The Federal Banking Commission (FBC) plans to approve the first hedge fund domiciled in Switzerland in its November 1997 session. Since the FBC approved in its February session this year the first two foreign hedge funds for public marketing and distribution in and from Switzerland, it appears the Swiss investment fund market has gained momentum. The new hedge fund scheduled to be approved is a fund of funds, predominantly investing its assets in offshore hedge funds, whereas the first two foreign hedge funds already approved were Irish investment funds using alternative investment techniques and instruments.
The Swiss Investment Fund Statute and its Ordinances distinguish three types of fund, namely securities funds, real estate funds and other types of funds with and without special risks. Hedge funds, and in particular the new fund of funds, fall within the category of other funds with special risks. For the registration of funds with special risks, the following requirements must be fulfilled:
- Funds with special risks must have a so-called warning clause which is compulsory in Switzerland in connection with the fund name.
- The warning clause must be approved by the Federal Banking Commission.
- In the prospectus, in any publication and in connection with the marketing of the funds, the warning clause must be used in the form approved.
- Units of funds with special risks can only be sold with a written agreement in which the future investor is fully informed about the special risks of the fund.
- The fund manager must employ at least two managers, who must have a thorough knowledge of and five years' professional experience with alternative investment techniques and instruments.
- The fund management can only employ investment advisers if there is evidence they meet the statutory standards for investment managers.
During the registration procedure for the new fund of funds, it transpired that the FBC used for the first time what might be called a black-box approach. The FBC thereby limited its scrutiny to the parties involved (ie the fund management, the custodian and the investment advisers of the fund) and the fund prospectus and regulations, thereby allowing the fund management to invest in any type of assets, including in particular funds for which registration would not be available in Switzerland because the regulatory environment and supervision in the country of the fund's domicile do not meet Swiss standards.
The new 'black-box' approach by the FBC gives reason to believe that in the near future it will register further structures such as feeder funds, so becoming one of the more progressive supervisory authorities in Europe.