When it comes to non-traditional funds, Switzerland is generally acknowledged to be a key market. Traditionally, many private banks in Zuric...

When it comes to non-traditional funds, Switzerland is generally acknowledged to be a key market. Traditionally, many private banks in Zurich and Geneva have become sponsors and distributors of hedge funds through their vast private client bases. Swiss hedge funds benefit from state-of-the-art, flexible regulation.

Various legal structures are available for the promotion of such investments, which can be categorised into the following broad categories: open-end mutual funds regulated by the Swiss Investment Fund Act; closed-end participation companies; and 'other' structures. The Swiss IFA, as amended 1994, introduced into Swiss law the concept of 'other funds with special risks', allowing the licensing of hedge funds to a broader public.

As of 1 May 2002, the Federal Banking Commission — the authority supervising Swiss mutual funds — has licensed 27 Swiss-based (onshore) and 23 foreign-based (offshore) hedge funds. Almost all non-traditional funds offered to the public are funds of hedge funds. The Swiss fund structure, which is a trust-like 'collective investment contract', allows investment in offshore hedge funds that are otherwise barred from being sold direct to the public.

The statutory framework of the IFA for hedge funds is flexible, and contains basic requirements for the prospectus, the managers of the fund management company and/or the external investment managers, the investors, and the external auditors. From the portfolio management perspective, short-selling, borrowing and otherwise using leverage are limited to 25 per cent of the fund's assets (although exceptions may be possible in some cases).

An increasingly popular choice is the creation of an investment company, which is a closed-end fund not subject to FBC supervision but only to Swiss company law. In order to offer an exit mechanism to investors, most investment companies have been listed on the Swiss Stock Exchange. Such a company is thus treated like any normal public stock company and enjoys great freedom with respect to leverage, investments and instruments.

Investors may benefit from increased transparency since SWX-quoted investment companies have to report in accordance with international accounting standards. Additional transparency requirements apply, since quoted companies have to comply with the listing rules and further provisions exclusively applicable for quoted investment companies.

Other structures also exist

For private placements of offshore vehicles, no rules apply, since a registration with the FBC is not needed. However, great care has to be taken to avoid these being considered a public offering. Managed account programmes may not be offered publicly either, but do have to be reported to the FBC. Other less-heavily regulated legal structures not covered by the IFA include fund-linked notes and similar structured products.

Thanks to the flexibility and success thus far of the applicable structures, rules and regulations, combined with favourable tax rulings, we anticipate continued growth for Switzerland as a hedge-fund domicile.

The fact that so many customers are nearby helps too!

Thomas Huber is a contributor from PricewaterhouseCoopers Consulting, Zurich