at the end of 2004 malta had 364 ucits collective investment schemes and 60 non-ucits funds, including a number of hedge funds
Malta may have earned its name in the 16th century as a fortress against Ottoman attackers, but it is now welcoming foreigners, including an increasing number of fund managers.
At the end of 2004, Malta had 364 collective investment schemes: 60 locally based; 66 based overseas; and 238 marketed in Malta under the terms of the Ucits Directive.
Sixty non-Ucits funds were registered in Malta, a total that includes hedge funds.
Kevin Valenzia, chairman of finance Malta, notes most hedge managers with Malta-domiciled hedge funds so far have migrated their funds from other jurisdictions, rather than setting them up from scratch in the Mediterranean jurisdiction.
Professional investor funds
Hedge funds fall under the professional investor fund (PIF) category, and, as at 28 January 2005, three new PIF applications were being processed, while seven were listed as 'potential applicants'.
Application fees for schemes are 300 Maltese liri ($726) - as is the annual fee - while "in principle" approval applications cost $485.
When registering a PIF in Malta, says Kenneth Farrugia, general manager at Valletta Fund Management (VFM), overall initial set-up costs should would not exceed B20,000
This is cheaper than those for established jurisdictions and, while Bannister insists Malta is not in competition with other onshore centres, unlike some, it is not seeing service providers leave its cities for reasons of high costs.
Joe Bannister, Malta Financial Services Authority (MFSA) chairman, says funds that would normally have automatically gone to more established jurisdictions may now be considering Malta instead.
"It may be partly because of cost, but also because when establishing a fund now, you're lucky if you get $5m. And when you do the rounds marketing, everyone says they're interested 'but we need to see performance. Come back later'," he says.
"How can you manage start-up costs and how can you administer a $5m fund in established jurisdictions? You don't want the administration costs eating into your start-up costs."
Bannister sees most of the MFSA's business in the near future coming from PIFs. This is supported by the 10 PIF applications being processed or expected, outnumbering the three for retail schemes excluding sub-funds. The two administrators and five assorted investment services firms filing for authorisation could help these funds along, should they win MFSA approval.
Valenzia adds: "Experience shows that once people get to know and use Malta, they honestly think it is an ideal location for their business. Malta has a number of advantages - English language, the structure of our laws, and the fact that it is a small place which helps because everyone knows and works well with each other, so any issues are quickly and properly dealt with."
Some traditional and hybrid hedge/long-only fund-management firms are re-domiciling Ucits platforms to Malta first - hedge funds may follow - to use as a beachhead into Italy and the Mediterranean, while others may consider preparing for Malta's 1 January 2006 introduction of a private pensions system.
"Italy is quite an open-architecture market, where banks normally sell third-party funds, selecting five or six fund managers. So, private labelling is quite interesting to them," Farrugia says.
PIFs are split into two sub-categories depending on the experience, status and wealth of the investor - qualified investors or experienced investors - that, in turn, determine allowable attributes of the fund.
A "qualifying investor" must have net assets exceeding $1m, including spouse's assets, or it can be a body corporate, trust, unincorporated body of persons or association, employees and directors of service providers to the PIF, or relations and close friends of promoters, limited to 10 per PIF. They may also be entities with at least $5m under discretionary management or advice.
Investors must explain why they qualify and that they have read and understood mandatory risk warnings. Minimum investment is $100,000.
There are no investment restrictions on funds distributed to such investors, according to Michael Xuereb, the MFSA's business development director.
Experienced investors, by contrast, are people with at least one year's experience in the financial sector or activity in hedge funds, or with reasonable experience in hedge funds.
The investment threshold for 'experienced investor' funds is just $20,000, and the fund may not leverage.
Contained in the PIF's documentation should be the fund name, that it is licensed by the MFSA as a PIF, that it is non-retail, and "therefore, the protection normally arising as a result of the imposition of the MFSA's investment and borrowing restrictions and other requirements for retail schemes do not apply."
The document should also state "investors in PIFs are not protected by any statutory compensation arrangements in the event of the fund's failure," and the MFSA has not assessed or made value judgments on the fund's soundness or accuracy or completeness of statements or opinions made about it. To save time, local operators, such as the Bank of Valetta, offer a 'turnkey' service, from enlisting chosen service providers through to submitting MFSA applications.
PIF-connected functionaries may be located outside Malta, but the MFSA must be satisfied they are of "sufficient standing and repute" and properly regulated. Experienced investor PIFs must appoint a custodian or prime broker who is independent of the manager and administrator, while for qualifying investor PIFs, neither custodians nor prime brokers are mandatory (although the MFSA would ordinarily expect one to be contracted).
The MFSA does not require functionaries for the PIF to be located in Malta, however, to avoid 'brass plating' - arguably more prevalent in offshore centres - a "judicial representative" must be appointed if the PIF is operated from outside Malta.
Managers located either in or outside Malta should realise the basis of the country's Income Tax Act, business laws and Trust Act is UK law, given Malta's heritage as a British colony.
"Operators can both locate a scheme, and set up the investment management operation, in Malta," says Valenzia.
"In addition, there may be tax benefits in doing so, as a result of the interaction of Malta's double tax treaty network with its full imputation system of taxation. A foreign operator setting up a company in Malta would be able to engage the services of this company to carry out either the investment management operations, or the administrative functions, or both, in Malta.
"Of course, there are licensing and other requirements that must be met if the residence of the company is to be established in, and maintained, in Malta. We are not talking about brass plate operations."
FROM OFFSHORE TO ONSHORE
While Malta's government saw early EU membership and standards were beneficial to a financial industry employing 5,500 people and earning about 12% of GDP, its first real insight came in 1994, when it stopped issuing offshore licenses.
Joe Bannister notes: "We have a very good traditional university, but there was an influx of law, business managers, economists and accountants, so it seemed to be a natural thing to develop Malta as a financial centre.
The MFSA absorbed what had been the offshore side of operations including those for investment services.
"In 1994, particularly because of the European aspiration, Malta had abolished the offshore centre and created an onshore centre, like a hybrid between Dublin and Luxembourg, giving those companies (who had been in the offshore portion) 10 years to wind up. Europe had to be the direction to go," Bannister says, "otherwise you're regulating your internal market and if you're going to be a proper finance centre you need access to wider financial markets." By September 2004 almost all offshore license holders had gone.
Of the few offshore banks, some were absorbed by HSBC, another became a division of the Bank of Valetta, while Erste Bank and another Austrian bank became offshore.
Malta's government had also introduced international standards as the norm in 1998 "before many EU countries," Bannister says.
Kevin Valenzia, who is also a senior partner at PricewaterhouseCoopers in Malta and heads their tax and legal services division, says: "Since the radical overhaul of Malta's laws in 1994, both the quality and quantity of international business using Malta has dramatically improved.
"Joining the EU gave Malta another major boost. Malta's market may not be big enough to be looked at as worthwhile moving to just for the local investor base." With its onshore focus and EU membership, Valenzia says, "it now makes sense for international businesses to look at basing some form of activity here because they are suddenly looking at a market much larger than just the domestic one."
When Malta's previous regulatory body stopped issuing offshore licenses in 1994, Valenzia says, some companies not in the regulated sector left the jurisdiction, others became onshore while others were bought up by onshore operators. Malta had no hedge funds during its offshore days.
"As seen in all the offshore centres the primary motivator typically tends to be minimisation of tax but that clearly has changed in Malta since 1994," Valenzia says, "and with membership of the EU in (May) 2004 it has improved things even further.
"Most of the new business Malta has seen to date has been in the insurance and funds sectors," Valenzia adds. "There has been some movement on the banking side, including, of course, operators such as HSBC, but I believe we will see more banks moving here once they see there is the ability to make money in Malta - they will form
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