Since the transposition of the AIFMD in mid-2013, hedge fund managers using Maltese structures have been provided with a wider choice.
However, during the transposition process the locally constructed Professional Investor Fund (“PIF”) regime, which at the time of transposition accounted for more than 84% of all collective investment schemes licensed in Malta, ran the risk of being phased out by the AIFMD compliant funds (“AIFs“).
Over the years the PIF regime has attracted a notable amount of small to medium size funds eager to operate in the Maltese regulatory environment. Its success is attributable to the fact that it is an inexpensive regime due to lighter regulatory costs and it allows hedge fund managers a certain degree of flexibility whilst operating within a robust and reputable legal framework. As an example, funds licensed as PIFs and targeted at sophisticated investors are not required to appoint a depositary so long as they have safekeeping arrangements that are considered adequate by the MFSA.
In doubt and in dire need of answers, the eyes of the local hedge fund industry turned to the Malta Financial Services Authority. The MFSA, which from early days showed promise of being a proactive and, more importantly, a pro-business regulator, took the conscious decision of retaining the PIF regime. This was no easy task. The MFSA jumped through all the regulatory hoops and thanks to a good dose of legal imagination and pragmatism was able to ensure the seamless coexistence of the PIF regime with that of the AIF.
So today hedge fund managers working in or through Malta may licence their hedge funds as a Professional Investor Fund or an Alternative Investor Fund. Whilst the AIF is licence which larger managers would tend to opt for due to the economies of scale which the passporting mechanism offers, the PIF regime is more suited in the following scenarios:
- In the case of a self-managed hedge fund, when its assets under management are below AIFMD threshold (ie. €100m if leveraged, € 500 if unleveraged);
- When the hedge fund is managed by a non-EU fund manager; and
- When the hedge fund is managed by a manager whose assets under management is below the AIFMD threshold ( ie. de minimis fund managers);
Furthermore, a hedge fund which was managed by an above threshold manager could have also been licenced as a PIF. However, this scenario implied that the PIF would be exposed to an additional “layer” of regulation which would require the PIF to comply with the “cumbersome” AIFMD rules applicable as well as, those applying to PIFs. Thus, the PIF would essentially be managed as if it were an AIF despite not having the possibility of marketing its units across the EU by means of the passporting procedure. This additional layer of regulation meant, for example, that the hedge fund required to appoint a local depositary or by virtue of a derogation which is specific to Malta, a credit institution from another EU or EEA Member State
On the 10th of March 2015 the MFSA published a consultation paper on the regulatory approach applicable to PIFs and AIFs. By means of the consultation paper, the MFSA invited feedback from the industry as to whether the PIF and AIF regime should be kept separate which would ensure that the full AIFMs would only manage AIFs to the exclusion of PIFs.
Following the consultation process, which ran until the 30th March 2015, the MFSA informed the industry that with effect from 1 June 2015, the AIFMs could only manage AIFs to the exclusion of PIFS and that existent PIFs which have been established by AIFMs have a one-year transitional period within which to comply with the said decision.
Therefore, by virtue of this decision, the state of play for hedge funds in Malta will be as follows:
- An EU AIFM will be established an AIF;
- A de minimis EU AIFM will be established a PIF and covert to a AIF if the fund manager transitions to an EU AIFM;
- A third country fund manager will be established a PIF or an AIF;
- A self-managed de minimis fund will be established as a PIF;
- A self-managed fund which is above threshold will be established as an AIF.
Today hedge fund managers are choosing Malta as it is a jurisdiction which offers them a choice for their specific needs. Many are using the PIF as an incubation licence, subsequently graduating to the AIF regime once their assets and management warrant the change in licence and/or they require to be able to passport throughout the EU.