Non-retail pooled funds

Available vehicles

What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Non-retail funds (other than limited partnerships) are normally established in offshore jurisdictions outside the UK.

Non-retail closed-ended funds (such as private equity funds) are normally established as English or non-UK (offshore) limited partnerships and non-retail open-ended funds (such as hedge funds) are normally established as offshore open-ended companies or trusts. Scottish limited partnerships, which have separate legal personality, are sometimes used as non-retail fund vehicles, (such as for private equity carried interest schemes) as they better protect limited partners from liability, while still being tax-transparent). The Cayman Islands and Ireland are commonly-used offshore jurisdictions for non-retail investment companies and the Cayman Islands, Guernsey, Jersey and Luxembourg are commonly-used offshore jurisdictions for non-retail limited partnership funds. Further, Guernsey or Jersey are typically used for forming non-retail exchange-listed closed-ended vehicles.

Laws and regulations

What are the key laws and other sets of rules that govern non-retail funds?

Non-retail funds are governed by the law of their jurisdiction of formation. Provided that they are only offered to professional investors, offshore jurisdictions generally impose relatively light requirements on these vehicles’ establishment and operation.

UK-based managers of non-retail funds are subject to UK law that implemented the EU Alternative Investment Fund Managers Directive (AIFMD), as they carry on the regulated activity of managing an alternative investment fund (AIF), unless they carry on portfolio management as a delegate of another manager and in which case they would instead be subject to UK law that implemented the EU Markets in Financial Instruments Directive II (MiFID II). The AIFMD requirements (such as the requirement to appoint a depositary) apply directly to the AIFM in relation to an AIF and so indirectly apply to the AIF. Further, certain types of non-retail UK AIFs may qualify as a venture capital fund or social entrepreneurship fund under UK law applying to AIFMs.

Authorised unit trusts (AUTs), open-ended investment companies (OEICs) and authorised contractual schemes (ACSs) can be established in the UK as qualified investor schemes (QISs), which are a type of scheme authorised by the Financial Conduct Authority (FCA) that have limited investment restrictions and are available only to professional and sophisticated retail investors. Due to this restriction, few QISs have been established in practice. They constitute AIFs (and so are subject to UK law implementing the AIFMD), but must also comply with additional requirements (such as the genuine diversity of ownership condition) to qualify for the tax treatment for an AUT or OEIC.

A UK AIF that is a money market fund (MMF) is also subject to the requirements under the UK Money Markets Fund Regulation 2017 (MMFR), such as rules on liquidity management procedures, a prohibition on external financial support and specialised investment eligibility, spread, concentration and portfolio rules. The applicable investment portfolio rules depend on the type of money market fund and whether it is ‘standard’ or ‘short-term’.


Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

The UK AIFM of a non-retail UK or non-UK AIF must usually be authorised by FCA under the Financial Services and Markets Act 2000 (FSMA) to carry on the regulated activity of managing an AIF. A UK delegate appointed by the AIFM to provide discretionary investment management services in respect of the AIF must usually be authorised by FCA under FSMA to carry on at least the regulated activity of managing investments. UK AIFMs are subject to the UK rules implementing the AIFMD for all purposes, unless they qualify as sub-threshold’ AIFMs (see below). The fund itself cannot be authorised or licensed, except if it qualifies as a long-term investment fund (LTIF), which must be authorised under the EU LTIF Regulation, as retained and amended in UK law. LTIFs must mainly be invested in small companies and can only allow investors limited redemption rights. They can be marketed in the UK to non-retail investors and (subject to conditions) retail investors.

Sub-threshold AIFMs are broadly AIFMs whose aggregate assets under management across the entire portfolios of their AIFs do not exceed €100 million or, if the AIFs are all unleveraged and provide no redemption rights for the first five years, €500 million. While sub-threshold AIFMs are subject to only a limited AIFMD regime, most must still be authorised under FSMA and comply with FCA rules.

As to marketing in the UK to professional (ie, non-retail) investors:      

  • a UK AIF managed by an above-threshold UK AIFM can be marketed in the UK, subject to approval by the FCA and compliance with the AIFMD and the general UK financial promotion regime;
  • a non-UK AIF managed by an above-threshold UK AIFM can be marketed in the UK, following notification to the FCA and subject to compliance with the AIFMD and the general UK financial promotion regime;
  • a UK or non-UK AIF managed by a non-UK AIFM (including a sub-threshold non-UK AIFM) can be marketed in the UK, following notification to the FCA and subject to compliance with the AIFMD and the general UK financial promotion regime; and
  • an AIF managed by a sub-threshold UK AIFM can be marketed in the UK, subject to compliance with the general UK financial promotion regime.

Who can market non-retail funds? To whom can they be marketed?

Subject to certain conditions, non-retail funds can broadly be marketed in the UK by UK or non-UK AIFMs to professional investors (ie, professional clients within the meaning of MiFID II, including individuals and local authorities satisfying the conditions to be treated as professional clients). It can often be difficult in practice for individuals and local authorities to satisfy these conditions. Separately, the UK financial promotion requirements allow non-retail funds to be marketed to certain other types of institutional and individual investors (such as local authorities and certified sophisticated investors), subject to conditions on the promotion’s content.

Subject to certain exemptions, a person marketing a non-retail fund in the UK must generally be FCA-authorised if it carries on in the UK a regulated activity in the course of marketing the fund, such as arranging deals in investments in the fund or giving investment advice to investors on investing in the fund.

In practice, UK intermediaries (such as those advising managers on their UK marketing strategy or finding prospective UK investors) are typically FCA-authorised.

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

There are no UK investor-protection rules that restrict ownership of non-retail funds to certain classes of investors, although, there are rules that restrict the marketing in the UK of non-retail funds to certain types of investors. Further, certain types of investors (such as UK pension funds) are subject to restrictions on the types of investment they can make (such as for risk management or prudential reasons). FCA-authorised persons must in addition ensure that any investment recommended to a retail or non-retail client is suitable for the client and that any ‘complex’ financial products, including non-retail funds, sold on an execution-only basis to retail clients (i.e. without advice) are appropriate for the client.

Managers and operators

Are there any special requirements that apply to managers or operators of non-retail funds?

UK AIFMs are subject to requirements under the FCA’s rules on (among other things) risk and liquidity management, valuation, financial resources, delegation, appointing a fund depositary, investor disclosure, regulatory reporting and anti-asset stripping. These rules generally reflect the requirements under the EU AIFMD. The manager of a non-retail fund must additionally comply with any applicable local rules of the jurisdiction in which the fund is established.

Tax treatment

What is the tax treatment of non-retail funds? Are any exemptions available?

Funds structured as partnerships are generally not treated as taxable entities for UK tax purposes, but instead the investors are treated as having invested directly in the underlying partnership assets.

Funds structured as offshore companies are taxable entities, but generally would not be subject to tax in the UK unless they derive certain UK source income (such as certain interest and some real estate related income or gains), or if they are treated as trading in the UK for UK tax purposes.  An asset manager transacting in the UK on behalf of an offshore company potentially results in the company being treated as trading in the UK, but typically the manager should qualify for the UK’s investment manager exemption, provided the manager is sufficiently independent from the fund.

UK non-resident fund investors are generally not subject to UK capital gains tax nor UK corporation tax on chargeable gains, unless the offshore fund has a significant direct or indirect investment (broadly 75 per cent by gross asset value) in UK land (real estate) in which case a special regime applies.

Offshore corporate funds (and some contractual funds, but not offshore partnerships) may fall within the UK offshore funds rules, under which UK resident investors will generally be subject to income tax on disposals of interests in the fund, although some exemptions apply particularly if the fund invests primarily in unlisted trading companies. If, however the fund elects to, and continues to qualify as, a reporting fund (which requires approval from HMRC), UK resident investors will be subject to income tax on income as it accrues (whether or not it is distributed), but should still qualify for capital gains tax on disposals of interests.  Special rules can apply to prevent double counting in relation to the taxation of holdings in a reporting fund and special rules can also treat distributions from bond funds broadly as if they were interest for tax purposes and require UK corporation tax payers to pay tax on bond fund holdings on an annual fair value basis.

Asset protection

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

Under UK law that implemented the AIFMD, a UK manager of a UK AIF must appoint a depositary to hold the AIF’s assets as its custodian and perform certain other oversight duties, such as monitoring the AIF’s asset valuation process and cash accounts. The depositary is strictly liable for the loss of any of the AIF’s assets by itself, as custodian, or by a sub-custodian of any of the AIF’s assets, unless it can prove that the loss resulted from an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts by it to the contrary. Depositaries carrying on business in the UK are also subject to the FCA’s CASS rules on custody of assets that are intended to ensure that custodians adhere to professional standards of care and diligence, including in the context of appointing sub-custodians.

A UK manager of a non-UK AIF that is not marketed in the UK is not required to appoint a depositary. A UK manager of a non-UK AIF that is marketed in the UK must appoint one or more entities to perform only the custody and monitoring (‘depositary-lite’) functions and the strict liability rule does not apply.


What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The UK AIFM of a non-retail UK AIF must normally be authorised by the FCA to carry on the regulated activity of managing an AIF. A UK full-scope AIFM must apply for FCA approval to market in the UK a UK AIF and must provide the FCA with the AIF’s details and a copy of its prospectus. The FCA then has 20 working days in which to grant or refuse approval for marketing the AIF.

A full-scope UK AIFM must notify the FCA before marketing a non-UK AIF in the UK and provide certain information to the FCA. The AIFM can market the AIF immediately after submitting the notification, although AIFMs in practice wait for the FCA’s acknowledgement of the notification, which usually takes a day or so.

While a UK AIF is not itself subject to organisational rules, its AIFM is subject to organisational rules and must periodically disclose to investors information on the AIF.


What are the periodic reporting requirements for non-retail funds?

A full-scope UK AIFM must, for each UK AIF it manages and for each UK or non-UK AIF it markets in the UK:  

  • make available an annual report that contains the AIF’s financial statements and certain disclosures, such as the total remuneration (split into fixed and variable amounts) paid by the AIFM to its staff, and the total remuneration paid to its senior management and staff members whose actions materially impact the AIF’s risk profile;
  • disclose certain information on the AIF (such as changes in its risk profile, liquidity or leverage) to its investors on a periodic basis; and
  • regularly report to the FCA (Annex IV reporting) on, among other things, the AIF’s risk profile, asset categories and principal exposures.