Hedge Funds Formation in Israel
Opening a hedge fund in Israel
Establishing a hedge fund in Israel
If you have decided to manage investments in the capital market, you have access to investors and you know how to raise capital, you have come to the right place. Below are some facts and data about the establishment of a hedge fund.
What is a hedge fund?
"Hedge fund" is a term that describes an amount of money invested in one corporation by several investors, but invested and managed by one manager, the fund manager.
In Israel there are something like 200-300 active funds. There are between 3000-5000 active funds in the world.
A hedge fund is a private entity. This is the reason why hedge funds have the widest variety of strategies to generate the highest return possibilities. They can do whatever they want.
- Short strategies. Look for properties that are priced significantly more than it is expected to be.
- Distressed securities - debt or shares. Takeover, or dissolution, or structural change.
- Merger arbitrage.
- Arbitrage in convertible bonds
- Investment in emerging markets
- Global macro - locate macroeconomic events and their consequences in order to make profits. For example, George Soros who knew how to predict the consequences of the Brexit on the pound, and made a short on the pound.
- Algorithmic trading
- Trading in virtual currencies
and more.
How to open a hedge fund in Israel?
A hedge fund consists of investors and the investment manager.
The process of establishing a hedge fund is essentially through the establishment of a limited partnership, or the establishment of a limited liability company - both at the Registrar of Companies and Partnerships. Of the two, the more common way to establish a hedge fund is through the opening of a limited partnership. To open a limited partnership, it is necessary to write a detailed partnership contract which Will include all the technical details of how the limited partnership will work and what will be the way of dividing the profits and additional payments to the fund manager - you.
What is the structure of a hedge fund?
A hedge fund is usually built from a Limited Partnership or LP for short. The limited partnership allows maximum legal protection for investors by actually limiting liability to the amount of their investment. This means that in the event that the partnership incurs losses, it will not be possible to require the investors to pay those losses.
Establishment of a hedge fund in Israel
Section 2(a) of the Law on Joint Investments in Trust establishes a strict series of restrictions on joint investment in securities. In non-legal Hebrew, the meaning of this law is: if you want to raise funds from investors for the purpose of generating profits from investing in securities, you have to go through the Securities Authority, and issue a prospectus. In other words, you make an offering of the fund on the stock exchange.
In other words, if you are interested in managing other people's money in the format of a shared pool of funds, and investing those funds in securities, you face a significant regulatory barrier in terms of legal and accounting expenses, and in terms of launch times.
How to open a hedge fund in Israel without going through an obstacle course?
One way is to approach qualified investors only. The idea is that as far as qualified investors are concerned, it is possible to request and raise funds for the purpose of investing in securities, provided that all investors, without exception, are qualified. In this way, the establishment of the hedge fund is done in a legal and permitted manner.
Ineligible investors can also be approached as long as it is not an offer to the public. The Securities Law states that an offer that is limited to up to 35 people per year is not considered an offer to the public. Although it is not the same law, it is common to draw this definition also to the Law on Joint Investments in Trust.
The second way is to open a hedge fund and invest in assets that are not securities. For example investing in real estate, or virtual currencies (including NFTs).
Hedge fund taxation
Ostensibly, when the investors hand over their money to the hedge fund so that the investment manager will invest it and generate an excess return, they become partners in the investment manager's business. And so, like any partner in any business, those investors are in principle required to pay a marginal tax on the profits that reach their pockets, which may reach 50%, pay VAT on the profit, and also social security.
On the other hand, it is about the profits generated by the investment. In the capital market, profits from shares are taxed with capital gains tax at a rate of 25%, and also in the real estate market, profits from the sale of assets are taxed at a rate of 25%. Moreover, if the investment portfolio manager at your bank were to invest the funds for you, 25% would be a rate The maximum tax you had to pay on any gain.
In other words, it can be said that there is a logical justification to be entitled to the reduced tax rate of 25% in the Gido Ralshelm Fund as well.
This structure of a limited partnership is the most acceptable in Israel for investments, because it allows the sole investors to maintain the tax benefit of 25% on capital gains, without the need to pay VAT and without the need to pay social security.
However, this tax benefit is only obtained after the agreement that the hedge fund comes with the tax authority. This agreement is called "rolling".
What is "Tax Ruling" in setting up a hedge fund?
The rolling is an individual application to the tax authority to request its approval in advance that the tax rate that will apply to investors is a capital gains tax of 25%. The rolling stipulates certain conditions, only if they are met, the tax authority will agree to allow the low capital tax rate on the individual's investments. The required conditions are, among other things, the appointment of a tax trustee (your accountant) who will be responsible for tax deductions for investors before the distribution of profits.
How long does it take to get a rolling from the tax authority? In principle, this is a common procedure that takes about two months, at the same time, due to the lack of manpower at the tax authority, there may be delays.
Hedge fund accountant costs
A hedge fund requires audited financial reports for the fund itself as well as for its management company, CPA costs more or less reach 36,000 NIS in the first year, and 24,000 in the second year.
Investment manager taxation
The fund manager is a limited liability company, and he pays normal and full corporate tax on his profits from managing the fund, as well as on profits he has when he invests in the fund.
Hedge fund and virtual currencies
In general, virtual currency is not a security. This means that, as long as it is not a security, open a hedge fund and raise funds also from ineligible investors and invest the funds in virtual currencies (subject to the more general limitations of the Securities Law - up to 35 ineligible bids per year).
Yes, you read that right. The Joint Investments in Trust Law does not apply to a hedge fund that invests in virtual currencies, and it is possible to open a hedge fund and invest its funds in virtual currencies without being subject to the restrictions described in the Joint Investments in Trust Law.
According to the Securities Authority, there is reason to consider amending the financial laws in such a way that providing a service according to the law in relation to a crypto asset of any kind (whether it is a security or not - such as a distinct means of payment such as Bitcoin) will be under the application of the law and will require a license. (See the Committee to Examine the Regulation of the Issuance of Decentralized Cryptographic Coins to the Public, Final Report, March 2019, p. 39).
To the best of our knowledge, this position of the Securities Authority has not changed since it was written, but the law has not been amended to support this opinion either. To the extent that the law has not been amended, it does not apply to the management of investments in virtual currencies.
Establishing a Global hedge fund
Establishing a hedge fund in Scotland
Scotland is a country under the sovereignty of England characterized by a unique legal entity - a Scottish hedge fund. This entity is European on the one hand, and on the other hand it is "transparent for tax purposes". What does "transparent for tax purposes" mean? that instead of a tax being imposed on the hedge fund (like a tax is imposed on a company, for example), a tax is imposed on the investors in the hedge fund, and this according to the tax that would have been imposed on them.
For example, if the Israelis Mr. Yossi Cohen and Mr. David Levy are investors in a Scottish hedge fund, the hedge fund will not pay any tax in Scotland, and neither Mr. Yossi and Mr. David will pay tax in Scotland but in Israel, according to the marginal tax rates that apply to each of them separately! Nevertheless, the Scottish hedge fund is a European legal entity for all intents and purposes, which is relevant for certain activities such as opening a bank account in Europe.
Opening a hedge fund in England
A hedge fund in England is essentially the same as a hedge fund in Scotland, but the hedge fund is required to submit annual income reports even if the source of the hedge fund's income is from abroad, and even if there is no need to pay any tax in England.
There are very important and substantial advantages to a hedge fund in England when it comes to doing business in Europe.
Establishment of a hedge fund in the Cayman Islands
We wrote a great article explaining the benefits of setting up a hedge fund in the Cayman Islands. Establishing a hedge fund in the Cayman Islands - to read the article click here
The service we provide
If you have decided to manage investments in the capital market, you have access to investors and you know how to raise capital, you have come to the right place.
We can open a hedge fund for you and give you solutions for all the envelopes you will need, including connection to the right accountants and business support, even beyond the legal field - right up to the point where you can shake hands with the first investor and say "Welcome to my hedge fund".
Our office operates in all areas of commercial law, including companies, limited partnerships, companies abroad, banking and international banking, financial licensing, in Israel and abroad (USA, Europe and more), high-tech and startups, intellectual property, and more.
In addition, our office specializes in the field of Bitcoin, coins and cryptographic tokens, including stock exchange licenses, accompanying large transactions, setting up mining farms and more.
Adv. Tamir hodorov, a partner in 'Hodorov Law Firm', deals in the field of companies and securities, and invests himself in the stock market and virtual currencies.
The topics discussed in the video:
- - A bit of philosophy behind the types of assets - forex, stocks, bonds, bitcoin
- - What is a sophisticated investor
- - Is a license required to invest, and to trade?
- – Does automated trading require a license?
- - Types of exchanges and appropriate licenses
- - Running stocks, trading based on insider information, managing portfolios for family and friends