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.


Scope of this note

This guide aims to help you navigate though Practical Law's investment fund materials.


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 ( www.practicallaw.com/3-505-5868) 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 below.

UK regulated funds

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

In practice, this means that 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).

Relevant rules for UK authorised investment funds are set out in the FCA's Collective Investment Schemes sourcebook ( www.practicallaw.com/3-527-3545) (COLL) and its Investment Funds sourcebook ( www.practicallaw.com/0-535-2006) (FUND).

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 non-UK funds can be recognised by the FCA under the following sections of FSMA ( www.practicallaw.com/5-505-5867) :

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) ( www.practicallaw.com/1-546-5526) .

For more information about UK recognised funds, see:

UCITS funds

UCITS are open-ended CISs that comply with the requirements of the UCITS IV Directive ( www.practicallaw.com/7-507-0895) (2009/65/EC).

To date, there have been five directives relating to UCITS funds:

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

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:


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 sections below explain 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:

Limited partnerships

A limited partnership is a partnership registered in accordance with the Limited Partnerships Act 1907 ( www.practicallaw.com/7-505-5079) . They can be CISs under section 235 ( www.practicallaw.com/3-505-5868) of FSMA.

For more information about limited partnerships, see:

Unauthorised unit trusts

Unit trusts that have not been authorised by the FCA under section 243 ( www.practicallaw.com/8-509-5273) of FSMA are unauthorised. For more information about unauthorised unit trusts, see:

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


Hedge funds

The term "hedge fund" is notoriously difficult to define. There is no legal or regulatory definition in the UK. The FCA explained, in its 2015 hedge fund survey, that a hedge fund is one of a category of funds known as alternative investment funds (AIFs). They can invest in a variety of assets, including commodities, derivatives and property, and often have a large degree of flexibility in how they invest. This means that they can pursue complex trading strategies, some have very concentrated portfolios, and others have very high levels of leverage.

For more information about hedge funds, see AIFMD below, and:


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 buy-outs. 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 AIFMD below and:

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 real 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 (SWFs) and high net worth individuals (HNWIs) 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:


Property funds

For resources on property funds, see:


Tax and investment funds

For resources on investment funds and tax issues, see:


Global guides

The following global guides are available:

Each guide brings together a range of information on topical 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:


Offering and promoting investment funds

The promotion and 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:


EU legislation relating to investment funds

There are a large number of pieces of actual and proposed EU legislation that impact, or are likely to impact, on investment funds and their managers. The key pieces of legislation are identified in the sections below, along with links to more detailed content.


The Alternative Investment Fund Managers Directive ( www.practicallaw.com/5-507-0882) (2011/61/EU) (AIFMD or AIFM Directive) introduced a harmonised (albeit controversial) regulatory framework for EU-established managers of AIFs, including requirements relating to authorisation, administration, remuneration, marketing and depositaries. In a nutshell, it is the Directive that governs how AIFs operate in the EU.

For a guide to Practical Law's materials on the AIFMD, see Practice note, A guide to the AIFMD: index ( www.practicallaw.com/2-503-9765) .


EMIR ( www.practicallaw.com/7-520-8440) (the Regulation on OTC derivative transactions, central counterparties (CCPs) and trade repositories (Regulation 648/2012)) imposes a number of requirements on counterparties to derivative contracts, CCPs and trade repositories. AIFs that have authorised or registered alternative investment fund managers (AIFMs) under the AIFMD are financial counterparties under EMIR, which triggers certain obligations.

For more information, see Practice note, Hot topics: EMIR ( www.practicallaw.com/5-503-4525) .

Short Selling Regulation

The Regulation on short selling and certain aspects of credit default swaps ( www.practicallaw.com/3-518-7312) (Regulation 236/2012) (Short Selling Regulation) imposes restrictions on the short selling of certain EU equity financial instruments and sovereign debt, and prohibits entry into uncovered sovereign credit default swaps (CDS). It also requires investors to disclose to the relevant regulator any net short positions in EU sovereign debt and equities traded on EU trading venues.

For more information, see Practice note, Short Selling Regulation: an overview ( www.practicallaw.com/9-517-6928) .


CRD IV (also referred to as CRD 4 or CRD4) is a major package of reforms to the EU's capital requirements regime for credit institutions and investment firms (which includes hedge fund managers). The package consists of the CRD IV Directive ( www.practicallaw.com/2-534-0767) (2013/36/EU) and the Capital Requirements Regulation ( www.practicallaw.com/4-534-0785) (Regulation 575/2013) (CRR), which replaced the Capital Requirements Directive (2006/48/EC and 2006/49/EC) (CRD). CRD IV implemented the main Basel III reforms in the EU, as well as introducing certain EU-specific reforms.

For more information, see Practice note, Hot topics: CRD IV ( www.practicallaw.com/4-505-2421) .

EuSEF Regulation

The European Social Entrepreneurship Funds Regulation ( www.practicallaw.com/6-532-4529) (Regulation 346/2013) (EuSEF Regulation) contains a marketing passport to allow fund managers to market qualifying social entrepreneurship funds to EU investors using the EuSEF designation.

For more information, see Practice note, European Social Entrepreneurship Funds (EuSEF) Regulation ( www.practicallaw.com/4-517-2697) .

EuVECA Regulation

The European Venture Capital Funds Regulation ( www.practicallaw.com/1-532-4517) (Regulation 345/2013) (EuVECA Regulation) sets out a marketing passport to allow fund managers to market qualifying venture capital funds (VCFs) to EU investors using the EuVECA designation.

For more information, see Practice note, European Venture Capital Funds (EuVECA) Regulation ( www.practicallaw.com/6-507-2022) .

ELTIF Regulation

The Regulation on European long-term investment funds ( www.practicallaw.com/3-614-7805) ((EU) 2015/760) (ELTIF Regulation) establishes a type of collective investment vehicle, called an ELTIF, that allows investors to invest in companies and projects that need long-term capital.

For more information, see:


The MiFID II Directive ( www.practicallaw.com/6-573-0849) (2014/65/EU) and the Markets in Financial Instruments Regulation ( www.practicallaw.com/4-573-0850) (Regulation 600/2014) (MiFIR) will repeal and recast the Markets in Financial Instruments Directive ( www.practicallaw.com/3-506-8149) (2004/39/EC) (MiFID). Together, the new regime will form the legal framework governing the requirements applicable to investment firms, trading venues, data reporting service providers and third-country firms providing investment services or activities in the EU.

For more information, see Practice note, Hot topics: MiFID II ( www.practicallaw.com/6-503-3276) .


The Market Abuse Regulation ( www.practicallaw.com/8-573-0848) (Regulation 596/2014) (MAR) (which will repeal and replace the Market Abuse Directive ( www.practicallaw.com/5-506-2504) (2003/6/EC) (MAD)) and the Directive on criminal sanctions for market abuse ( www.practicallaw.com/0-573-0847) (2014/57/EU) (CSMAD) introduce an updated and strengthened EU market abuse regime, incorporating a wider range of tougher sanctions. These include criminal sanctions under CSMAD for at least the most serious cases of market abuse. The UK and Denmark have not opted in to CSMAD.

For more information, see Practice note, Hot topics: New EU market abuse regime ( www.practicallaw.com/8-515-2094) .

MMF Regulation

As part of its work on shadow banking and investment funds, the European Commission identified a number of concerns about money market funds (MMFs). These concerns led to the publication of a legislative proposal for a Regulation on money market funds (MMF Regulation), which is currently with the European Parliament and the Council of the EU for negotiation and adoption. If adopted, the MMF Regulation will introduce a general framework of requirements to enhance the liquidity and stability of MMF funds.

For more information, see Practice note, Hot topics: Money Market Funds Regulation (MMF Regulation) ( www.practicallaw.com/9-553-5865) .

SFT Regulation

The Regulation on reporting and transparency of securities financing transactions ( www.practicallaw.com/1-621-7187) ((EU) 2015/2365) (SFT Regulation) requires all SFTs to be reported to trade repositories, places additional reporting requirements on investment managers, and introduces prior risk disclosures and written consent before assets are rehypothecated. The reforms in the SFT Regulation will apply to AIFMs.

For more information, see Practice note, Hot topics: SFTR ( www.practicallaw.com/1-590-4125) .


Asset management columns

Monica Gogna, a partner in the Investment Management & Financial Regulation team at Ropes & Gray LLP, shares her thoughts with Practical Law Financial Services subscribers on topical developments concerning the asset management sector on a regular basis. See Practice note, Monica Gogna's (Ropes & Gray) asset management columns ( www.practicallaw.com/4-597-8191) for Monica's columns to date.

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