miércoles, 1 de junio de 2011

How to create a hedge fund in Mexico?

In Mexico now is possible to open a hedge fund because of the changes to the mexican securities law (Ley del Mercado de Valores) in the year 2005. I recommend that a hedge fund should be constituted as an Investment Promoter Anonymous Society, in spanish is Sociedad Anónima Promotora de Inversión (S.A.P.I.). This figure will make possible for a corparation to redeem its own shares by repurchasing them. Another key aspect is that this figure allows to issue shares that do not have the right to vote, this is very important if you want to maintain the control of the fund.

A mexican Hedge Fund will require to charge a recommended fee structure of 2% / 20%, why? Because the investment advisor will have to pay 16% of Value Added Tax, so if you charge 2% in real life you will be receiving 1.72%; the same applies to the commision over profits of 20%. The structure I recommend for a Hedge Fund in Mexico is the following:

The structure its very simple and it consists of a qualified investor contributing its own equity to the fund, and the fund manager will trade the money in the fund in order to get a return. There are multiple strategies that a hedge fund can use in order to make a return, in Mexico the most common strategies are:

- Value oriented
- Long/short equities
- Managed Futures

It is very important to mention that a Hedge Fund can't publicize itself, you can only offer shares via a private offer to qualified investors or up to 99 smaller investors, this is regulated in article 8 of the Mexican Securities Law. If someone fails to comply with this article there is a penalty that ranges from 2 to 10 years of jail.

The worst part of doing a mexican hedge fund is related to taxes. In the year 2011 if you have profits in a corporation or any other legal identity the tax rate is 30%. Now, there are some problems with deductibility of losses, if for example you win by buying and selling bonds and you loose money trading shares, you are not going to be able to deduct share losses to the bond profits, so you end up paying an even higher tax rate.

There are other formalities that companies must meet, for example decisions taken in the general assembly of shareholders should be protocolized by a public notary, this increases operation costs.

In my opinion it is better to open a hedge fund in the United States with the traditional LLP/LLC structure because it allows to pass the tax obligation to the shareholders and the fund does not pay taxes, the shareholders are responsible of paying taxes. Another alternative can be the use of fiscal paradises like the Cayman Islands or Nevis, their corporate regulations are very flexible and as IBCs they don't pay taxes, the shareholder will be responsible of paying taxes in its country of residence or of citizenship.

This is my first article in english, I want to expand my readers base to english speaking people, too. Please feel free to comment on this article.

Humberto P. Aguilar

5 comentarios:

  1. Good afternoon Humberto,

    The information you provide in the above segments its significantly practical, and you cover a hedge-fund's vital areas. In addition, like a cherry on top of a vanilla-ice-cream, your recommendation to legally structure a hedge-fund is immaculate.

    Nonetheless, if I were to need more information about the subject, where do you recommend me to go and look for it?

    Pleased with your article,

    Pedro Luis Garcia

  2. It depends of the hedge fund jurisdiction, if you are planning to incorporate it in Mexico then you should read the following laws:
    Ley del Mercado de Valores
    Ley General de Sociedades Mercantiles
    Ley del Impuesto sobre la Renta
    Ley del Impuesto Empresarial a Tasa Única
    Código Fiscal de la Federación

    In Mexico the law denominated "Ley del Mercado de Valores" article 8 establishes what is a private offer. This article tells that anyone can do a private offer to qualified or institutional investors or to less than 100 investors only when you sell stock of a company.

    In the United States there is a lot of literature that talks about the subject, but you can start with the Securities Act of 1933 section 4(2), this section exempts private offers from registering. And now the Dodd-Frank Act requires hedge funds that manage assets of $150 million or more to register with the SEC.

    In the case of Mexico there is no literature at all, you need to do research. I do not recommend to create a hedge fund in Mexico because of the complexities of the mexican tax system.

  3. Hello Humberto, I want to start a hedge fund here in México. Do you recomend me to open it in a fiscal paradise? how can I do that?

    Here is my mail: firelshit@hotmail.com

    I hope you can contact me.

    Great article!

  4. Hello Humberto

    I would like to contact you personally, because I'm involved in a Hedge fund creation project here in Mexico and I'm interested to have your opinion and involvement in this project.

    Please contact me at my e-mail: jcohenb@gmail.com

    Best Regards.

  5. Hi humberto
    Can yo contact me via email cortesgabriel90@gmail.com