New Ultra-Accredited Investor Mutual Fund: The First Hedge Fund Concept
To enable Thai asset management companies to offer a greater variety of funds and to provide more investment alternatives for local investors, the Office of the Securities and Exchange Commission of Thailand (the SEC) recently issued a new regulation allowing the setting up of a mutual fund for Thai institutional investors and ultra-accredited investors1 (the Ultra-Accredited Investor Mutual Fund, or UI Fund), and liberalized the fund investment regulations to cater for this UI Fund.2 The regulation on permissible investment by private funds has also been relaxed as the SEC views the private fund management relationship as a contractual relationship between the private fund owner and the asset management company where the private fund owner should be able to invest in various financial products, and not being subject to any restriction like in foreign countries.
The new regulation and amendment came into effect on 1 March 2017. This Client Alert flags the key changes relating thereto.
I. Ultra-Accredited Investor Mutual Fund (UI Fund)
A. What's New?
In the past, mutual funds offered to non-retail investors could only invest in certain asset types, subject to a restrictive investment limit and were strictly prohibited from entering into any borrowing transaction (including repo transactions).
With an introduction of the UI Fund under the new SEC regulation, the UI Fund can invest in any type of financial instruments and financial transactions, including high-risk products like derivatives and short sales,3 without being subject to any investment limit (except for product limit on deposit investment and borrowing as elaborated below), similar to a concept of "hedge fund" in other countries.
However, the UI Fund can only be offered to Thai institutional investors4 and ultra-accredited investors as explained in the sub-section below.
The only applicable investment limit to the UI Fund is the product limit on investment in deposits and deposit-like instruments (B/E, P/N) issued by certain Thai financial institutions, not exceeding 45% of the fund's net asset value (NAV), which is derived from tax issues.
The UI Fund can also borrow money or enter into a repo transaction for up to 50% of the fund's NAV for the purpose of fund investment management.
When investing in derivatives (including certain types of structured notes), or entering into borrowing transactions and repo transactions for fund investment management purposes, or short sales, the asset management company must also disclose details of the fund's maximum investment limit in the relevant fund prospectus for investors' information. However, no guideline on the term "maximum limit" is available yet.
B. Who are Thai Ultra-Accredited Investors?
Thai ultra-accredited investors are:
- juristic persons having any of the following characteristics –
- shareholder equity of at least Baht 200 million pursuant to the latest audited financial statement; or
- direct investment in securities or derivatives of at least Baht 40 million, or, if the calculation also includes deposits, at least Baht 80 million, pursuant to the latest audited financial statement;
- in the case of individuals, when combined with spouse, having any of the following characteristics –
- net asset value (excluding permanent residence) of at least Baht 70 million;
- annual income of at least Baht 10 million, or, if not combined with spouse, at least Baht 7 million; or
- direct investment in securities or derivatives of at least Baht 25 million, or, if the calculation also includes deposits, at least Baht 50 million.
II. Relaxation of the Regulation on Investment by Private Funds
Similar to the UI Fund, private funds can now invest in any type of financial instruments and financial transactions, including high-risks products, without being subject to any investment limit (even the product limit applicable to the UI Fund). The only difference regarding permissible investment between the UI Fund and private funds is that private funds cannot borrow money or enter into any repo transaction.
III. Impact of the New Regulation
As a Thai mutual fund can only invest in an offshore fund or collective investment scheme (CIS) that invest in assets in which the Thai fund is permitted to invest (i.e. look-through concept), with UI Fund introduced, an asset management company in Thailand can now set up a UI Fund as a feeder fund to offer to Thai qualified investors. The UI can then invest into an offshore master fund without the concern of matching the investment policy and limits applied by an offshore master fund with the restrictive and complex permissible investment and limit applicable to Thai fund as the only limits applied are the product limits for deposit investment and borrowing transactions.
Baker McKenzie will continue to provide updates should further development occur.
1 CMSB Notification No. TorNor. 15/2560.
2 CMSB Notification No. TorNor. 87/2558, as amended by CMSB Notification No. TorNor. 14/2560.
3 Short sale transactions are subject to conditions pursuant to clause 14 of CMSB Notification No. TorNor. 14/2560.
4 Thai institutional investors are: (1) the Bank of Thailand; (2) commercial banks; (3) banks established under specific laws; (4) finance companies; (5) credit fonciers; (6) securities companies; (7) non-life insurance companies; (8) life insurance companies; (9) mutual funds; (10) private funds managed by securities companies for investment of investor under (1) to (9) or (11) to (25), or high net-worth investors; (11) provident funds; (12) the Government Pension Fund; (13) the Social Security Fund; (14) the National Savings Fund; (15) the Financial Institution Development Fund; (16) derivatives business operators under the law on derivatives; (17) futures business operators under the law on agricultural futures trading; (18) international financial institutions; (19) Deposit Protection Agency; (20) the Stock Exchange of Thailand; (21) juristic persons in the category of statutory corporation; (22) juristic persons whose shares are held by persons under (1) to (21), in aggregate, exceeding 75 percent of all shares with voting rights; (23) foreign investors having similar characteristics to persons under (1) to (22); (24) fund managers or derivatives fund managers pursuant to the CMSB Notification on personnel in the capital market business; and (25) any other investors as specified by the SEC Office.