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Thursday, 11th September 2025 |
| Luxembourg versus Dublin - which is the best centre for domiciliation |
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| Although Dublin is arguably the most favoured fund domicile in Europe for alternative investments, Luxembourg has developed a strong reputation to rival Ireland, DONNACHA O’CONNOR writes, in this analysis of domiciling a fund in both Luxembourg and Dublin. |
For various reasons, the Caribbean, and, most notably, the Cayman Islands, has traditionally been the domicile of choice for the majority of hedge fund managers. However, over the last number of years stiff competition has emerged from Europe. There are a number of factors prompting this challenge, notably the institutionalisation of the hedge fund investor-base, the lightening of hedge fund product regulation within Europe, regulatory developments in the US which may lead to compulsory registration of hedge fund managers and the potential for eventual EU-wide distribution.
Ireland has arguably become the favoured fund domicile in Europe for alternative investments. The IFSC is home to a well-established fund administration business servicing more than US$200 billion in ‘alternative’ fund assets. The Irish Stock Exchange also lists the largest number of the world’s offshore funds.
Luxembourg has also developed a strong reputation to rival Ireland. It has been possible to establish hedge funds and funds of hedge funds in Luxembourg for the past ten years, and Luxembourg has recently clarified its legal framework applicable to alternative funds. Luxembourg’s reputation remains principally that of a location for retail funds for the European market.
Apart from the usual considerations of investor requirements, low tax rates and the quality and experience of local service providers, which are beyond the scope of this article, an important factor in deciding whether to domicile a hedge fund in either of these European offshore centres is the regulatory environment in which the fund will operate and, particularly, the extent to which the fund has prudential restrictions.
Some of these factors are outlined below and a full version of this article appears in this month’s electronic version of Finance Dublin, which can be accessed at www.financedublin.com
Legal and regulatory framework
Ireland: Due to investment, borrowing and other restrictions contained in the UCITS Directive of 2003, it is not possible to establish traditional hedge funds (involving short selling of securities and relatively high levels of leverage) as UCITS. As a result, hedge funds established in Ireland are established under domestic Irish legislation and are further governed by detailed regulations (the Non-UCITS Notices and Guidance Notes), made pursuant to the legislation by IFSRA. The broad regulatory framework for UCITS and non-UCITS is similar.
The legal structures available to promoters establishing hedge funds in Ireland are the unit trust, variable capital and fixed capital investment companies (public limited companies) and the limited partnership.
Luxembourg: The Luxembourg funds industry is regulated by the Commission de Surveillance du Secteur Financier (the CSSF). The Law of 2002, is the main piece of investment fund legislation and governs the establishment and administration of both UCITS and non-UCITS. It is supplemented by the Law of 1991 governing institutional funds and CSSF Circulars, in particular, Circular CCSF 02/80, which contains specific rules concerning Luxembourg alternative investment schemes. CSSF Notes and Grand Ducal Regulations also apply.
The choices of legal structure available in Luxembourg are the contractual type fonds communs de placement (FCP) (similar to a unit trust structure), the soci?t? d’investissement ? capital variable (SICAV) (public limited companies) and the soci?t? d'investissement ? capital fixe (SICAF), which may be established as a public limited company or as a partnership limited by shares.
Timing of hedge fund authorisation
Currently IFSRA takes approximately eight weeks, and the CSSF takes approximately eight to 12 weeks, to authorise a hedge fund.
Ireland’s regulator, in conjunction with the funds industry in Ireland, is making significant strides towards substantially reducing this delay. The new draft Guidance Note on prime brokers and OTC counterparties (common features in hedge fund structures) introduces a certification procedure, which will improve IFSRA’s review timetable.
Likewise, timing is a significant issue being addressed with the Luxembourg industry.
Basic regulatory requirements for hedge funds
The basic regulatory requirements are similar in both jurisdictions.
Ireland: The fund’s promoter must complete a straightforward application form to be considered by IFSRA which is designed to provide evidence of the promoter’s good repute, level of financial resources and regulatory status, if any, in its home jurisdiction. Directors of the fund or of the management company or general partner must be approved in advance by IFSRA. Only approved administrators and trustee-custodians may be used. Investment managers must generally be regulated in their home jurisdictions, have not less than €125,000 in shareholders’ funds and have appropriate experience in the type of fund management which they propose to undertake. Unless they can ‘passport’ into Ireland from another EEA Member State, investment managers will be subject to an approval process similar to that to which promoters are subjected. Where derivatives are used for speculative purposes, the investment manager has to demonstrate its experience in such use. Annual audited accounts must be submitted to IFSRA and each fund’s shareholders within four months of the audit date. Unaudited semi-annual accounts, generally prepared by the fund’s administrator, must be submitted to IFSRA and shareholders within two months of the half-year end.
Luxembourg: To be approved in Luxembourg, the promoter must be a well-known financial institution. There is no requirement that a promoter be a Luxembourg entity or have a connection with Luxembourg, however, the proposed promoter of a fund must provide the CSSF with all relevant documents to evidence its reputation, experience and financial standing. Approved administrators and custodians must be used. Directors of the management company (for funds established under the form of an FCP) or of the investment company must be approved by the CSSF. In addition, the principal shareholders of the management company must be approved by the CSSF. The day-to-day asset management of a fund may be carried on from outside Luxembourg, either through individuals (general managers) or through legal entities (investment managers or advisors). The CSSF will, however, review the reputation and professional expertise of all persons involved in the management of a fund. The investment manager has to demonstrate that it has expertise in the strategy of any proposed hedge fund. Annual audited accounts must be submitted to the CSSF and each fund’s shareholders within 4 months of the audit date. Unaudited semi-annual accounts, generally prepared by the fund’s administrator, must be submitted to the CSSF and shareholders within 2 months of the half year end.
Investment restrictions for hedge funds
Ireland: Investment restrictions are applied by reference to the fund’s target investor-category, being Retail, Professional Investor and Qualifying Investor; the basic restrictions for retail funds being doubled in the case of Professional Investor Funds (“PIFs”) and disapplied in full, subject to a few minor exceptions, in the case of Qualifying Investor Funds (“QIFs”). Hedge funds may be established as Retail investor funds of hedge funds and Professional or Qualifying Investor single or multi-strategy funds. To date the majority of single and multi-strategy hedge funds have been established as QIFs due to the greater flexibility of that category, while a large number of moderately leveraged funds, such as long-short/market neutral have been established as PIFs. There has also been a significant take-up of the Retail fund of hedge fund product.
QIFs are permitted to use derivatives, securities, establish long and/or short positions, invest in units of other funds, including hedge funds, without restriction, provided adequate disclosure is made in the QIF’s Prospectus.
Luxembourg: Specific investment restrictions are applied to funds that qualify as undertakings for collective investment pursuing alternative investment strategies under CSSF Circular 2/80.
Specific restrictions: A summary of specific investment restrictions is set out in full in the electronic versions of this article, which can be accessed at www.financedublin.com. Matters discussed include the restrictions imposed by the Irish and Luxembourg authorities on:
• The use of derivatives
• The use of securities
• Investment in the units of other Collective Investment Schemes
• The use of leverage and borrowing restrictions
• Short selling techniques
• Counterparty risk exposure limits
• The use of prime brokers
Over the past year, the European hedge fund industry has continued to develop, with investors, fund promoters and regulators all playing key roles. While the growing need for a regulated product is being addressed in discussions at a European level on the possibility of a pan-European hedge fund product, offshore centres such as Ireland and Luxembourg continue to adapt to the industry’s needs in their domestic regulatory frameworks. |
Donnacha O’Connor is a partner in Dillon Eustace.
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