Switzerland, on 1 March 2024, is launching a new fund category called the Limited Qualified Investor Fund (L-QIF). A from the Swiss asset management association AMAS noted that it aims to “increase the number of collective investment schemes launched in Switzerland.” It added that the L-QIF is meant to be an alternative to Luxembourg’s reserved alternative investment fund (Raif), but that it doesn’t “fully achieve the original objective of liberalising the structure.”

To hear more about the new fund and whether it poses a competitive threat to Luxembourg’s Raif, Delano caught up with , partner at Elvinger Hoss Prussen in Luxembourg, and separately with Switzerland-based Ilan Mizrahi, CEO of Fundpartner Solutions CH (part of Pictet Asset Services).

In a few words, what is the background behind the L-QIF?

Benjamin Rossignon: From Switzerland’s perspective, the L-QIF is presented as the Swiss cousin of the Luxembourg Raif. The Luxembourg Raif has until now had a great success with Swiss institutional investors. In order to try to counterbalance that situation, the Swiss government has decided to put in place a new type of investment vehicle which presents many similarities with the Luxembourg Raif.

Ilan Mizrahi: The development of Switzerland’s L-QIF is made possible thanks to amendments to the Federal Act on Collective Investment Schemes (CISA) and its ordinance (OPCC). This fund promises rapid time to market, increased efficiency, ease of use, liberal regime and reduced costs, which has been expected in the Swiss market for a number of years. We see this evolution of regulations as a great opportunity to respond even better to the specific needs of our customers who are increasingly specialised and sophisticated.

Could you describe some of the main features of Switzerland’s L-QIF?

Mizrahi: The L-QIF is largely inspired by the characteristics of the Luxembourg Raif. Exclusively reserved for qualified investors, it is not subject to approval or authorisation from Finma [Swiss Financial Market Supervisory Authority], which promotes rapid implementation and marketing of the vehicle, at low costs. It also offers great flexibility and simplified product lifecycle management, which is a substantial advantage over existing fund categories.

The L-QIF regime is very liberal, the investment requirements and risk distribution rules of the CISA provided for approved funds are in principle not applicable. Only the investment techniques and certain investment restrictions applicable to an alternative type fund, the framework of which is already broad, will be found under the L-QIF regime--limitation on the level of leverage used, for example. This improves the flexibility offered to promoters, particularly with regard to asset categories and the implementation of investment strategies. The L-QIF could constitute an appropriate vehicle for alternative type investment strategies or for the benefit of illiquid or difficult to assess investments, i.e., private equity. This market could probably be revitalised in Switzerland. Funds combining traditional and alternative strategies can be structured and launched more quickly.

Rossignon: The L-QIF must be be managed by a Finma-supervised entity--ensuring proper management and compliance with regulations--and structured under one of the following legal forms: Swiss contractual funds (SCFs), Swiss investment companies with variable capital (Sicavs) or Swiss limited partnerships for collective investment (Swiss LPs).

No specific investment guidelines and risk diversification rules exist. The L-QIF is not subject to a new tax treatment: it will be treated as other Swiss funds. The L-QIF will be qualified as a tax transparent fund for direct income tax purposes with the consequence that the L-QIF will be exempt from Swiss taxes and the unitholders will be subject to tax on their proportionate share of the income and gains generated by the L-QIF.

Although the L-QIF must be managed by a Finma-supervised entity, it is not subject to approval or authorisation from the Swiss regulator. Are there any particular safeguards in place?

Mizrahi: Despite its very broad framework, the regulations nevertheless provide safeguards to guarantee the safety of the vehicle. We are thinking here in particular of the requirements to designate a regulated establishment for fund administration (fund management under Swiss law) and the delegation of management can only take place with a collective asset manager. The institutes will also be subject to duties of information and transparency towards investors. The documentation must describe and give indications on any investment strategies, investment techniques or constraints applicable to the fund. It will be key for the institutes responsible for administering the L-QIF to become aware of the important role they play in guaranteeing and complying with regulatory requirements, as the fund is not subject to Finma supervision.

How does the L-QIF compare to Luxembourg’s Raif?

Rossignon: Like the Raif, the L-QIF is not subject to regulatory approval or supervision which allows to improve time-to-market and makes it more attractive for fund managers. A Raif must be managed by an authorised alternative investment fund manager (AIFM) and the Alternative Investment Fund Managers Directive (AIFMD) requires that authorised AIFMs ensure that the AIFs they manage comply with the AIFMD product rules--in particular rules on delegation and AIFMD depositary regime.

Mizrahi: It is not easy to compare the two vehicles intrinsically… The Raif facilitates the creation of funds for alternative strategies and private investments--private equity, private debt, etc. The L-QIF, although not a direct competitor, offers an alternative in Switzerland to also consider the emergence of this type of vehicle and strategy. L-QIFs do not require Finma approval but must still meet certain compliance requirements. They have, however, been specifically designed to respond to the growing sophistication and expertise of certain investment professionals.

Both vehicles aim to improve time to market and flexibility for well-informed or qualified investors under Swiss law. Current regulations in Luxembourg in particular and soon in Switzerland facilitate this objective. A systematic analysis of the specific needs of each of our clients must be carried out to determine which fund solution should be put forward, taking into account different criteria such as the need for marketing the product, tax aspects, circle and domicile. investors, asset types, etc.

In your opinion, does the Swiss L-QIF pose a serious competitive threat to Luxembourg’s Raif?

Rossignon: The Raif benefits from both (i) the passport of its authorised AIFM for marketing to professional investors within the EU and (ii) the AIFMD rules (which aim to provide transparency and protection to investors). This is, in our view, the key difference with the L-QIF which does not benefit from such rules, in particular the passport for marketing in the EU. As a result, the creation of the L-QIF does not constitute, from a Luxembourg perspective, a competitive alternative to the Luxembourg Raif.

In our view, the Raif is still the vehicle of choice for Swiss managers looking to combine contractual freedom and short time-to-market together with both the protection of the AIFMD framework, and the marketability of an investment vehicle benefiting from an EU passport.

Mizrahi: The L-QIF represents an alternative to funds regulated in Switzerland, making it possible to improve the time to market while benefiting from a very liberal regime in terms of management constraints, the fund not providing for investment prescriptions or requirements in terms of risk distribution rules. Establishments must, however, guarantee at all times compliance with the rules of the L-QIF, particularly in terms of transparency and information to investors and monitoring of product risks. The L-QIF differs from existing Finma-approved funds through its flexibility in terms of asset classes and investment strategies. It represents a fantastic opportunity for the Swiss market and for institutes like ours to expand our range of products and deploy new fund solutions.

This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .