A specialized investment fund or SIF is a type of investment fund

Collective investment scheme

A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...

 governed by the Luxembourg

Luxembourg

Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...

ish law of the 13th February 2007 replacing the law

Law

Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...

 of 1991 defining the legal framework for institutional funds and enlarging the destribution scope to "informed investors". The SIF law significantly simplified the rules for setting up investment fund structures ranging from straight forward investment strategies investing in listed securities to hedge fund

Hedge fund

A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...

s, real estate

Real estate

In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

 and private equity

Private equity

Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....

 funds.

Legal Structures

The SIF may be structured as a SICAV, a SICAF or a contractual form, which must have a management company (FCP). A SICAV or a SICAF can be set up as a public limited company

Public limited company

A public limited company is a limited liability company that sells shares to the public in United Kingdom company law, in the Republic of Ireland and Commonwealth jurisdictions....

 (SA), a partnership limited by shares (SCA), a private limited liability company (S.àr.l.) or a cooperative organized as an SA.

These different entities may create sub-funds each with a different investment policy. The rights of investors and of creditors concerning a sub-fund or which have arisen in connection with the creation, operation or liquidation of a sub-fund are limited to the assets of that sub-fund (i.e. Protected Cell Concept), unless a clause included in the constitutional documents provides otherwise.

Eligible Investors

A fund created under the SIF Law may be sold to “well-informed investors”.
According to the SIF law a well-informed investor is:

• an institutional investor,
• a professional investor,
• Any other type of investor who has declared in writing that he is an "informed investor" and either invests a minimum of €125,000 or has an appraisal from a bank, an investment firm or a management company.

Diversification

The Luxembourg regulator (CSSF) issued a circular letter 07/309 on 3 August 2007 containing guidelines on the principle of risk spreading

Diversification (finance)

In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of...

 and investment restrictions for SIF vehicles:

• In principal, a SIF cannot invest more than 30% of its assets or commitments to subscribe to securities of the same nature issued by the same issuer. However, this restriction does not apply to investments in securities issued or guaranteed by an OECD Member State or its local authorities, supranational institutions or organizations. Furthermore, it is not applicable to target UCIs, which are subject to risk diversification principles that are at least comparable to those relevant to SIFs.

• Short sale
  Short sale
  A short sale can refer to various kinds of transactions:*Short – the seller is not the owner of a security that he or she sells*Short sale – the lender allows a property to be sold for less than the amount owed on a mortgage and takes a loss. This usually occurs when the market drops and the...
  
  s may not, in principle, result in the SIF holding a short position in securities of the same type, issued by the same issuer and representing more than 30% of its assets.

• When using financial derivative instruments, the SIF must ensure, through an appropriate diversification policy of the underlying assets a comparable level of risk spreading. Similarly, the counterparty risk in an OTC transaction must, when applicable, be limited having regard to the quality and qualification of the counterparty.

Investment Restrictions and Leverage

The SIF Law does not specify any detailed investment restrictions or leverage rules. It simply states that a SIF should apply the principle of risk diversification.

The CSSF may provide exemptions from these restrictions on a case-by-case basis. However, the CSSF may also request that additional restrictions are adhered to, in cases of funds with specific investment policies.

Minimum Fund Size and Dividends

The minimum fund size that must be reached within 12 months of inception has been set at €1.25 million.

Issued shares of a SICAV must be fully subscribed, but only 5% of the amount of the subscription must be paid up in cash or by other means of contribution. This facilitates structures such as private equity funds to make capital call over a period of time.

There are no specific restrictions on the payment of dividends. Nevertheless, such payments may not result in the size of the SIF falling below the minimum level of €1.25 million.

Valuation of the Assets

Unless otherwise provided for in the issuing document, the valuation

Valuation (finance)

In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...

 of the asset

Asset

In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...

s must be based on fair value

Fair value

Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...

, determined in accordance with the procedures laid down in the management regulations (FCP) or articles of incorporation (SICAV-SICAF).

Duties and Taxes

The CSSF filing duty is fixed at €2650 for a single compartment SIF and €5000 for a multiple compartment SIF. The CSSF annual fee is fixed at €2650 for a single compartment SIF and €5000 for a multiple compartment SIF.

An annual subscription tax of 0,01% on the net asset value

Net asset value

Net asset value is a term used to describe the value of an entity's assets less the value of its liabilities. The term is most commonly used in relation to open-ended or mutual funds because shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net...

(NAV) has to be paid to the Luxembourg government.

Sources

http://www.cssf.lu/

http://www.legilux.public.lu/leg/a/archives/2007/0013/index.html

http://www.lfp.lu/