The Main Functions of Investment Funds in Luxembourg

The Main Functions of Investment Funds in Luxembourg

Updated on Thursday 18th July 2019

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The-Main-Functions-of-Investment-Funds-in-Luxembourg.jpgInvestment funds in Luxembourg can take various forms and are established with the purpose of generating important turnovers. There are several types of investment funds established in Luxembourg, which is the most representative market in the European area in this sense. The first investment fund, set up in 1959, was incorporated in Luxembourg. Our team of financial representatives can provide legal advice on the functions of the local investment funds. 
 

What are the main functions of investments funds? 

 
The functions for which an investment fund in Luxembourg is set can vary based on the type of vehicle that was registered here. Regardless of the fund’s type, the main function is to invest a large sum of money with the purpose of obtaining a high return on investment, but also to make additional investments on local and foreign markets. Investors who are considering opening an investment fund in Luxembourg must know that the structure can be set up for the following purposes:
 
  • collecting funds from retail investors – in the case of funds operating as investment companies;
  • investment companies are in charge with investing in various financial instruments that can generate relevant gains;
  • establishing investment policies and strategies in accordance with the investors’ needs and plans;
  • issuing shares to the investors, based on the basic structure of the fund (open-end or closed-end funds);
  • investing in financial instruments such as bonds, stocks, commodities, currencies and any other type of financial asset; 
  • making investments in specific sectors – most of the funds are traded on local and international stock markets;
  • making investments in newer sectors, such as the green energy sector (renewable energy, climate change and others, sectors in which Luxembourg is a leading market). 
 

What is the responsible investing fund market in Luxembourg? 

 
Following the decision taken in Paris in December 2015 regarding climate change, numerous investors and investment managers have agreed on various investment policies that were created to sustain investments in green energies, with the purpose of reaching a low-carbon based economy. 
 
Those who want to open a Luxembourg fund must know that this market is the leading jurisdiction on policies addressed to investors who want to invest in this new sector, and it had already created various types of funds that are useful for this purpose. Businessmen must know that the following apply, when we refer to the responsible investing fund market in Europe and Luxembourg
 
  • in 2014, the responsible investing (RI) fund market in Europe had a total value of EUR 376 billion;
  • in 2016, the same market grew at a value of EUR 476 billion, which represented an increase of 26.6% compared to 2014;
  • if in 2010, there were approximately 1,500 such funds registered in Europe, by 2016 their number increased at 2,413;
  • 31% of the RI funds in Europe are represented by vehicles registered in Luxembourg;
  • in comparison, the second most developed market is France, which accounts for only 15% of RI funds;
  • at the level of 2016, Luxembourg had a share of 39% of all the assets under management held by European RI funds;
  • RI funds investing in environmental causes in Luxembourg represent 38% of all funds operating in this sector. 
 

The functions of SIFs in Luxembourg 

 
The specialised investment funds (SIF) are funds which address to well-informed and qualified investors. SIFs allow a higher level of flexibility related to the investment policies carried out by the investors; at the same time, the regulatory framework under which SIFs function is less strict, in comparison with other types of funds. 
 
The following video offers a short presentation on the main functions of Luxembourg investment funds:
 

 
A SIF can be registered under the following structures: common investment fund (FCP), investment company with variable capital (SICAV) and investment company with fixed capital (SICAF). It is important to know that a SIF can be established under an umbrella-structure, which will allow the establishment of multiple compartments within the fund that can carry out different investment policies; our team of financial agents can offer more details in this sense. 
 

What is the purpose of an umbrella fund in Luxembourg? 

 
Funds in Luxembourg can be registered as a single fund structure or as multiple compartments fund (also referred to as umbrella funds). The umbrella fund can be incorporated for a wide category of funds available here, including for the SICAR in Luxembourg. Some of the main advantages of the structure are presented below: 
 
  • the umbrella fund is registered as a single legal entity, operating with several compartments;
  • the main function of an umbrella fund is that it can carry multiple investment strategies at the same time;
  • the umbrella fund can also be selected for the SICAV in Luxembourg, a type of investment fund with a variable capital;
  • each compartment of the fund has its own portfolio and liabilities;
  • it is necessary to know that, in the case of certain types of funds, a compartment of the fund can invest in other compartments of the same fund;
  • this can be the case of a SIF in Luxembourg and the compartments can be registered as open-ended or closed-ended.  
 
In this country, most of the SICAVs and SICAFs in Luxembourg are incorporated as umbrella funds with several compartments. Since each sub-fund can carry its own investment policy, the investors may appoint an investment manager for each of the compartments, but it is important to know that the same manager can supervise the activity of all the sub-funds. 
 
The advantage of a Luxembourg fund that is set up with multiple compartments is that the investors can benefit from a high level of flexibility in carrying their investment strategies. Besides this, there are several tax advantages and the investors can benefit from reduced operational costs, compared to investing in a fund with a single structure. 
 
 

The functions of UCIs in Luxembourg 

 
Investment funds in Luxembourg can be set up as undertakings for collective investments (UCI), which can be further categorized in: undertakings for collective investment in transferable securities (UCITS) and alternative investment funds (AIFs). One of the main utilities of the UCITS is that they allow the distribution in all member states of the European Union, once the fund received its authorization in the country in which it was established. 
 
The rule is available under the European Passport, a measure imposed under the EU UCITS directive issued in 1985, which set out the basis for a common European market. The regulation, which was first imposed by Luxembourg, offers a high level of protection for the investor. Entrepreneurs who need further information on the functions of the investment funds available in Luxembourg can address to our team of financial consultants for assistance.