Hedge Funds Presentation Final
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Hedge Funds Presentation Final Hedge Funds Presentation Final Presentation Transcript

  • PricewaterhouseCoopers’ Global alternative investments seminar* • Amsterdam • Dublin • Minneapolis • Bermuda • Edinburgh • New York • Boston • Hong Kong • San Francisco • Cape Town • Johannesburg • São Paulo • Chicago • London • Singapore • Dallas • Los Angeles • Zurich *connectedthinking PricewaterhouseCoopers LLP 
  • Global alternative investments seminar* Hedge Fund Breakout - Introduction 4 June 2009 Lachlan Roos – UK Tax Hedge Fund Leader PricewaterhouseCoopers LLP 
  • Hedge Fund Breakout - Introduction The year in review An id it all…. ea sa lin d ss There were victims…. ad hewhere are al now? The So we wa ys th e wi nn er s! 4 June 2009 PricewaterhouseCoopers LLP Slide 3
  • Agenda/Contents Hedge Fund Remuneration Planning Malcolm Collings – Human Resource Services Tax AIFM Directive James Greig – PwC Legal Mark James – Business Recovery Services UCITS III for Hedge Funds? Elizabeth Stone – Investment Management Tax Sally Cosgrove – Investment Management Assurance James Greig – PwC Legal Q&A PricewaterhouseCoopers LLP
  • Global alternative investments seminar* Remuneration Planning Malcolm Collings – HRS Tax PricewaterhouseCoopers LLP 
  • Hedge Fund Remuneration Planning Broad recap for employees and partners Our planning ideas If all else fails PricewaterhouseCoopers LLP
  • Hedge Fund Remuneration Planning - Key Announcements Income tax rates increase to 50% • Income tax will increase to 50% for employees/partners with income over £150,000 • Personal allowance will be reduced for employees/partners earning over £100,000 so that it is eliminated over £112,950 • CGT left at flat rate 18% 4 June 2009 PricewaterhouseCoopers LLP Slide 7
  • Hedge Fund Remuneration Planning – Other Issues Internationally mobile executives • Increase in tax rates means RNOR and detached duty relief more valuable • Lease premium arrangements for 10 years or less entered into after 22 April 2009 no longer effective • Minor changes to remittance basis • Personal allowances available to non-residents available by reason only of being Commonwealth citizens may no longer be claimed on that basis after 5 April 2010 • Dividends from overseas shares taxable at new rate up to 42.5% (as opposed to 50%) 4 June 2009 PricewaterhouseCoopers LLP Slide 8
  • Hedge Fund Remuneration Planning Pensions • Relief for pension contributions reduces for individuals with taxable income over £150,000 per annum • For individuals with taxable income over £180,000 relief worth only 20% • Special annual allowance charge of 20% prevents significant accelerated contributions • Employer Contributions included in analysis therefore restrictions on usage of : - Salary Sacrifice Vehicles - IPP’s • Possible alternative mechanisms : - Deferral using employee benefit trust; - EFRBS 4 June 2009 PricewaterhouseCoopers LLP Slide 9
  • Hedge Fund Remuneration Planning Leaving The UK Comparative Tax Analysis post budget (% Net Income Receipts) Rank Location % Net Income 1 Dubai 95% 2 Hong Kong 85% 3 Singapore 83% 4 Guernsey 80% 5 Switzerland (Zurich) 68% 6 Japan (Tokyo) 62% 7 Germany (Frankfurt) 60% 8 USA (New York State and City) 60% 9 France (Paris) 58% 10 UK (London) from 2010 56% ** based on Married Executive with 2 children earning £250k 4 June 2009 PricewaterhouseCoopers LLP Slide 10
  • Hedge Fund Remuneration Planning Anti-avoidance and compliance • Senior accounting officers of major corporates will be required to certify that adequate controls in place to prepare accurate tax calculations • HMRC will publish a list of planning arrangements it considers do not work • Naming and shaming of companies and individuals who have deliberately understated tax of £25,000 or more • New penalty regime introduced from 6 April 2010 4 June 2009 PricewaterhouseCoopers LLP Slide 11
  • Hedge Fund Remuneration Planning Impact on Reward in Alternatives Sector • Possible planning opportunities - Income deferral • Use of employee benefit trust • Use of family benefit trust • Loan arrangements - Income acceleration • Pay 2009 bonuses prior to 6 April 2010 • Accelerate vesting on LTIPs (possibly subject to continued forfeiture risk) • Take money from deferral arrangements prior to April 2010 4 June 2009 PricewaterhouseCoopers LLP Slide 12
  • Hedge Fund Remuneration Planning Impact on Reward in Alternatives Sector • Possible planning opportunities (continued) - Delivering capital gains. • Convert RSUs to restricted securities taxable immediately • Tax efficient LTIP using HMRC approved company share option plan • Joint ownership in shares • Special classes of shares • Contracts for differences 4 June 2009 PricewaterhouseCoopers LLP Slide 13
  • Hedge Fund Remuneration Planning Planning for Employees • Movement to Limited Liability Partnership (LLP) Structure • Pension planning is not dead • Acceleration of remuneration • Income to capital - Equity packages - Phantom equity packages - Debt packages 4 June 2009 PricewaterhouseCoopers LLP Slide 14
  • Hedge Fund Remuneration Planning Planning for Partners • Pension planning is not dead • Corporate partner planning • Acceleration of profit share at 41% tax rate • Passing on the NI saving • Income to capital - Equity packages - Phantom equity packages - Debt packages 4 June 2009 PricewaterhouseCoopers LLP Slide 15
  • Global alternative investments seminar* AIFM Directive James Greig – PwC Legal Mark James – Business Recovery Services PricewaterhouseCoopers LLP 
  • AIFM Directive The AIFM Directive Who is caught? • Any person who manages an Alternative Investment Fund (AIF) • AIF defined as: “any collective investment undertaking, including compartments thereof whose object is the collective investment in assets and which does not require authorisation as a UCITS” • So it catches: o Hedge Funds, Venture Capital Funds, Real Estate Funds, Infrastructure Funds; o REITs, JPUTs, PCCs; o Carried interest vehicles, Investment Companies, etc. 4 June 2009 PricewaterhouseCoopers LLP Slide 17
  • AIFM Directive The AIFM Directive – Size thresholds and exemptions Managers of AIFs where, in aggregate, either: • Assets under management (if gearing is used) are less than €100m; • Assets under management do not exceed €500m, where no leverage is used and investors are subject to 5 year lock in from initial constitution; • Managers who manage only funds which are not domiciled in the EU, provided the funds are not marketed into the EU; • EU banks, insurers, pension funds and sovereign wealth funds. 4 June 2009 PricewaterhouseCoopers LLP Slide 18
  • AIFM Directive The AIFM Directive Key provisions of the Directive (1): Managers: • The only entities in the EU permitted to manage an AIF which is to be sold in the EU will be managers whose registered and head office are in an EU member state; • Qualifying AIFMs will be able to take advantage of a passport to provide services and market their AIFs across Europe; • Qualifying AIFMs will have to meet stringent requirements regarding: o regulatory capital; and o systems and controls, and risk management and reporting requirements and • Qualifying AIFMs will need to appoint: o EU resident custodians/depositaries; o Valuers; and o EU qualifying auditors. 4 June 2009 PricewaterhouseCoopers LLP Slide 19
  • AIFM Directive The AIFM Directive Key provisions of the Directive (2): Prohibitions and requirements: • Qualifying AIFs can only be sold to MiFID qualifying professional investors within EU; • Managers not resident in the EU may not be authorised under the Directive but may, subject to stringent conditions – see below – get a licence to market; • The ability of qualifying AIFMs to delegate service provision outside the EU is limited; • An ordinary EU resident MiFID authorised investment firm NOT authorised under the AIFM Directive may NOT market shares in an non-qualifying AIF or (worst case construction) provide any management services to an non- EU AIF! 4 June 2009 PricewaterhouseCoopers LLP Slide 20
  • AIFM Directive Possible Fund Structures and the Implications of AIFM Directive Scenario 1 – EU Fund / Manager Fund Administration / Prime Brokerage / Custodian $ Fund UK Manager Fund Service Custodian (EU) Provider (UK) (Dublin) $ Fund Management PricewaterhouseCoopers LLP
  • AIFM Directive Possible Fund Structures and the Implications of AIFM Directive Scenario 2 – Offshore Fund / EU Manager Fund Administration / Prime Brokerage / Custodian $ Fund Fund Service UK Manager (Cayman) Provider (Dublin) $ Fund Management Fund Service Provider (Cayman) PricewaterhouseCoopers LLP
  • AIFM Directive Possible Fund Structures and the Implications of AIFM Directive Scenario 3 – Offshore Fund / Manager Fund Administration / Prime Brokerage / Custodian $ Fund US/Offshore Fund Service Manager (Cayman) Provider (Cayman) $ Fund Management US/Offshore Manager PricewaterhouseCoopers LLP
  • AIFM Directive – Hedge Funds & Insolvency The headlines you don’t want to see 4 June 2009 PricewaterhouseCoopers LLP Slide 24
  • AIFM Directive – Hedge Funds & Insolvency Weavering Macro Fund Limited (in liquidation) Facts • Liquidity constraints following redemptions late 2008 • Fund insolvent: liquidators appointed 19 March 2009 • US$637m of the US$500m NAV was an interest rate swap with a related party • SFO arrests 15 May 2009 • Investigations continue 4 June 2009 PricewaterhouseCoopers LLP Slide 25
  • AIFM Directive – Hedge Funds & Insolvency Lessons learned Ordinary Due Diligence would have raised questions • Published Report and Accounts held warning signs • Heavy cash outflows vs. steady NAV increases • IRS disclosed in list of investments • Already dominant by 2007 4 June 2009 PricewaterhouseCoopers LLP Slide 26
  • Global alternative investments seminar* UCITS III for Hedge Funds? James Greig – PwC Legal Elizabeth Stone – IM Tax Sally Cosgrove – Assurance PricewaterhouseCoopers LLP 
  • UCITS III for Hedge Funds? UCITS III Launches 4 June 2009 PricewaterhouseCoopers LLP Slide 28
  • UCITS III for Hedge Funds? UCITS III – an appropriate vehicle for hedge funds? • Permissible investments (old) - covered options - futures - currency forwards • Permissible investments (UCITS III) - Swaps (including TRS) - CFDs - credit default swaps 4 June 2009 PricewaterhouseCoopers LLP Slide 29
  • UCITS III for Hedge Funds? What is possible / not possible under UCITS? AUTHORISED FORBIDDEN • Short position through derivatives; • Direct short sales; • Closed end listed alternative funds; • Regulated open end alternative • Open end alternative funds. funds within trash ratio; • Direct investment in commodities; • Derivatives on commodities indices. • Derivatives on commodities; • Certificates on ineligible assets if no • Certificates embedding derivatives embedded derivatives; on ineligible assets; • CSS on loans with cash settlement; • CDS resulting in kind settlement; • 100% leverage through derivatives; • Leverage from borrowing; • Liquid portfolio. • Illiquid portfolio. 4 June 2009 PricewaterhouseCoopers LLP Slide 30
  • UCITS III for Hedge Funds? Investment restrictions and risk diversification Certificates on commodities reflecting the performance of 10% per issuer CORE PORTFOLIO an underlying commodity 1:1 Derivatives on diversified commodities indices or on If counterparty risk is limited to 5-10% diversified indices of commodities futures Derivatives on non sufficiently diversified indices (if no high Maximum 10% to a given index (application of 5-10-40% exposure to the index) rule) Listed closed-end funds (including SIFs) 10% per issuer Securities of companies whose principle income derive 10% per issuer from a given commodity Unlisted closed-end funds 10% (together with total unlisted holdings and open-ended funds) TRASH Open-end alternative funds (if 10% together with other unlisted supervised and supervisory investments Trash ratio: cooperation) maximum 10% Open-end SIFs 10% together with other unlisted investments 4 June 2009 PricewaterhouseCoopers LLP Slide 31
  • UCITS III for Hedge Funds? UCITS III – an appropriate vehicle for hedge funds? Equity hedge  Long short (130/30)  Relative value  Global macro  Equity long/short  Distressed debt  Fixed Income Arb  Emerging markets  Event driven  4 June 2009 PricewaterhouseCoopers LLP Slide 32
  • UCITS III for Hedge Funds? Growth in their distribution footprint Registrations UCITS I UCITS III 55.000 50.000 55.680 13% growth last 45.000 9 months 40.000 35.000 78% growth last 3 years 30.000 24.900 25.000 65.000 round trip 20.000 registrations 15.000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Sept 2008 Source: PwC 2008 Global Distribution Poster 4 June 2009 PricewaterhouseCoopers LLP Slide 33
  • UCITS III for Hedge Funds? Current “Hot spots” for fund distribution Top regions for Country new registrations of sale New registrations Total Registrations New registrations 2007 Q1- Q2 2008 Europe Germany 4.923 561 + 152 Eastern Europe Czech Republic 802 292 + 75 Middle East Bahrain 908 46 + 17 Asia Singapore 1.824 515 + 175 Americas Chile 1.216 774 ? Africa South Africa 112 19 ? Source: PwC 2008 Global Distribution Poster 4 June 2009 PricewaterhouseCoopers LLP Slide 34
  • UCITS III for Hedge Funds? Onshore vs offshore funds - key considerations • Regulatory regime • Valuation, Reporting and disclosure requirements (including track record) • Set up costs • Marginal costs • Tax treatment of fund (capital taxes, WHTs, direct taxes) • Tax treatment of UK investors (marginal rates of income/capital gains tax) • Tax treatment of other target investor groups 4 June 2009 PricewaterhouseCoopers LLP Slide 35
  • UCITS III for Hedge Funds? Onshore vs offshore funds - key considerations Taxation Onshore Offshore Funds Investment • Investment income taxed at • Income and gains exempt at fund level 20% • Gains exempt • TEF regime – all income/gains exempt Trading • All trading profits taxed at 20% • Trading profits exempt unless “white list applies – investment income taxed at 20% • TEF regime – all income/gains exempt if “white list” applies HNWI Investors Qualifying Non-qualifying Distributions • Equity Dividend – 25%* (36%) annually NA • Interest Distribution – 40% (50%) annually Redemptions • Gain on redemption – 18% 40% (50%) (Deferral but taxed as income) Preference NA Qualifying Fund – 32% differential on gain 4 June 2009 PricewaterhouseCoopers LLP Slide 36
  • UCITS III for Hedge Funds? Onshore vs offshore funds - key considerations Taxation Onshore Offshore Funds Investment • Investment income taxed at 20% • Income and gains exempt at fund level • Gains exempt • TEF regime – all income/gains • Investment income distributable or reportable exempt • Gains exempt (and neither distributable or reportable) Trading • All trading profits taxed at 20% Trading profits exempt unless “white list applies – investment income taxed at 20% • All trading profits are distributable or reportable • TEF regime – all income/gains unless the fund is equivalent to an UK AIF and white exempt if “white list” applies list applies HNWI Investors Qualifying Non-qualifying Distributions • Equity Dividend – 25%* (36%) annually NA • Interest Distribution – 40% (50%) annually Redemptions • Gain on redemption – 18% 40% (50%) (Deferral but taxed as income) Preference NA Qualifying Fund – 32% differential on gain 4 June 2009 PricewaterhouseCoopers LLP Slide 37
  • UCITS III for Hedge Funds? Distributor Status vs Reporting Fund Regime UK Distributor Status Reporting regime Annual retrospective certification Advance certification of fund – increased investor certainty? of status by HMRC Annual calculation of UK Annual calculation of UK reportable income (similar to current UK equivalent profits, equivalent profits with reliance on IAS and IMA SORP principles) Status required for entire Investor election investment period Annual cash distribution of 85% Funds required to report 100% of income, rather than to physically distribute of income required Investor taxed on cash Investors taxed on higher of reported income and distributions distribution Investment restriction No investment restriction Fund of funds - computational adjustments? Equalisation Equalisation? Statutory discretion re breaches Breach provisions 4 June 2009 PricewaterhouseCoopers LLP Slide 38
  • UCITS III for Hedge Funds? Onshore and offshore Impact of Authorised Funds Statement of Recommended Practice Onshore Offshore Application • Preparation of the annual and half • For those funds distributing in to the UK is yearly report and accounts of all used to determine amounts as revenue or authorised funds capital for the purposes of distributing in to the • Determines amounts as revenue or UK (reportable income under new regime) capital for the purposes of distribution of income property of the fund and taxation Impact: Interest from debt securities is recognised on an effective yield basis by reference to the Interest from debt purchase price. securities Those securities purchased at a discount recognise an amount of interest greater than the coupon over the life of the debt security. Those securities purchased at a discount recognise an amount of interest greater than the coupon over the life of the debt security. Impact: Where positions are undertaken to protect or enhance capital, and the circumstances support Derivatives and split of it, the returns are capital. returns between revenue Where positions are undertaken to protect or enhance revenue, and the circumstances support and capital it, the returns are capital. When positions generate total returns it will generally be appropriate to split returns between revenue and capital. 4 June 2009 PricewaterhouseCoopers LLP Slide 39
  • Global alternative investments seminar* Q&A This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2009 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and PricewaterhouseCoopers LLP independent legal entity. 