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 typically established outside the UK, in an offshore jurisdiction, because there are no UK non-retail tax-exempt fund vehicles available, other than unauthorised unit trusts open only to UK tax-exempt unitholders.

In practice, closed-ended non-retail funds, such as private equity funds, are typically established as English or non-UK (offshore) limited partnerships and open-ended non-retail funds, such as hedge funds, as offshore open-ended companies or trusts. Scottish limited partnerships, which, unlike English limited partnerships, have separate legal personality, are occasionally used as non-retail fund vehicles (eg, for private equity ‘carried interest’ schemes, because they are closed-ended, but still tax-transparent). Commonly used offshore jurisdictions for non-retail limited partnerships are the Cayman Islands, Guernsey and Jersey and, for non-retail investment companies, the Cayman Islands and Ireland.

Exchange-listed closed-ended vehicles offered only to non-retail investors are typically formed in Guernsey or Jersey.

Laws and regulations

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

Non-retail funds are subject to the governing law of their jurisdiction of formation. Most offshore jurisdictions impose relatively light requirements on the establishment and operation of these vehicles, provided they are offered only to professional investors.

UK-based managers of non-retail funds are subject to UK law implementing the AIFMD, because they carry on the regulated activity of managing an AIF. The AIFMD requirements apply indirectly to an AIF, through imposing obligations on the AIFM (such as the appointment of a depositary). In addition, certain types of non-retail funds may qualify in the UK as a European venture capital fund or European social entrepreneurship fund under EU law applying to AIFMs. For example, sub-threshold AIFMs (see question 25) may obtain such a designation for a fund in order to allow it to be marketed to ‘professional investors’ (see question 26), and certain other substantial investors, throughout the EEA under an EU passport.

An AUT, OEIC or ACS may be established in the UK as a qualified investor scheme (QIS), a type of scheme with limited investment restrictions authorised by the FCA and available only to professional and sophisticated retail investors. In practice, because of this restriction, very few QISs have been established. As a QIS is not a UCITS, it will constitute an AIF under the AIFMD.

A UK AIF that is an MMF must comply with the MMFR’s specialised investment eligibility, spread, concentration and portfolio rules, and its liquidity management procedures and prohibition on external financial support (such as a guarantee). The applicable investment portfolio rules will depend on the type of MMF and whether it is ‘short-term’ or ‘standard’.


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

A UK manager of a non-retail fund (wherever the fund is established) (an AIFM) will usually have to be authorised under the FSMA. UK AIFMs, unless ‘sub-threshold’ (see below), will be subject to the EU AIFMD for all purposes. The fund itself does not have to be (and cannot be) authorised or licensed, except in the specialised case of European long-term investment funds (ELTIFs), which must be authorised under the EU ELTIF Regulation. ELTIFs must be primarily invested in small companies and can allow investors only limited redemption rights. They can be marketed throughout the EEA, under an EU ‘passport’, to non-retail investors and (subject to conditions) also to retail investors.

Sub-threshold AIFMs are AIFMs whose aggregate AIF assets under management, across their entire portfolio, do not exceed €100 million or, where the funds are unleveraged and (for at least five years) closed-ended, €500 million. Sub-threshold AIFMs are only subject to a limited AIFMD regime, but most must be authorised under the FSMA and accordingly comply with the FCA rules.

For marketing in the UK to non-retail (‘professional’) investors (see question 26), AIFs can be separated out as follows (see further question 31):

  • an EEA (including UK) fund managed by an above-threshold EEA (including UK) AIFM, which, subject to approval by or notification to the FCA and compliance with the AIFMD, can be marketed in the UK by a UK AIFM, and, under the AIFMD passport rules, by a non-UK AIFM;
  • a non-EEA fund managed by an above-threshold EEA (including UK) AIFM, which can be marketed in the UK, following notification to the FCA, subject to compliance with the AIFMD;
  • a fund managed by a non-EEA AIFM (including a sub-threshold non-EEA AIFM), whether the fund is established within or outside the EEA, which can be marketed in the UK, following notification to the FCA, subject to compliance with the AIFMD; and
  • a fund managed by a sub-threshold EEA (including UK) AIFM, which can be marketed in the UK, subject to compliance with the general UK financial promotion regime (see question 9).

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

Non-retail funds can be marketed in the UK by AIFMs (EEA (unless sub-threshold) or non-EEA) as set out in question 25 to professional investors (professional clients, within the meaning of MiFID II, including individuals (eg, investing through family offices) and local authorities satisfying the financial conditions to be treated as professional investors). In practice, it can be difficult for individuals and local authorities to satisfy these financial conditions. Separately, the UK financial promotion rules allow non-retail funds to be marketed to a number of other types of institutional and individual investor. In particular, non-retail funds can be marketed under those rules to local authorities and various classes of individual investor (such as certified sophisticated investors - see question 10), subject to conditions as to the promotion’s contents.

A person marketing a non-retail fund in the UK must be FCA-authorised if it:

  • carries on a regulated activity in the course of marketing the fund, such as giving investment advice or arranging deals in investments; and
  • carries on such activity in the UK, within the meaning of the FSMA (subject to the overseas person exclusion referred to in question 4).

In practice, UK intermediaries (eg, advising managers on UK marketing strategy or locating prospective UK investors) are normally FCA-authorised.

Brexit and beyond

Following the UK’s referendum on continued membership of the EU in June 2016, the UK was scheduled to leave the EU on 29 March 2019. However, the date has now been delayed until 31 October 2019, although the UK can exit prior to that time if an agreement is reached. Even with this extended date, there is expected to be a transition period following the UK’s exit, when EU law subsisting at exit will continue to apply in the UK, as well as EU law coming into effect after exit, but during the transition period. At the end of this period, the UK will be free to retain, amend or repeal EU legislation applying in the UK (whether directly or indirectly). The crucial point here is that, although EU-derived, this legislation will then apply only in the UK, rather than throughout the EEA, unless (but then only to the extent) any special (bespoke) EU-UK deal effectively preserves its wider EEA ambit (eg, through an ‘equivalence’ regime for UK fund managers, allowing them ‘market access’ to the EEA, provided the applicable UK regulation is deemed ‘equivalent’ to the corresponding EU regulation). It is unclear whether any bespoke deals will in fact be concluded for the UK financial services industry, although the industry is pressing the UK government to negotiate, in particular, the continuation of EU passporting rights (market access) for UK fund managers (retail and non-retail) and UK retail funds. Despite this lack of clarity, most observers do expect bespoke deals.

If there are none, the most important impact of EU exit, at the end of the transition period, will be that UK fund managers will lose these passporting rights, which currently allow them to:

  • conduct ‘cross-border’ business throughout the EEA (including servicing clients in the EEA from the UK);
  • establish branches throughout the EEA;
  • sell UCITS and (most) AIFs throughout the EEA; and
  • access all EEA-regulated financial markets, central clearing counterparties and securities clearing systems.

Also, without a bespoke deal, at the end of the transition period, UK UCITS funds will automatically lose their ‘UCITS’ labels, and any delegation of investment management by an EEA UCITS fund manager to a UK fund manager will probably require the EEA manager to retain a more substantial EEA (non-UK) administrative and governance presence than now, making delegation less attractive.

Ownership restrictions

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

There are no UK investor-protection rules restricting ownership of non-retail funds (including exchange-listed funds) to certain classes of investor. There are rules that limit the marketing in the UK of non-retail funds to certain classes of investor (see question 26), and certain types of investor, such as UK pension funds and UK charities, are subject to rules governing the types of investment they can make, for prudential or risk management reasons. In addition, FCA-authorised persons must ensure that any investment recommended to a client, whether retail or non-retail, is suitable for the client. There are also rules that apply to firms selling ‘complex’ financial products, including non-retail funds, on an execution-only basis to retail clients (ie, without giving advice) to ensure that any product sold is appropriate for the purchasing client.

Managers and operators

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

The FCA’s rules for AIFMs (in particular, its FUND rules) cover (among other things) financial resources, risk and liquidity management, valuation, delegation, the appointment of a fund depositary, regulatory reporting, investor disclosure (transparency) and anti-‘asset stripping’. These rules represent accepted international standards of best practice for AIFMs, including hedge fund managers. The manager of a non-retail fund must also comply with any applicable locally derived rules of the jurisdiction in which the fund is established. For example, Ireland imposes rules on the governance and reporting required for funds established in Ireland.

Tax treatment

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

Funds structured as partnerships are typically exempt from UK direct taxes. Broadly, then, partnership investors are taxed as if they had invested directly in the underlying partnership assets.

Funds structured as offshore companies are also typically not subject to UK direct taxes, provided that, where their activities would otherwise constitute trading in the UK for UK tax purposes (including through a dependent agent permanent establishment), the manager qualifies for the UK’s ‘investment management’ tax exemption.

Under the UK offshore funds rules, UK-resident investors are generally subject to income tax on gains realised on the disposal of holdings in offshore companies, unless, very broadly, the fund is approved by HMRC as a ‘reporting fund’ and reports its income annually to UK investors and HMRC. If so, UK-resident investors pay capital gains tax on gains realised on their reporting fund holdings, but will have been subject to income tax (where applicable) on any income reported by that reporting fund (whether distributed or not). 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 (see question 18) 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?

The AIFMD (as implemented in the UK) requires an EEA manager of an EEA AIF to appoint a depositary to hold the fund’s assets, as its custodian, and to perform certain other oversight duties, such as monitoring the fund’s cash accounts and its asset valuation process. An AIF depositary is liable for the loss of any of the fund’s assets by itself, as custodian, or by a sub-custodian of any of the fund’s assets (strict liability), unless it can prove that the loss arose as a result of an external event beyond its reasonable control, the consequences of which would have been unavoidable despite all reasonable efforts by it to the contrary. If the depositary carries on business in the UK, that business will also be subject to the FCA’s CASS rules on custody of assets, designed to ensure that custodians observe professional standards of care and diligence, including in the appointment of sub-custodians.

An EEA manager of a non-EEA AIF not marketed in the EEA need not appoint a depositary. An EEA manager of a non-EEA AIF marketed in the EEA must appoint one or more entities to perform the depositary’s custody and monitoring functions (‘depositary-lite’ functions), but the strict liability custody rule will not apply.


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

The UK manager of a non-retail UK fund (a UK AIF) must usually be authorised by the FCA as an AIFM. A UK AIFM (unless sub-threshold) must apply to the FCA for approval to market a UK (or EEA non-UK) AIF in the UK and provide details of the AIF and a copy of its prospectus to the FCA. The FCA then has 20 working days in which to grant or refuse permission to the AIFM to market the AIF.

A UK AIFM (unless sub-threshold) must notify the FCA prior to marketing a non-EEA AIF in the UK and provide prescribed information. It may market the AIF following the notification (although, in practice, it will wait for acknowledgement of the notification from the FCA, which typically takes a day or so).

A UK AIF is not itself subject to organisational rules, although its manager (the AIFM) is subject to such rules (see question 28). The AIFM must disclose information regarding the AIF to investors on a periodic basis (see question 32).


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

A UK AIFM (unless sub-threshold) must, for each EEA AIF it manages and for each AIF (wherever established) it markets in the EEA:

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