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
