There are two types of Funds that can be established in the DIFC, and be managed by either a DFSA licensed Fund Manager or an External Fund Manager:
Public Funds
Exempt Funds
Both Public Funds and Exempt Funds must have a Registered Auditor who is required to report on the financial accounts of the Fund on an annual basis, pursuant to international financial reporting standards. A Fund Manager must also provide interim and annual reports to unitholders and the DFSA. The annual reports must include a valuation of the Fund assets acceptable to the Fund’s registered auditor.
Private Funds still in existence will be phased out by 11 July 2010 (i.e. within 2 years) as the new category Exempt Funds replaces the Private Funds regime.
Specialist Funds
Islamic Funds
The Fund Manager of an Islamic Fund needs to have a licence that authorises it to conduct Islamic Business or an Islamic Window before setting up an Islamic Fund.
The Fund Manager must, in respect of the Islamic Fund:
• Appoint a Shari’a Supervisory Board (SSB) to the Fund. It may use the Firm’s SSB for Shari’a governance purposes of the Islamic Fund;
• Establish and maintain Shari’a compliant systems and controls and an Islamic financial business policy and procedures manual for the Fund; and
• Ensure that the Constitution and Prospectus of the Fund are approved by the Fund’s or Firm’s SSB.
Hedge Funds
The Fund Manager of a Hedge Fund is responsible for ensuring that risks associated with the Fund are adequately managed by:
• Ensuring that there is adequate segregation of duties between the investment function and the Fund valuation process;
• Observing best practice standards and guidance issued by the DFSA, in particular the DFSA Hedge Fund Code of Practice; and
• Observing the requirements that relate to the appointment of prime brokers with authority to combine the assets of the Fund with any other assets, which can only be done in respect of Exempt Funds, and not Public Funds.
Private Equity Funds
These are generally Exempt Funds and taking account of the practices and associated risks, the Fund Manager of an Exempt Fund, for example:
• Is not required to entrust the Fund Property to an Eligible Custodian; instead it must appoint an Investment Committee to the Fund; and
• Must make certain disclosure in its Prospectus relating to how the Fund’s assets are held.
Property Funds
All Property Funds (i.e. Funds investing predominantly in real estate or real estate-related assets) must be closed-ended Funds.
A Property Fund which is a Public Fund, in addition to being a closed-ended Fund, must:
• Invest only in Real Property or Property Related Assets, but may retain up to 40% of its investments in cash or certain specified Securities;
• Be an Investment Company or Investment Trust;
• Be listed, within 6 months of its establishment, either on an Authorised Market Institution or an Exchange in a Recognised Jurisdiction;
• Have the Fund property valued annually, and before acquiring or disposing any asset, do so on the basis of an independent valuation of the relevant property; and
• Limit its borrowings to 80% of its total net asset value.
Property Funds – Real Estate Investment Trusts (REITs)
REITS are a sub-set of Property Funds, which are designed for income generation. A REIT must, in addition to being closed-ended:
• Use only Investment Company or Investment Trust as the Fund vehicle;
• Be a Public Fund that is listed and traded on an Authorised Market Institution;
• Distribute 80% of its audited annual net income to Unitholders;
• Not borrow beyond 70% of net asset value; and
• Invest in ‘property under development’ only up to 30% of its total assets.
In addition to the above specialist classes of Funds, the DFSA Funds regime also has specific provisions dealing with Feeder Funds and Fund of Funds.