitled to lodge objections with FINMA) (see below).
The dissolution of an investment fund.

The fund prospectus determines the applicable publication media, which can be either

Print media (for example, Neue Zürcher Zeitung or Le Temps).
A publicly accessible electronic platform approved by FINMA

In particular, the following must be published by the FCP's fund management company or the SICAV:

Annual report, indicating where the report can be obtained free of charge, within four months of the end of the financial year.
Semi-annual report, indicating where the report can be obtained free of charge, within two months of the end of the first half of the financial year.
The issue and redemption price or net asset value (NAV) each time units or shares are issued or redeemed. Prices for securities funds must be published at least twice a month and prices for real estate funds and funds where the right of redemption at any time is restricted must be published at least once a month.
Details of any amendments to the following (including an indication of where the amendments can be obtained free of charge):

prospectus, simplified prospectus or key investor information document (KIID);
fund contract or articles of association and investment regulations.

In addition, investors are entitled to request further information from the FCP's fund management company or SICAV about:

The basis for the calculation of the NAV.
Further details on individual businesses.
The exercise of membership or creditors' rights or risk management upon claiming a legitimate interest.

Regulators

FINMA must be notified in relation to:

Any change in the persons responsible for the management and business operations (and any facts which could question the good reputation and guarantee of proper management by these persons).
Any change in significant equity holders, with the exception of company shareholders in a SICAV (and any facts which could question either the good reputation of such equity holders or the prudent and sound business practice, due to the influence of the significant equity holders).
Any change in relation to financial guarantees, particularly if the minimum requirements are no longer met.
Any change of executive persons entrusted with the performance of the custodian bank's duties.
Any amendments to any of the following:
prospectus, simplified prospectus or KIID;
fund contract or articles of association and investment regulations.

FINMA must approve any change of circumstances relevant to the continued authorisation of the collective investment scheme. In relation to foreign collective investment schemes, the Swiss representative must notify FINMA of:

Any measures taken by a foreign supervisory authority against the fund, specifically its withdrawal of approval.
Any changes to the relevant documents of the foreign fund such as:
the prospectus, simplified prospectus or KIID;
the fund contract or articles of association and investment regulations;
any other documents necessary for approval under applicable foreign laws and those for Swiss collective investment schemes.

9. What are the key requirements that apply to managers or operators of hedge funds?
Any parties managing or operating local and/or foreign collective investment schemes in or from Switzerland must obtain prior authorisation from FINMA.

Fund management companies

The primary object of the fund management company is the conduct of the fund business. Fund management companies:

Conduct the fund business for FCPs.
Perform the administration and the portfolio management for SICAVs (to the extent such tasks have been delegated to the fund management company by the SICAVs).

The fund management company must be a company limited by shares and have its registered office and main administrative office in Switzerland. The main administrative office will be deemed located in Switzerland if all the following requirements are met:

The tasks of the board of directors (which are inalienable and non-transferable under Swiss corporate law) are carried out in Switzerland.
In relation to each of the investment funds it manages, at least the following tasks are carried out in Switzerland:

decision on the issue of units;
decision on the investment policy and valuation of the assets;
valuation of the assets;
determination of the issue and redemption prices;
determination of the profit distributions;
determination of the content of the prospectus, the simplified prospectus, the annual and semi-annual report as well as other publications intended for investors;
fund accounting.

Fund management companies can also provide the following ancillary services:

Discretionary management of individual portfolios.
Investment advisory services.
Safekeeping and technical administration of collective investment schemes.
Fund business for foreign collective investment schemes, provided an agreement exists on the co-operation and the exchange of information between FINMA and the relevant foreign supervisory authorities in relation to the fund business (and the foreign law requires such an agreement).

Fund management companies can also delegate certain other tasks to qualified third parties. However, the fund management company can only delegate investment decisions to asset managers of collective investment schemes subject to a recognised supervision (that is, asset managers that are either subject to the supervision of FINMA or of a foreign supervisory authority).

SICAVs

The sole object of a SICAV is a collective capital investment, whereby:

A self-managed SICAV performs its own administration.
Externally-Managed SICAV delegates the administration to an authorised fund management company (see above, Fund management companies).

SICAVs can also delegate portfolio management to a fund management company. However, a SICAV (self-managed or externally managed) can only delegate investment decisions to an asset manager of collective investment schemes that is subject to recognised supervision.

Asset managers

Asset managers make investment decisions and ensure that the proper conduct of portfolio and risk management for one or more (local or foreign) collective investment schemes is carried out. Asset managers of Swiss collective investment schemes managed investment funds based on a delegation from an FCP or a SICAV.Asset managers of collective investment schemes with their registered office in Switzerland can be any of the following:

Legal entities, in the form of:

companies limited by shares;
partnerships limited by shares; or
limited liability companies.
General and limited partnerships.
Swiss branches of foreign asset managers of collective investment schemes, provided:
the asset manager, including its branch, is subject to an appropriate supervisory control at its registered office;
the asset manager is adequately organised and has commensurate financial resources and qualified personnel to operate a branch in Switzerland;
an agreement exists on co-operation and the exchange of information between FINMA and the relevant supervisory authorities.
A "Swiss branch of a foreign asset manager" means a foreign asset manager of a collective investment scheme that employs persons in Switzerland to conduct asset management on its behalf on a permanent, commercial basis in or from Switzerland, in accordance with CISA and CISO.

All asset managers of collective investment schemes operating in or from Switzerland require FINMA authorisation for their activities, regardless of whether they manage local or foreign collective investment schemes. However, the following exemptions apply:

De minimis. No FINMA authorisation is required for asset managers whose investors are solely qualified investors and which meet one of the following requirements:

the assets under management (including the assets acquired through the use of leveraged finance) amount to no more than CHF100 million;
the assets under management consist of non-leveraged collective investment schemes where investors are not permitted to exercise redemption rights for a period of five years after their first investment is made in each of these collective investment schemes, and the amount is for no more than CHF500 million;
the investors are exclusively group companies of the group of companies to which the asset manager belongs.

Regulated financial intermediaries. Swiss banks, securities dealers, insurance companies, and fund management companies are exempt from obtaining an asset manager's licence (since they are already subject to the prudential supervision of FINMA). Asset managers can also perform ancillary services, including:

Fund business for foreign collective investment schemes, provided an agreement exists on the co-operation and the exchange of information between FINMA and the relevant foreign supervisory authorities in relation to the fund business and the foreign law requires such an agreement.
Discretionary management of individual portfolio.
Investment advisory services.
Distribution of collective investment schemes.
Representation of foreign collective investment schemes.

Delegation of specific tasks to qualified persons is permitted. Asset managers can only delegate investment decisions to asset managers of collective investment schemes that are subject to a recognised supervision.

Legal fund vehicles and structures

10. What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures?

Local hedge funds are mostly structured as funds of hedge funds in the form of open-ended funds (either contractual investment funds (FCPs) or SICAVs of the category "other funds for alternative investments". Other funds for alternative investments include open-ended collective investment schemes whose investments, structure, and investment techniques (short-selling, borrowing of funds and so on) and investment restrictions exhibit a risk profile that is typical for alternative investments.
The permitted investments for these funds are basically the same as for traditional investments (in particular, securities, precious metals, real estate, derivatives and structured products and units of other collective investment schemes). Short-selling is also permitted and the FINMA can also grant exceptions. However, funds for alternative investments are subject to lower restrictions compared to funds for traditional investments, as follows:

Loans can be raised for an amount of up to 50% of the fund's net assets.
Up to 100% of the fund's net assets can serve as collateral.
Overall exposure can be up to 600% of the fund's net assets.

Reference must be made in the fund name, as well as in the prospectus and marketing material, to the special risks involved in alternative investments. The prospectus must be offered free of charge to interested persons prior to an agreement being concluded or prior to subscription. FINMA may allow the transaction-related settlement services of a directly investing another fund for alternative investments to be provided by a regulated institution specialising in such transactions (prime broker). It may specify which monitoring functions must be undertaken by the fund management company and the SICAV.

Swiss investment fund regulation does not provide for additional vehicles specifically designed for hedge funds. In practice, however, these funds for alternative investments are no alternative to established hedge fund locations such as the Cayman Islands that provide for much more flexibility as to the possible investments, leveraging and customisation.

Tax treatment
11. What is the tax treatment for hedge funds?

Funds

The following applies to open-ended funds, closed-ended funds, and hedge funds:

Corporate income tax. Contractual investment funds (FCPs) and investment companies with variable capital (SICAVs) are generally tax-transparent and therefore not subject to corporate income tax. The fund's income is taxed in the hands of the investors (see below, Resident investors). The only exception applies to income derived from directly-owned real estate which is subject to corporate income tax at the level of the fund, but at reduced rates.
Capital tax. Capital tax is levied at LPs and is only subject to capital tax for directly-owned real estate.
Withholding tax. Profit distributions or accumulated profits from non-distributing (yearly deemed distributions) FCPs, SICAVs are subject to a 35% withholding tax. However, to the extent that such distributions or accumulated profits derive from real estate, no withholding tax is due. Further, capital gains and capital contributions by the investors can also be distributed without being subject to withholding tax, provided they are reported separately.
Issuance stamp tax. The issue of interests or shares in FCPs and SICAVs is not subject to issuance stamp tax.
Transfer stamp tax. The issue of interests or shares in Swiss FCPs and SICAVs is exempt from transfer stamp tax.

Resident investors

The following tax considerations are only applicable to resident individual investors who hold the interests or shares in an FCP or a SICAV as private assets:

Income tax. Distributions or accumulated profits of non-distributing FCPs or SICAVs are in principle subject to income tax at the level of the individual investors. Distributions or accumulated profits stemming from realised capital gains or from directly-owned real estate are not subject to income tax, provided they are reported separately by the collective investment scheme. Income derived from foreign open-ended collective investment schemes is subject to the same taxation rules.
Withholding tax. Withholding tax withheld from distributions or remitted on accumulated profits can be fully reclaimed by resident investors based on national law.
Transfer stamp tax. The issue of interests or shares in foreign collective investments schemes is subject to 0.15% (foreign investment schemes being exempt investors) transfer stamp tax, provided a Swiss securities dealer is involved in the transaction. Secondary market transactions in Swiss FCPs or SICAVs are subject to transfer stamp tax at a rate of 0.075% per party, provided a Swiss securities dealer is involved in the transaction. For interests and shares in foreign collective investment schemes, the transfer stamp tax rate amounts to 0.15% per party.

Non-resident investors

Non-resident investors are not subject to Swiss income tax simply because of an investment in a Swiss FCP or a SICAV. Withholding tax on distributions or accumulated profits of non-distributing funds is levied independently of the state of residence of the investor (see above, Funds). If at least 80% of the fund's income is from foreign sources, a non-resident investor can reclaim the withholding tax based on national law (or alternatively, the Federal Tax Administration may not levy the withholding tax at all). If the foreign-sourced income amounts to less than 80%, a non-resident investor can potentially reclaim (part of) the withholding tax based on a double tax treaty between Switzerland and the non-resident investor's state of residence.

Restrictions

12. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties?

Alternative investments that are structured as open-ended funds may issue new units or shares at any time in accordance with the fund regulations. Equally, investors may, as a rule, request the redemption of their units or shares in investment companies with variable capital (SICAVs) and contractual investment funds (FCPs) at the net asset value (NAV) at any time.

However, the regulations of a fund, whose value is difficult to calculate or which has limited marketability, can provide that redemption may only be requested on specific dates, but at least four times per year. This must then be explicitly stated in the fund regulations, the prospectus and the simplified prospectus. In addition, on a justified request by the FCP's fund management company or SICAV, FINMA can restrict the right of redemption at any time, depending on the particular investments and investment policy of the fund. This especially applies if the fund invests in the following:

Assets not listed or not traded on a regulated market open to the public.
Mortgages.
Private equity.

The restrictions must equally be stated in the fund regulations, the prospectus and the simplified prospectus. However, in both cases, the right to redeem at any time can only be suspended for a maximum of five years.

The SICAV and FCP's fund regulations can also provide for repayment to be deferred temporarily and on an exceptional basis in the following circumstances:

Where a market, which serves as the basis for the valuation of a significant proportion of the fund's assets is closed, or if trading on such market is restricted or suspended.
In the event of political, economic, military, monetary or other emergencies.
If owing to exchange controls or restrictions on other asset transfers, the fund can no longer transact its business.
In the event of large-scale withdrawals of units or shares, which may significantly endanger the interests of the other investors.

The SICAV or FCP must immediately inform the FINMA and its auditors of any decision to defer redemptions and communicate the decision to its investors in a suitable manner. In addition, in exceptional circumstances FINMA can grant a limited deferment for the repayment of units or shares if this is in the interests of all investors. There are no statutory restrictions on transferring the investors' units of an FCP. However, restrictions can be determined in the fund contract. The shares in a retail SICAV are freely transferable. However, the articles of association may restrict investor eligibility to qualified investors if the shares are not listed on an exchange.

Private placement

13. Are private placements of hedge funds permitted under national private placement rules in your jurisdiction?
For the "private placement" and distribution rules in Switzerland, see Question 4.

14. What are the requirements for making a private placement of hedge funds?
For the "private placement" and distribution rules in Switzerland, see Question 4.
Reform

15. What (if any) proposals are there for the reform of hedge fund regulation?
The Swiss financial market regulation is currently undergoing major changes. Existing rules already have or will soon be complemented or replaced by new laws, in particular by the following:
Financial Market Infrastructure Act (FMIA).

FinSA.

FinIA.
The FMIA entered into force on 1 January 2016, while the Swiss Federal Council's dispatch including revised draft bills for the FinSA and FinIA was published in late 2015. The Swiss Parliament adopted both bills in the final votes on 15 June 2018, which are expected to enter into force on 1 January 2020. FinSA and FinIA (as well as the implementing ordinance) will also have an impact on Swiss collective investment schemes regulation, for example:

The licensing of fund management companies and asset managers of collective investment schemes (newly designated as managers of collective assets) will be governed by the FinIA.
The provisions on distribution in the CISA will be deleted and the distributor licence will be abandoned. The definition of distribution under the CISA will be replaced by the definition of offering under the FinSA. The offering of foreign collective investment schemes to qualified investors will no longer require the appointment of a Swiss representative and a Swiss paying agent.

The FinSA will contain a definition of professional clients and the definition of qualified investors under the CISA will be amended accordingly. The FinSA will provide for a suitability and appropriateness test. Pursuant to the FinSA, financial service providers will be required to group their clients into institutional clients, professional clients and private clients.

A duty to prepare a basic information sheet will be introduced by the FinSA if collective investment schemes are offered to private clients (which shall replace the KIID and simplified prospectus).
The FinSA also contains rules of conduct that will apply in addition to those already set forth in the CISA.

Matthew Feargrieve is a qualified financial services lawyer in the UK and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Learn more about Matthew Feargrieve on his website here. You can also join Matthew Feargrieve's professional network by connecting on his Linkedin page here. Alternatively, you can also follow Matthew Feargrieve here for more updates.

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