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Friday, 14th August 2020
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Regulatory issues and alternatives: the importance of MIFID Back  
 
The Markets in Financial Instruments Directive (MiFID) applies to investment firms and credit institutions when providing investment services and to regulated markets. MiFID is a comprehensive regulatory regime covering investment services and financial markets in Europe and introduces common standards for investor protection throughout the European Union. The MiFID Regulations were transposed into Irish law on 15 February 2007 and came into effect on 1 November 2007.

Hedge Funds investment - is unregulated, and as such, falls outside of the auspices of the Financial Regulator in Ireland. Any investment in a hedge fund by a private investor is likely to be substantial. Given that private investors in hedge funds are dealing in such large amounts, it is presumed that they are sophisticated investors aware of the risks and rewards involved. This is similar to the qualifying investor fund (QIF) in Ireland, where the minimum investment is E250,000, thus excluding retail investors.

However, the Regulator has made provision for retail investors to become involved in the alternative investment sector through the establishment of funds of hedge funds. In its report, ‘Enhancement of the EU framework for investment funds - expert group reports: Comments of the Irish Financial Services Regulatory Authority’, the Regulator commented on the availability of fund of hedge funds to retail customers, saying, ‘we consider that there is scope for the introduction of a harmonised hedge fund product, for sale to retail investors, in the form of a fund of hedge funds.’

Private equity - The premier funds are often accessible only to investors able to make commitments of E10 million in each fund, so creating a diversified portfolio of around ten private equity funds would require a commitment of around E100 million. Instead, investors need to focus on getting diversified exposure to the best performing managers. For most investors, the most effective solution will be to use a fund of funds, a vehicle whose popularity has grown rapidly, particularly during the last five years. The wide variation in private equity returns between top quartile and median managers is the main driver for investors to use a fund of funds in order to get diversified exposure to the top performing funds.

Qualifying Investor Funds (QIFs) can, accordingly, pursue investment strategies which include short selling, significant borrowings, derivatives and investments in hedge funds, without restriction. Similarly, the limits on the level of investment in any given market or securities which apply to all other types of funds in Ireland do not apply to QIFs.

Accordingly, QIFs are particularly suitable for sale to sophisticated and experienced investors, who are expected to be aware of the risks of more aggressive investment strategies.

In order to qualify as a QIF, the fund may only accept investors who satisfy certain eligibility criteria (Qualifying Investors) and who subscribe a minimum of E250,000 into the fund.

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