The Securities and Investment Business Act, 2010 defines a mutual fund as a legal vehicle that collects and pools investor funds for the purpose of collective investment and whose funds interests are redeemable on demand atan amount computed by reference to the net assets of the fund. All mutual funds doing business in or from within the BVI are required to be registered as a public fund or recognised as a private or professional fund. Important matters to consider in the structure of the mutual fund are considered below.
THE UNDERLYING INVESTMENTS
Although most funds permit themselves a range of investments, they generally specialize in a particular area, such as equities, bonds, currencies, particular geographical areas or market sectors. Hedge funds rely to an extent upon the use of derivative instruments. In addition, some funds may rely heavily on the use of leverage or trade upon margin in order to boost returns and are higher risk, in particular where these are also based upon derivatives.
Where the intended investments are relatively liquid investors can subscribe and redeem their shares for cash on a regular basis. If the intended asset classes are illiquid investments, such as real estate developments or film finance, then valuations and redemption opportunities may be less frequent, or a "closed-ended" (non licenced) fund may be appropriate.
A fund may intend to invest in a variety of asset classes and to offer investors a choice of portfolio mix, with the option to switch between asset classes at minimal cost. A common structure is the "Fund of Funds", "Umbrella Fund" or “Segregated Portfolio Company”. Sub-funds offer a menu from which investors can access on a pooled basis when they may have no access individually. A Segregated Portfolio Company ensures that the risks of one class of investment does not affect investors in another class and if a fast growing choice of structure.
THE LEGAL EXISTENCE OF THE FUND
The BVI Business Companies Acts provides extraordinary flexibility that allows the company to be modeled to the exact requirements of the offering. The BVI is the world leader for company formations and “BVI’s” are used by investment managers worldwide. The limited liability aspect of a company affords the directors and stakeholders protection from personal claims in the absence of fraud. The BVI Business Companies Act also provides for the formation of multi class and segregated portfolio companies.
The Limited Partnership Act allows for Limited Partners who are not liable for losses beyond their initial partnership contribution (investors) and a General Partner, as such as partnership is not ideal for speculative funds but may be of consideration in tax planning.
The Unit Trust is not typically used for private/professional funds due to the liability of the Trustee for the administration of the funds and the additional corporate secretarial in maintaining and administering unit holders in accordance with the trust deed.
SIBA together with Regulations and a Code of Conduct govern the establishment and management of public, private and professional funds. Public funds are required to be registered, a simpler recognition procedure is in place for funds qualifying as private or professional.
METHOD OF MARKETING SHARES
The fund structure is also affected by where and to whom the funds are offered. The law defines the fund as either:
- Public fund offered to the general public.
- Professional fund offered to professional investors" (individuals subscribe at least $100,000 and have a net worth at least one million dollars or are institutional investors).
- Private funds have less than 50 persons or offered on a restricted basis.
The nature of offering will determine the category of fund and the regulatory requirements to be considered. Whilst BVI law is important, domestic legislation in the jurisdictions of offering are important to consider.
INVESTOR RETURNS
The typical fund issues redeemable shares and has the objective of capital growth. Subject to any limitations in the constitutional documents of offering document there is no restriction on the number of shares that the fund can issue. After the initial offering period subscriptions and redemptions are traded at the Net Asset Value and typically beingeing a growth fund dividends are not declared.
The frequency of redemptions is governed by the liquidity of the underlying investment and by the frequency of valuations. Normally valuation takes place on the last business day of each month. If the fund is highly liquid and prepared to bear the administrative costs valuations can daily.
A closed-end fund will usually return capital on an irregular basis after the underlying asset is sold and is a suitable vehicle for property funds.
KEY FUNCTIONARIES, FEES AND EXPENSES
The Sponsor is the creator of the fund and will typically hold voting shares in the fund that are not entitled to distributions. Investor shares are typically non-voting preferred redeemable shares.
Subscribers and redemptions may be subject to a load which may be at different rates depending on investment amount or length of investment. Commissions may also be payable.
The Investment Manager is responsible for investment of the fund’s asset. The manager earns fees in the range of 1 to 3% of the NAV per annum. In addition managers normally take an incentive fee based upon increases in the NAV which range from 5% to 50% of the gain, usually with a high watermark. The fund may also appoint an Investment Advisor.
The Administrator keeps the books and records of the fund, calculates the NAV. Administration fees depend upon the activity and complexity of the fund generally in the region of 10-30 basis points. The Administrator often acts as Registrar and Transfer Agent maintaining the share register of the fund.
The Custodian holds the fund's cash and investment assets. Commonly fund assets are held by one or more brokers who execute trades on behalf of the fund. Custodial Fees can also be a fixed fee or a percentage of NAV. Where a broker acts as de facto custodian, it usually charges on a transactional basis.
In addition, the fund will also be responsible for all of its own legal, accounting, corporate, regulatory and other administrative expenses.