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Since January 1 2004 it has been possible to establish hedge funds in Denmark in the form of an "other collective investment scheme" pursuant to chapter 17 the Danish Investment Associations and Special-Purpose Associations as well as other Collective Investment Schemes Act (the IAA).

The minister of economic and business affairs has introduced a bill amending the IAA and proposing that open-ended hedge funds that receive funds from a wide group of investors or from the public in general are required to obtain authorization from the Danish Financial Services Authority (FSA). Other open-ended hedge funds can on a voluntary basis obtain authorization. These regulated hedge funds have the exclusive right to use the Danish term Hedgeforening in their name.

Regulated hedge funds are not subject to investment or placement regulation. Their risk policy and risk profile should be set out in their articles of association, and the board of directors should on this basis set out the specific risk limits. Each of the registered holders of units in the fund must be notified of any change in such limits. Any breach of the risk policy or any exceeding of the specific limits must be reported to the Danish FSA and to each of the registered holders of units in the fund.

Another special feature is that the regulated hedge funds should be open for issue and redemption at least once every month, which could prove disadvantageous in the international context.

The expansion of regulated hedge funds is dependent on an amendment to the tax legislation. The bill introduced to this effect proposes that holders of units in hedge funds be taxed on the basis of a mark-to-market principle, which might be a drawback compared to interest in companies in which the investor is taxed on the basis of a realization principle.

The new regulation is expected to come into force on July 1 2005. Existing chapter 17 funds will be covered by a six-month grandfathering provision.

Hedge funds have previously been offered in Denmark by way of bonds linked to hedge funds. The Danish FSA, in a decision from October 2004, stated that such bonds constitute indirect marketing of the hedge fund and require approval from the Danish FSA.

Morten Krogsgaard

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