IRELAND – The European savings directive on the funds industry will have an impact on Hedge funds and hedge fund of funds, according to a handbook from Dublin- and London-based funds consultancy Carne Global Financial Services.

The directive is due to come into force on 1 July 2005.

“Many hedge managers have taken a view that the directive does not affect any hedge funds,” said Carne CEO John Donohoe. “This is not true.”

The handbook notes that, depending on their domicile, hedge funds may be directly or indirectly affected by the directive.

Hedge funds domiciled outside specified territories, for example Bermuda and the Bahamas, do not appear to benefit from the directive’s exemption of UCITS-type funds. Consequently, if they are held by EU-taxable individuals and involve a cross-border payment, for example a redemption payment by a paying agent within the specified areas, such a payment could fall within the reporting or withholding tax requirements if the fund breaches the various asset tests. “

It also lists other complications for hedge funds, including:
Hedge fund of funds may require asset tests from the underlying hedge funds regardless of the underlying funds’ domicile, so hedge funds domiciled in the Cayman Isles or Dublin may need to supply asset tests even though they may be outside the scope of the directive;
Asset tests may be very complex especially where leverage or derivatives are used;
Long/short funds can hold considerable cash, thereby affecting asset test;
Many hedge funds are administered in Dublin or Luxembourg resulting in the paying agent being based within the EU.

“It is imperative that managers understand their ultimate investor base and be able to look through nominee accounts where possible to determine any impacts,” said Donohoe. “Where a fund may be directly or indirectly impacted the manager should determine the need for investor communication and ensure full compliance with the directive.”

Copies of the handbook are available from John Donohoe at john.donohoe@carnegroup.com or on +353 1 489 6800.

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