Global Securities Markets: Navigating the World's Exchanges and OTC Markets

EAST VERSUS WEST (DERIVATIVES VERSUS FUNDS)

Investment funds come in various forms—mutual funds (open-end companies investing in liquid securities), exchange-traded funds (ETFs), closed-end funds (listed funds that are similar to ETFs), hedge funds, private equity funds, venture capital funds, and real estate funds. The primary features of all of these investment funds are the diversification of risk, limitation of liability, and third-party management. Investment funds can be organized in many ways and in many different countries. The form of organization is often determined by the nature of the investments. For example, U.S. mutual funds are typically organized as Delaware, Maryland, or Massachusetts corporations or business trusts permitting daily redemptions and subscriptions and are transparent (by election with the IRS) for tax purposes—meaning that income, gains, and losses are deemed to be received by the investor rather than the fund. The European equivalent of the U.S. mutual fund, UCITs, are organized along similar lines. On the other hand, private equity funds and hedge funds, which typically invest in less liquid securities and are not offered to the public, are typically structured as Delaware limited partnerships (or LLCs) or companies with limited liability in the Cayman Islands, Luxembourg, or Ireland. This structure also provides for a tax transparency (in the case of partnerships) or tax exemption (in the case of funds organized in tax havens). Venture capital ...