hedge funds presentation final

PricewaterhouseCoopers LLP

PricewaterhouseCoopers’Global alternative investmentsseminar*

*connectedthinking

• Amsterdam

• Bermuda

• Boston

• Cape Town

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• Edinburgh

• Hong Kong

• Johannesburg

• London

• Los Angeles

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Hedge Fund Breakout - Introduction4 June 2009

Global alternative investments seminar*

Lachlan Roos – UK Tax Hedge Fund Leader


4 June 2009

The year in review

Hedge Fund Breakout - Introduction

The headlines said it all….There were victims….

Andas always the

winners!

So where are we now?


Agenda/Contents

Hedge Fund Remuneration PlanningMalcolm 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 TaxSally Cosgrove – Investment Management AssuranceJames Greig – PwC Legal

Q&A


Remuneration Planning


Malcolm Collings – HRS Tax


Hedge Fund Remuneration Planning

Broad recap for employees and partnersOur planning ideasIf all else fails


4 June 2009

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%

Hedge Fund Remuneration Planning - Key Announcements


4 June 2009

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 22April 2009 no longer effective

• Minor changes to remittance basis

• Personal allowances available to non-residents available by reason only ofbeing Commonwealth citizens may no longer be claimed on that basis after5 April 2010

• Dividends from overseas shares taxable at new rate up to 42.5% (asopposed to 50%)

Hedge Fund Remuneration Planning – Other Issues


4 June 2009

Pensions

• Relief for pension contributions reduces for individuals with taxable incomeover £150,000 per annum

• For individuals with taxable income over £180,000 relief worth only 20%

• Special annual allowance charge of 20% prevents significant acceleratedcontributions

• Employer Contributions included in analysis therefore restrictions on usageof :

- Salary Sacrifice Vehicles

- IPP’s

• Possible alternative mechanisms :

- Deferral using employee benefit trust;

- EFRBS



4 June 2009

Leaving The UKComparative Tax Analysis post budget (% Net Income Receipts)

56%UK (London) from 201010

58%France (Paris)9

60%USA (New York State and City)8

60%Germany (Frankfurt)7

62%Japan (Tokyo)6

68%Switzerland (Zurich)5

80%Guernsey4

83%Singapore3

85%Hong Kong2

95%Dubai1

% Net IncomeLocationRank

** based on Married Executive with 2 children earning £250k



4 June 2009

Anti-avoidance and compliance

• Senior accounting officers of major corporates will be required tocertify that adequate controls in place to prepare accurate taxcalculations

• HMRC will publish a list of planning arrangements it considers do notwork

• Naming and shaming of companies and individuals who havedeliberately understated tax of £25,000 or more

• New penalty regime introduced from 6 April 2010



4 June 2009

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 forfeiturerisk)

• Take money from deferral arrangements prior to April 2010



4 June 2009

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

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

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



AIFM Directive



Mark James – Business Recovery Services


4 June 2009

Who is caught?

• Any person who manages an Alternative Investment Fund (AIF)

• AIF defined as:

“any collective investment undertaking, including compartments thereofwhose object is the collective investment in assets and which does notrequire authorisation as a UCITS”

• So it catches:

o Hedge Funds, Venture Capital Funds, Real Estate Funds, InfrastructureFunds;

o REITs, JPUTs, PCCs;

o Carried interest vehicles, Investment Companies, etc.

The AIFM Directive

AIFM Directive


4 June 2009

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 isused 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.

The AIFM Directive – Size thresholds and exemptions

AIFM Directive


4 June 2009

Key provisions of the Directive (1):

Managers:

• The only entities in the EU permitted to manage an AIF which is to be soldin the EU will be managers whose registered and head office are in an EUmember state;

• Qualifying AIFMs will be able to take advantage of a passport to provideservices 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.

The AIFM Directive

AIFM Directive


4 June 2009

Key provisions of the Directive (2):

Prohibitions and requirements:

• Qualifying AIFs can only be sold to MiFID qualifying professional investorswithin EU;

• Managers not resident in the EU may not be authorised under the Directivebut may, subject to stringent conditions – see below – get a licence tomarket;

• The ability of qualifying AIFMs to delegate service provision outside the EUis limited;

• An ordinary EU resident MiFID authorised investment firm NOT authorisedunder the AIFM Directive may NOT market shares in an non-qualifying AIFor (worst case construction) provide any management services to an non-EU AIF!

The AIFM Directive

AIFM Directive


Possible Fund Structures and the Implications of AIFM Directive

Scenario 1 – EU Fund / Manager

UK Manager Fund(EU)

FundServiceProvider

(Dublin)

Fund Management

$

$

Fund Administration / PrimeBrokerage / Custodian

Custodian(UK)

AIFM Directive


Scenario 2 – Offshore Fund / EU Manager

UK ManagerFund

(Cayman)

FundServiceProvider

(Dublin)

Fund Management

$

$

Fund Administration / PrimeBrokerage / Custodian

FundServiceProvider

(Cayman)

AIFM Directive



Scenario 3 – Offshore Fund / Manager

US/OffshoreManager

Fund(Cayman)

FundServiceProvider

(Cayman)

Fund Management

$

$

Fund Administration /Prime Brokerage /

Custodian

US/OffshoreManager

AIFM Directive



4 June 2009

The headlines you don’t want to see

AIFM Directive – Hedge Funds & Insolvency


4 June 2009

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 relatedparty

• SFO arrests 15 May 2009

• Investigations continue



4 June 2009

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






Elizabeth Stone – IM Tax

Sally Cosgrove – Assurance


4 June 2009

UCITS III Launches



4 June 2009

• Permissible investments (old)

- covered options

- futures

- currency forwards

• Permissible investments (UCITS III)

- Swaps (including TRS)

- CFDs

- credit default swaps

UCITS III – an appropriate vehicle for hedge funds?



4 June 2009

What is possible / not possible under UCITS?

AUTHORISED

• Short position through derivatives;

• Closed end listed alternative funds;

• Regulated open end alternativefunds within trash ratio;

• Derivatives on commodities indices.

• Certificates on ineligible assets if noembedded derivatives;

• CSS on loans with cash settlement;

• 100% leverage through derivatives;

• Liquid portfolio.

FORBIDDEN

• Direct short sales;

• Open end alternative funds.

• Direct investment in commodities;

• Derivatives on commodities;

• Certificates embedding derivativeson ineligible assets;

• CDS resulting in kind settlement;

• Leverage from borrowing;

• Illiquid portfolio.



4 June 2009

Investment restrictions and risk diversification

Securities of companies whose principle income derivefrom a given commodity

Listed closed-end funds (including SIFs)

Derivatives on non sufficiently diversified indices (if no highexposure to the index)

Derivatives on diversified commodities indices or ondiversified indices of commodities futures

Certificates on commodities reflecting the performance ofan underlying commodity 1:1

10% per issuer

10% per issuer

Maximum 10% to a given index (application of 5-10-40%rule)

If counterparty risk is limited to 5-10%

10% per issuer

Open-end SIFs

Open-end alternative funds (ifsupervised and supervisorycooperation)

Unlisted closed-end funds

10% together with other unlistedinvestments

10% together with other unlistedinvestments

10% (together with total unlistedholdings and open-ended funds)

Trash ratio:maximum 10%

CO

RE

PO

RT

FO

LIO

TR

AS

H



4 June 2009

Equity hedge

Long short (130/30)

Relative value

Global macro

Equity long/short

Distressed debt

Fixed Income Arb

Emerging markets

Event driven


UCITS III – an appropriate vehicle for hedge funds?


4 June 2009

UCITS I UCITS IIIRegistrations

24.900

55.68013% growth last9 months

Source: PwC 2008 Global Distribution Poster

78% growth last3 years

65.000 round tripregistrations

15.000

20.000

25.000

30.000

35.000

40.000

45.000

50.000

55.000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Sept2008

Growth in their distribution footprint



4 June 2009

Total Registrations New registrations 2007New registrations

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 ?

Countryof sale

Top regions fornew registrations

Source: PwC 2008 Global Distribution Poster

Current “Hot spots” for fund distribution



4 June 2009

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

Qualifying Fund – 32% differential on gainNAPreference

40% (50%)(Deferral but taxed as income)

• Gain on redemption – 18%Redemptions

NA• Equity Dividend – 25%* (36%) annually

• Interest Distribution – 40% (50%) annually

Distributions

Non-qualifyingQualifyingHNWI Investors

• Trading profits exempt• All trading profits taxed at 20%unless “white list applies –investment income taxed at 20%

• TEF regime – all income/gainsexempt if “white list” applies

Trading

• Income and gains exempt at fund level• Investment income taxed at20%

• Gains exempt

• TEF regime – all income/gainsexempt

Investment

Funds

OffshoreOnshoreTaxation




4 June 2009

Qualifying Fund – 32% differential on gainNAPreference

40% (50%)(Deferral but taxed as income)

• Gain on redemption – 18%Redemptions

NA• Equity Dividend – 25%* (36%) annually

• Interest Distribution – 40% (50%) annually

Distributions

Non-qualifyingQualifyingHNWI Investors

Trading profits exempt

• All trading profits are distributable or reportableunless the fund is equivalent to an UK AIF and whitelist applies

• All trading profits taxed at 20%unless “white list applies –investment income taxed at 20%

• TEF regime – all income/gainsexempt if “white list” applies

Trading

• Income and gains exempt at fund level

• Investment income distributable or reportable

• Gains exempt (and neither distributable orreportable)

• Investment income taxed at 20%

• Gains exempt

• TEF regime – all income/gainsexempt

Investment

Funds

OffshoreOnshoreTaxation




4 June 2009

Distributor Status vs Reporting Fund Regime

Equalisation?Equalisation

No investment restriction

Fund of funds - computational adjustments?

Investment restriction

Investors taxed on higher of reported income and distributionsInvestor taxed on cashdistribution

Advance certification of fund – increased investor certainty?Annual retrospective certificationof status by HMRC

Breach provisionsStatutory discretion re breaches

Funds required to report 100% of income, rather than to physically distributeAnnual cash distribution of 85%of income required

Investor electionStatus required for entireinvestment period

Annual calculation of UK reportable income (similar to current UK equivalent profits,with reliance on IAS and IMA SORP principles)

Annual calculation of UKequivalent profits

Reporting regimeUK Distributor Status



4 June 2009

Onshore and offshoreImpact of Authorised Funds Statement of Recommended Practice

Interest from debt securities is recognised on an effective yield basis by reference to thepurchase price.

Those securities purchased at a discount recognise an amount of interest greater than thecoupon over the life of the debt security.

Those securities purchased at a discount recognise an amount of interest greater than thecoupon over the life of the debt security.

Impact:

Interest from debtsecurities

• For those funds distributing in to the UK isused to determine amounts as revenue orcapital for the purposes of distributing in to theUK (reportable income under new regime)

• Preparation of the annual and halfyearly report and accounts of allauthorised funds

• Determines amounts as revenue orcapital for the purposes of distributionof income property of the fund andtaxation

Application

Where positions are undertaken to protect or enhance capital, and the circumstances supportit, the returns are capital.

Where positions are undertaken to protect or enhance revenue, and the circumstances supportit, the returns are capital.

When positions generate total returns it will generally be appropriate to split returns betweenrevenue and capital.

Impact:

Derivatives and split ofreturns between revenueand capital

OffshoreOnshore



This publication has been prepared for general guidance on matters of interest only, and does not constituteprofessional advice. You should not act upon the information contained in this publication without obtaining specificprofessional advice. No representation or warranty (express or implied) is given as to the accuracy or completenessof 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 anyconsequences of you or anyone else acting, or refraining to act, in reliance on the information contained in thispublication or for any decision based on it.

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Q&A
