How to start a investment fund: Key Points and Types

Starting an investment fund is an ambitious and potentially lucrative venture, but it requires careful planning, knowledge, and expertise. Whether you are an experienced investor or an entrepreneur with a vision for wealth management, launching an investment fund can open doors to a world of financial opportunities. However, it’s a complex process that involves navigating legal, financial, and operational hurdles. This article provides an in-depth guide on how to start your own investment fund, outlining key steps, required considerations, and practical advice.

What is an Investment Fund?

An investment fund is a pool of capital gathered from multiple investors to be managed collectively in order to achieve a common investment goal. These funds are managed by professional fund managers, who allocate the capital into various asset classes like stocks, bonds, real estate, or even alternative investments such as commodities or cryptocurrencies.

With investment funds, individual investors do not make decisions about how a fund’s assets should be invested. They simply choose a fund based on its goals, risks, fees and other factors. A fund manager oversees the fund and decides which securities it should hold, in what quantities, and when the securities should be bought and sold.

Investment funds allow individuals to invest in a diversified portfolio without needing the time, knowledge, or capital to directly manage investments themselves. By pooling their money with other investors, fund participants can benefit from the expertise and skills of professional managers, as well as from the diversified nature of the fund’s assets.

Investment Fund Types

Before diving into how to start an investment fund, it’s crucial to understand the different types of funds that exist. Each type of fund has its own characteristics, goals, and regulatory frameworks.

Types of investment funds include mutual funds, exchange-traded funds (ETFs), hedge funds and alternative funds (AIF).

The most prominent fund types include:

1. Mutual Funds

Mutual funds are among the most popular and widely available investment options for retail investors. They pool money from many individual investors and use that capital to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are typically managed by professional asset managers and are subject to strict regulatory oversight to ensure transparency and fairness.

2. Exchange-traded funds (ETFs)

ETFs are investment funds listed on stock exchanges. In other words, just like shares, they can be bought and sold on the stock exchange at the listed price, while investing in different assets (shares, bonds and others) such as investment funds.

An ETF’s investment objective is to replicate the composition and behaviour of a certain index (by sectors, commodities etc.) or securities portfolios, for example, equity indexes (Ibex 35, EuroStoxx 50, Nasdaq 100 etc.) or fixed-income indexes. This makes it a very popular product for investing in tendencies or themes, since once the assets in a tendency have been grouped on an index, the ETFs replicate their behaviour.

ETFs enable investors to:

Invest in tendencies or themes, with no need to select the companies to be invested in.
Invest in the short/medium/long term, depending on their investment strategy.
Diversify the portfolio by geographies and sectors.
Buy and sell stakes at the listed price.

3. Hedge Funds

Hedge funds are pooled investment funds that cater to high-net-worth individuals and institutional investors. They are less regulated than mutual funds and often employ more complex strategies, such as leverage, short-selling, and derivatives trading, to achieve high returns. Hedge funds usually charge performance-based fees in addition to management fees.

4. Direct Investment Funds

Direct Investment Funds enable investors to purchase mutual funds directly from the Asset Management Company (AMC) or fund house, eliminating the need for an intermediary such as a distributor. This direct approach saves cost, as investors can bypass commissions and fees associated with traditional mutual fund investing.

5. Alternative Investment Funds

Alternatives are becoming core to investor portfolios. BlackRock offers alternative solutions, such as credit, private equity, real assets and hedge funds.

An alternative investment fund (AIF) is a collective investment in non-traditional and intangible assets in which investors’ capital and profits are pooled. Alternative assets include tangible assets like real estate and metals and financial tools like hedge funds, exchange traded funds (ETFs), mutual funds, venture capital, and many more. Real estate is frequently categorised as an alternative investment.

Alternative investments have grown popular because of their relative ease of access to the market for individuals. Institutional investors are still holding most of the well-known alternative investment assets, like real estate, hedge funds, and venture capital. Individual investors are leaning more on newer and more innovative alternative investments, such as, peer-to-peer lending, exchange-traded funds, and anything that is available to invest in easily on digital platforms for minimum capital. The structure for each investment asset also differs. For instance, some have a high capital requirement to invest in, barring many individuals from taking advantage of the assets. While others are very convenient to get into (for example, ETFs).

Each type of investment fund has different regulatory requirements, financial strategies, and investor profiles, which is why it is crucial to identify the type of fund you want to create and the investor demographic it will serve.

How to Start an Investment Fund: Key Points

Starting an investment fund involves several critical steps that require careful consideration. These include setting up the legal structure, obtaining financial licensing, finding investors, selecting the right assets to invest in, and building a solid fund administration framework. Below, we’ll outline the key points that are essential in the process of creating an investment fund.

1. Define the Investment Strategy and Target Market

The first step in starting an investment fund is to define your investment strategy. Are you planning to create a hedge fund, a mutual fund, or a private equity fund? Each of these fund types will require different strategies for asset allocation, risk management, and portfolio management.

Hedge Funds might focus on high-risk, high-return strategies, including short-selling, arbitrage, or investing in derivatives.
Mutual Funds are typically more conservative and invest in stocks, bonds, and other relatively stable financial instruments.
Alternative Funds could involve taking ownership of private companies with the goal of improving them and eventually selling them for profit.
Venture Capital Funds focus on investing in high-growth potential startups and emerging businesses etc.

You will also need to determine your target market. Are you looking to attract high-net-worth individuals, institutional investors, or retail investors? Understanding your target market will help determine the legal structure and fund type.

2. Create a Legal Structure and Entity

The next step in starting an investment fund is to set up the legal structure. Common legal entities for investment funds include:

Limited Partnerships (LPs): Common for hedge funds, private equity, and venture capital funds. The general partner (GP) manages the fund, while limited partners (LPs) are the investors.
Limited Liability Companies (LLCs): Often used for mutual funds or private investment funds.
Trusts: Some funds, such as real estate investment funds, might be structured as trusts.

When selecting a legal structure, consider the tax implications, the level of liability protection, and the ability to raise capital. You will need to work with a lawyer specializing in fund formation to ensure the legal structure is optimal for your fund’s operations.

3. Obtain Financial Licensing

The investment fund industry is highly regulated, and depending on the type of fund you wish to start and the jurisdiction in which you plan to operate, you will need to obtain the necessary financial licenses. Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States or the Financial Conduct Authority (FCA) in the UK, impose strict rules on fund managers and require that they be licensed to manage and distribute funds.

For example, if you are starting a mutual fund or hedge fund, you may need to register with the SEC, and comply with regulations such as the Investment Advisers Act or the Investment Company Act. Similarly, for private equity or venture capital funds, you may need to file specific exemptions or comply with specific regulatory regimes that govern these fund types.

But you always can try to start your investment with more open EU or even offshore countries that have many perspectives and are relatively easy to enter. We will stop on some examples below. So, read the whole article not to miss any important information.

4. Set Up Fund Administration and Management

Fund administration involves all the operational and back-office functions required to manage the fund, including accounting, reporting, investor relations, and compliance. You’ll need to hire a fund administrator or establish an internal team to handle these tasks, which include:

Valuation of assets: Determining the fair market value of the fund’s holdings.
Investor reporting: Providing regular updates to investors regarding the performance of the fund.
Compliance: Ensuring that the fund is in full compliance with regulatory requirements.

Fund administration is a crucial part of running a successful investment fund, as it ensures transparency, proper record-keeping, and timely reporting.

5. Raise Capital

Raising capital is one of the most challenging aspects of starting an investment fund. It involves marketing your fund to potential investors, explaining your investment strategy, and demonstrating your expertise. Most fund managers approach institutional investors, high-net-worth individuals, or family offices to secure the necessary capital. Building relationships and leveraging your network is key to securing investors.

You will need to develop a Private Placement Memorandum (PPM) that outlines the terms of the investment, the risk factors, the fund’s strategy, and the expected returns. The PPM will be essential in attracting investors and ensuring that they understand the risks involved.

6. Comply with Tax Regulations and Financial Reporting Requirements

Running an investment fund comes with significant tax and financial reporting obligations. Depending on your fund structure, you may be subject to different tax treatments and reporting requirements. For example, hedge funds often have pass-through tax structures, while mutual funds might be subject to corporate tax rates. Proper tax planning is essential to ensure your fund is structured in the most tax-efficient way.

How Much Does It Cost to Create an Investment Fund?

The cost of starting an investment fund can vary widely depending on factors such as the fund’s size, the complexity of the investment strategy, the legal and regulatory requirements, and the location of the fund. However, you can expect to spend money on:

Legal and licensing fees: Setting up the legal structure and obtaining necessary licenses can cost anywhere from $50,000 to $200,000.
Fund administration: Depending on the size of the fund, fund administration costs could range from $100,000 to $500,000 per year.
Marketing and investor relations: Attracting investors may require hiring a team, creating marketing materials, and attending industry conferences. This could cost several hundred thousand dollars in the early stages.
Operational costs: This includes office space, salaries for employees, compliance, and other operational expenses.

How to Create an Investment Fund in Offshore Countries

Our company assists with the official registration of offshore funds, including the Cayman Islands registration. This jurisdiction has a good reputation and is not on the FATF and OECD blacklists of the non-cooperating countries.

Nonetheless, we need to point out that on March 13, 2022, the Cayman Islands were included in the European Union’s list of high-risk third countries, which, in the long run, can complicate the interaction of the Cayman funds with the EU financial institutions. Another advantage of a Cayman hedge fund is that the director and/or the founder do not have to be the residents of this jurisdiction.

There are two types of funds in the Cayman Islands:

Regulated (open) – Licensed mutual funds, Administered mutual funds.
Unregulated (open and closed) – Registered mutual funds, Private funds – are the most suitable options for our clients.

Requirements for the fund:

Two directors and one shareholder, not necessarily the jurisdiction residents.
Compulsory audit of financial statements.

A fund may be exempt from licensing in the Cayman Islands under the condition that the investment activity is carried out in favor of the shareholders (investors) with a minimum investment cheque of 100,000 USD.

Among other options, we would like you to consider the following offshore jurisdictions:

The British Virgin Islands have a good reputation, simple registration procedure, and no requirements for the residency of the directors and founders.

The Bahamas provide anonymity and confidentiality for the investors, exemptions from local taxes and fees, and a simple company registration process with the minimum requirement of one shareholder and one director.

Hedge funds in Europe

All financial activities in Europe are subject to licensing. This is also true for Malta, where we can assist you in obtaining an investment and hedge fund license from the local regulator – The Malta Financial Services Authority (MFSA). In terms of the organizational and legal basis, the investment fund type in Malta advisable to our clients is SICAV (French – Société d’Investissement à Capital Variable). It allows you to attract additional investors, apply various investment strategies, and invest in securities.

Types of hedge funds in Malta and the requirements for them

Depending on the potential investors, there are three types of investment funds in Malta

The Professional Investor Fund for Experienced Investors.
The Professional Investor Fund for Qualified Investors.
The Professional Investor Fund for Extraordinary Investors.

Requirements:

Experienced Investors are the persons who are aware of all the risks and have relevant expertise and work experience in financial markets;
Qualified Investors are the persons whose net worth is more than 750,000 EUR or who are the members of a group whose net worth is higher than the abovementioned;

Extraordinary Investors are the persons whose net worth is more than 7.5 million EUR or a company that is a member of a group whose net worth is higher than the abovementioned.

Alternative Investment Funds in EU

The Czech Republic alternative investment fund

The Czech Republic offers a growing alternative investment fund (AIF) market with several potential benefits for investors. Here’s a breakdown of their value and advantages:

As a member of the European Union, the Czech Republic offers investors access to the single market, which can provide additional investment opportunities and benefits. Country has a well-developed regulatory environment for AIFs, which provides investors with a high level of protection and transparency.
The AIF market in the Czech Republic is growing rapidly, offering investors a wider range of investment options and opportunities.
AIFs offer exposure to a broader range of asset classes beyond traditional stocks and bonds, such as private equity, real estate, infrastructure, crypto and venture capital. This diversification can help to reduce portfolio risk and improve overall returns.
The Czech Republic has a well-developed regulatory framework for Alternative Investment Funds (AIFs). These requirements are designed to protect investors and ensure transparency in the AIF market.

Here are the key requirements for AIFs in the Czech Republic:

Legal form of the fund: it should be organised as a Limited Liability Company (s.r.o.) or Joint Stock Company (a.s.).

The Czech Republic doesn’t impose specific requirements regarding the residency, work experience, education, or bank account availability for beneficiaries, directors, or employees.

Capital requirements: no, capital can be from 1 CZK.

There is no legal requirement to have a physical office within the country.

Structure: an alternative fund may have 1 founder. The founder can combine the position with the director. No minimum required number of employees or specific requirements for the salaries.

Both external and internal audits are mandatory, annual

The alternative fund has the right to manage assets of a maximum of 20 unqualified investors and an unlimited number of qualified investors.

Definition of a qualified investor: A person who has made a statement that he understands the possible risks of investing in this fund and has invested at least 125,000 EUR, or approx. 40,000 EUR (given that the authorized securities trader or investment company approved such investment).

An alternative fund does not have the right to offer its services publicly. It means a restriction from actively soliciting or marketing investment products to the general public. Observing this limitation AIF operates with a more restrictive investor base and focuses on private placements or targeted marketing to qualified individuals or institutions.

The main functionality of a Czech AIF is to pool investor capital and invest it in a diversified portfolio. This allows investors to gain exposure to a variety of asset classes and investment strategies that they may not be able to access on their own.

This alternative fund has the ability to provide collective investment services in the following assets:

Investment instruments (stocks, bonds, funds, ETFs, etc.).

Derivatives (CFDs, options, futures, investment instruments with leverage and securities, etc.). Note: When investing in leveraged investment vehicles, this fund has different limits.

Commodities (gold, silver, oil, etc.).

Real estate (direct, SPV real estate, etc.).

Crypto assets.

Collectibles (collections of paintings, stamps, coins, vintage, etc.).

Any other assets that can be held and valued.

Estonia Alternative Fund

Estonia Alternative Fund (AIF) is a type of collective investment fund that allows investors to pool their capital and invest in a variety of alternative assets, such as private equity, venture capital, crypto, hedge funds, and real estate. AIFs are becoming increasingly popular in Estonia, due to a number of advantages, including:

The main main advantages of choosing Estonia are: EU membership, tax regime, economic stability, regulatory oversight and specific benefits along with significantly simplified requirements for setting up a fund compared to other European jurisdictions:

More freedom for the fund managers to structure their funds and invest in a variety of assets
Relatively efficient and streamlined regulatory framework for AIFs
Investors in AIFs are not subject to capital gains tax on their investments.
The requirements for an AIF are significantly lower than, for example, a cryptocurrency company. They are fully feasible even for clients who are non-residents of Estonia or EU countries.

In particular, the main requirements for registering a small alternative fund in Estonia are:

The presence of at least two board members for registration of a Fund Management Company (limited partnership);
There are no residency requirements for founders. The founder can be a member of the board;
It is important for the successful establishment of a fund that the founders have a SOF/SOW with supporting documents. It is also important that the founder is not from sanctioned countries.
An investment policy is formulated (at least in general terms);
The Managing Fund Company has to appoint a local AML officer, who will be interviewed by FIU in frames of petition consideration and who will be acting as a contact person for FIU;
It is strongly recommended that such a AML officer have relevant (in the financial field preferably) experience – from 2 years
At least one local director, who can combine an AML officer position;
Local physical office – with company identification data;
100 EUR – recommended authorized capital for payment (shareholders are required to pay the authorized capital)
Funds financial statements must include the following documents: Balance sheet, Gains and losses report, Cash flow statement, Appendix to financial statements;
The financial statements of Fund must be prepared in accordance with International Financial Reporting Standards (IAS/IFRS) and presented to fund shareholders within 6 months after the end of the reporting year.
Annual audit of the Fund is mandatory if the Fund: has assets of more than 10 million euros; has a debt of more than 5 million euros; attracts investments from more than 100 investors.
The Fund’s audit must be carried out by an independent audit company registered in Estonia. The auditor must be certified according to international auditing standards.

In accordance with Estonian legal regulations, the Alternative Investment Fund does not have a right to offer its units publicly. At the same time, in accordance with the Law, the Fund’s offer is not considered public in the following cases

(at least ONE of the following rules must be observed):

The total value of the offer of the Fund units does not exceed EUR 2,500,000 during a one-year period for all EU countries;
The offer for the purchase of the Fund units is made only to investors who purchase Fund units within the framework of each individual offer for at least EUR 100,000;
Within the framework of the offer for the purchase of units, the nominal value of one unit is at least EUR 100,000;
The offer to purchase Fund units is made only for professional investors;
The offer for the purchase of fund shares is made to a maximum of 150 legal entities or natural persons.

SOPARFI (Société de Participations Financières) Luxembourg

A SOPARFI (Société de Participations Financières) is a type of holding company in Luxembourg with particular advantages for investors looking to manage their assets internationally. It provides a valuable tool for holding companies, investors, and international groups seeking a stable, tax-efficient, and flexible structure for managing their international investments and assets.

Here’s the breakdown:

Being based in Luxembourg, SOPARFI enjoys the benefits of operating within the European Union’s single market.
SOPARFIs can invest in a wide array of assets including shares, securities, real estate, intellectual property, cryptocurrencies and more without major restrictions.
SOPARFIs offer significant potential for tax reduction, particularly regarding dividends and capital gains, due to the participation exemption and Luxembourg`s double tax treaties.
Luxembourg’s stable legal environment and sophisticated financial infrastructure provide a secure and reliable foundation for international investments.

Here are the main requirements to establish and operate a SOPARFI in Luxembourg:

Legal Form:

Must be incorporated as one of the following commercial company types:

Société Anonyme (SA) – Public limited company
Société à responsabilité limitée (Sàrl) – Private limited company
Société en commandite par actions (SCA) – Partnership limited by shares

Eligible Activities:

Primary Purpose: The main activity of a SOPARFI must be the holding of participations (shares) in other companies.

Additional Activities: Can engage in financing activities related to its holdings (loans, financial security, etc.).
Potential Commercial Activities: With a business license, a SOPARFI can engage in specific commercial activities as defined in its articles of association.

Minimum Capital:

SA: €30,000 (at least one-quarter paid-up)
Sàrl: €12,000 (fully paid-up)
SCA: €30,000 (at least one-quarter paid-up)

Substance Requirements:

Physical Presence: A SOPARFI must have a real office presence in Luxembourg.
The company must have at least one manager (gérant) who can be a legal entity or an individual, Luxembourg resident or not.
Economic Activity: Demonstrate genuine economic activity in Luxembourg (staff, expenses, etc.)

Administrative & Regulatory:

Articles of Association: Must clearly specify the SOPARFI’s objective as holding participations and other permitted activities.
Registration: The SOPARFI needs to be registered with the Luxembourg Trade and Companies Register (RCS).
Accounting & Auditing: Annual accounts must be prepared in accordance with Luxembourg GAAP and may be subject to audit.
Tax Filings: A SOPARFI is subject to corporate income tax and municipal business tax, along with the usual tax filing obligations.

Functionality

Investment Management: SOPARFIs actively manage their investments in subsidiaries, handling funding, dividends, and strategic decisions regarding those holdings.

Income Generation: SOPARFIs generate income through dividends earned from their shareholdings and potential capital gains when selling those shares.

Financing Activities: They can provide financing to their subsidiaries or related companies in forms like loans, guarantees, and other financial instruments.

Intellectual Property Management: SOPARFIs can hold and manage intellectual property (IP) rights such as patents, trademarks, and copyrights.

Restrictions

Business Activities: While some commercial activities are permitted, a SOPARFI’s main function must remain the holding of participations.

Tax and Regulatory Compliance: SOPARFIs, like all companies in Luxembourg, are subject to corporate taxes, filing obligations, and various regulations.

Advantages of SOPARFIs

Tax Optimization: Potential for tax benefits through participation exemptions and Luxembourg’s double tax treaties.

Asset Protection: Holding assets through a separate company offers a layer of protection.

Investment Flexibility: Can invest in a wide range of assets without major limitations.

Flexible Investment Vehicle: SOPARFIs can be used to structure various collective investment schemes.

Conclusion

Creating an investment fund is a complex and challenging process, but with the right strategy, structure, and resources, it can be highly rewarding. Whether you are interested in launching a hedge fund, mutual fund, private equity fund, or venture capital fund, understanding the key steps—such as defining your strategy, obtaining financial licensing, setting up fund administration, raising capital, and managing compliance—is essential for success.

Be prepared for a rigorous but exciting journey, and remember that the regulatory environment, investor expectations, and operational complexities require thorough planning and execution. With careful attention to detail and the right partnerships, your investment fund can become a thriving and profitable business.

SBSB assists you with registration of investment fund (including the granting of the license) in Malta, as well as in other jurisdictions. We provide you with a “turn-key” service, which means a range of services – consults, company registration, documentation, and client support and representation in all the issues regarding the regulatory authorities.