Investment-Fund-Management-Business

Economic Substance Regulations (ESR) – Investment Fund Management Business

The definition of an Investment Fund Management Business encompasses Licensees that provide discretionary investment management services in relation to domestic or foreign “Investment Funds”.

Discretionary Investment Fund Management services include making investment, divestment and risk related decisions on behalf of an Investment Fund. UAE businesses providing fund administration, custodian, investment advisory, and other Investment Fund related services are not considered engaged in an Investment Fund Management Business.

The Investment Fund itself is not considered an Investment Fund Management Business, unless it is a self-managed fund (the Investment Manager and the Investment Fund are part of the same entity).

Where an Investment Fund is structured as a partnership and has both a corporate General Partner and an Investment Fund Manager, only the Investment Fund Manager would be subject to the Regulations if the General Partner does not undertake business activit ies separate from its role as General Partner of the Investment Fund.

 

Core Income-Generating Activities of an Investment Fund Management Business

The Regulations mention the following CIGAs for an Investment Fund Management Business:

    • ‘Taking decisions on the holding and selling of investments‘ – This CIGA involves the independent consideration, deliberation and making of investment and divestment decisions. A licensee that is merely implementing decisions of another entity with respect to the holding a nd selling of investments without independent evaluation before taking steps or decisions to effect the investment or divestment decisions taken, does not perform the CIGA.It is a commercial reality that the directors or members of an investment committee may not all be based in the UAE or be physically present in the UAE when investment and divestment decisions are taken. However, for this CIGA to be seen as taking place in the UAE, the majority of those making the decisions should be physically present in the UAE when the decisions are made.

 

    • ‘Calculating risk and reserves’ – Managing an Investment Fund involves identifying, measuring, monitoring and controlling risks attributable to the Investment Fund’s operations and investments. This CIGA refers to activities in respect of risks for the Investment Fund as a whole, as opposed to isolated risk calculations for one area of applicable risk that does not take into account all relevant risks applicable to the Investment Fund and the reserves required on a holistic basis.

 

    • ‘Taking decisions on currency or interest fluctuations and hedging positions’ – This CIGA refers to the activities required to determine if the Investment Fund is exposed to, or if it is in the best interests of the Investment Fund to enter into, hedging arrangements against currency or interest fluctuations, and taking relevant decisions regarding those determinations. As with the other CIGAs, the Investment Fund Manager is expected to perform this activity on a holistic basis, taking into account the Investment Fund’s overall position. Isolated decisions involving specific investments are not sufficient to meet the CIGA requirement.

 

  • ‘Preparing reports to investors or any government authority with functions relating to the supervision or regulation of such business’ – This CIGA does not require the Licensee to perform the administrative task of compiling the various routine annual or quarterly reports. However, the Licensee is expected to oversee this work from the UAE and to ensure the necessary systems and processes are in place, including the contractual arrangement with any third party administrator. The Licensee is also expected to have the ultimate responsibility for the reporting, and to have the necessary understanding and knowledge to accuratelyconvey the position of the Investment Fund(s) at any time
Example:

 

Trinity Fund is an Investment Fund registered with the SCA. The fund is structured as a limited partnership with Trinity LLC (UAE) as its corporate General Partner. Trinity LLC has appointed Morpheus LLC (UAE) as the investment manager for the Trinity Fund, and has delegated to Morpheus LLC the day- to-day investment and divestment decision making responsibilities. The administration of the Investment Fund is handled by a third-party administrator established in the UAE, Neo LLC.

 

Trinity Fund itself is not considered to undertake an Investment Fund Management Business.
Trinity LLC, on the basis that its activities are limited to being the General Partner of the Trinity Fund, with all discretionary investment management activities being delegated to Morpheus LLC, is not considered to undertake an Investment Fund Management Business.

 

Morpheus LLC, as the investment manager of the Trinity Fund, is considered as carrying on an Investment Fund Management Business.

 

Neo LLC does not provide discretionary investment management services and is therefore not considered an Investment Fund Management Business.

 

Reach out to Spectrum to know everything about ESR. Contact at +971 50 9866466 or email us at info@spectrumaccounts.com now!

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