A guide to Practical Law's investment fund materials

A guide to Practical Law's investment fund materials, including details about regulated funds, unregulated funds, hedge funds, private equity funds, Islamic funds, and property funds.

Practical Law

What are investment funds?

An investment fund is, in essence, a vehicle for collective investment by two or more investors, whose money is invested on a pooled basis on their behalf by an investment manager in return for a fee.

In the UK, section 235 of the Financial Services and Markets Act 2000 (FSMA) sets out the definition of a collective investment scheme (CIS), commonly known as a "fund". Under section 235(1), CIS means:

"Any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income."

For more information about the definition of a CIS, see Practice note, Investment funds: overview: Definition (www.practicallaw.com/4-203-1837).


Regulated funds

Investment funds can be regulated or unregulated. A regulated fund is broadly one that is authorised, recognised, or registered by a regulator. The section below explains where to find Practical Law materials on regulated funds. For information about unregulated funds, see Unregulated funds.

UK regulated funds

The following types of funds can be authorised by the FCA for sale to retail customers:

  • Open-ended investment companies (OEICs), also known as investment companies with variable capital (ICVCs). These are established and authorised by the FCA under the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228).

  • Authorised unit trusts (AUTs), established under trust law and authorised by the FCA under section 243 of FSMA.

  • Authorised contractual schemes (ACS) (also referred to as tax transparent funds (TTFs)), established under the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013 (SI 2013/1388) and authorised by the FCA under section 261C of FSMA.

In practice, this means that, in order to be authorised in the UK, a fund must fall within one of the following categories:

  • A UCITS scheme (that is, an undertaking for collective investment in transferable securities).

  • A non-UCITS retail scheme (NURS) (including a NURS operating as a fund of alternative investment funds (FAIF)).

  • A qualified investor scheme (QIS).

For an overview of UK authorised investment funds, see Practice note, Investment funds: overview (www.practicallaw.com/4-203-1837).

For more information about UK regulated funds, see the following resources:

For more information on marketing investment funds, see Offering and promoting investment funds below.

UK recognised funds

In the UK, certain funds can be recognised by the FCA under the following sections of the FSMA:

  • Section 264. This section applies to funds constituted (that is, incorporated) in another EEA state.

  • Section 272. This section applies to funds that can be individually recognised by the FCA because they meet specified criteria.

Before July 2013, some funds authorised in a designated country or territory could be recognised under section 270. of FSMA. However, section 270 was repealed by the Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773).

For more information about UK recognised funds, see the following resources:

UCITS funds

UCITS (that is, undertakings for collective investment in transferable securities) are open-ended CISs that comply with the requirements of the UCITS IV Directive (2009/65/EC).

There have been four directives relating to UCITS funds:

  • The UCITS Directive (85/611/EEC). This is commonly known as UCITS I and set out the legal framework for the single market for investment funds, including requirements for the organisation, management and oversight of UCITS funds.

  • The Management Company Directive (2001/107/EC). This introduced new requirements for management companies and a simplified disclosure document.

  • The Product Directive (2001/108/EC). This extended the range of assets in which UCITS are eligible to invest. The Management Company Directive and the Product Directive, which both amended UCITS I, are collectively known as UCITS III.

  • UCITS IV (2009/65/EC). The final text of UCITS IV was published in the Official Journal of the European Union (OJ) on 17 November 2009 and member states had to implement this Directive by 1 July 2011.

For more information about UCITS funds and ongoing reform in this area, see the following resources:

Exchange traded funds

Exchange traded funds (ETFs) are typically open-ended CISs, the units of which are traded on regulated markets and investment exchanges. ETFs aim to replicate indices (such as the FTSE 100 or S&P 500) and are typically redeemable on a daily basis. Broadly, ETFs can be physical (where the fund invests directly in the underlying assets that comprise the index) or synthetic (where the fund gains exposure to the index by entering into a swap agreement with a counterparty).

For more information about ETFs, see the following resources:


Unregulated funds

An unregulated fund is not authorised or recognised by a regulator (although the fund manager will typically be authorised or regulated).

Common unregulated fund structures include unauthorised unit trusts, limited partnerships and investment trusts. The section below explains where to find Practical Law materials on unregulated funds.

Investment trusts

The FCA Handbook defines an investment trust as a company listed in the UK or another EEA state that is approved by HMRC, or would qualify for such approval if resident and listed in the UK. Essentially, an investment trust is a company formed for the purposes of investing in other companies. They are closed-ended funds and do not constitute CISs.

For more information about investment trusts, see the following resources:

Limited partnerships

A limited partnership is a partnership registered in accordance with the Limited Partnerships Act 1907. They can be CISs under section 235 FSMA.

For more information about limited partnerships, see the following resources:

Unauthorised unit trusts

Unit trusts that have not been authorised by the FCA under section 243 of FSMA are unauthorised. For more information about unauthorised unit trusts, see the following resources:

For more information on marketing investment funds, see Offering and promoting investment funds below.


Hedge funds

A hedge fund is notoriously difficult to define and there is no legal or regulatory definition of a hedge fund in the UK. The Alternative Investment Management Association's (AIMA) roadmap to hedge funds defines a hedge fund as:

"An investment program whereby the managers or partners seek absolute returns by exploiting investment opportunities while protecting principal from potential financial loss."

For more information about hedge funds, see the following resources and The AIFMD below:


Private equity funds

Private equity funds are funds established to invest specifically in unquoted securities. They are typically structured as limited partnerships and limited liability partnerships (LLPs). Their investments include venture capital, management buy-ins and management buyouts. The British Private Equity and Venture Capital Association's (BVCA) guide to private equity describes it as the:

"Medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies."

For more information about private equity funds, see the following resources and The AIFMD below:

For more information about private equity transactions, standard documents and checklists on private equity and venture capital, see Practice note, A guide to Practical Law's private equity and venture capital materials (www.practicallaw.com/9-502-9112).


Islamic funds

Sharia funds (that is, funds that are consistent with the principles of Islamic law) are of increasing interest to financiers and global Islamic investors, both Sharia-compliant and conventional. In particular, financiers are attracted to the potential to create products aimed at sovereign wealth funds and high net worth individuals in the Middle East, Malaysia and other Islamic countries. The creation of attractive Sharia-compliant funds can be more difficult, and may involve more development costs and time, than the creation of traditional investment funds. The fund's structure, its investment strategy (and therefore underlying investments) and contracts with service providers (especially the fund manager) must all comply with Sharia principles.

For more information about Sharia-compliant funds, see the following resources:


Property funds

For resources on property funds, see:


Tax and investment funds

For resources on investment funds and tax issues, see:


Cross-border materials

The following multi-jurisdictional guides are available:

Each guide brings together a range of information on current cross-border issues and includes country-specific Q&A guides. Each jurisdiction is described in a separate chapter, written by one of the leading firms on the subject in that jurisdiction. It is possible to search the guides by question or jurisdiction.


Regulation of investment managers

In the UK, most investment managers are authorised and regulated by the FCA. For more information about the authorisation process and the regulated activities carried on by investment managers, see the following resources:

For information about US investment adviser registration requirements, see Article, Federal Registration of Private Fund Advisors (www.practicallaw.com/3-503-1392).


Offering and promoting investment funds

The promotion or marketing of both regulated and unregulated investment funds triggers financial promotion issues in the UK. For more information about who can promote investment funds, to whom funds can be promoted, what financial promotion rules apply and whether exemptions exist, see the following resources:



The Alternative Investment Fund Managers Directive (2011/61/EU) (AIFM Directive or AIFMD) has introduced a harmonised regulatory framework across the EU for EU-established managers (AIFMs) of alternative investment funds (AIFs). The AIFMD entered into force on 21 July 2011 and had to be implemented by member states by 22 July 2013.

For more information about the AIFMD, including links to primary source material and a list of next steps, see Practice note, Hot topics: The AIFMD (www.practicallaw.com/1-503-3820).

For an overview of how the AIFMD has been implemented in the UK, see Practice note, UK implementation of the AIFMD (www.practicallaw.com/8-518-5527). We also have a podcast that examines the UK authorisation process and marketing issues.

For a guide to particular aspects of the AIFMD, see Travers Smith LLP's AIFMD practice notes and articles:

For more information on the rights, powers and obligations of the European Securities and Markets Authority (ESMA) and the European Commission to adopt level 2 measures to supplement the text of the AIFMD, see Practice note, The AIFM Directive: secondary measures (www.practicallaw.com/3-503-8968).


Other EU developments

Practical Law tracks a range of EU developments that impact on investment funds. For more information, see:

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