The Basics of Non-Mainstream Pooled Investment Vehicle Investing

Non-mainstream pooled investment vehicles offer an alternative to traditional investments, allowing individuals to diversify their portfolios and potentially increase returns. These vehicles often have unique structures and requirements.

A key characteristic of non-mainstream pooled investment vehicles is their exemption from the Investment Company Act of 1940, which regulates traditional investment companies. This exemption allows for greater flexibility in investment strategies and structures.

Investors in non-mainstream pooled investment vehicles typically require a higher level of sophistication and financial knowledge, as these investments often involve complex structures and higher risk.

A 3A firm must not communicate or approve an invitation or inducement to participate in a non-mainstream pooled investment if it's likely to be received by a retail client.

This restriction is subject to COBS 4.12.4 R and doesn't apply to units in unregulated collective investment schemes, which are subject to a statutory restriction on promotion in section 238 of the Act.

The restriction in (1) includes a Gibraltar-based firm to the extent that the rule doesn't already apply to such a firm as a result of GEN 2.3.1R.

This means that a 3A firm has to be careful about how they promote non-mainstream pooled investments to avoid reaching retail clients.

Here's a breakdown of the key points:

Retail investors are protected by additional rules that only apply to certain types of LTAFs, specifically those open to mass market retail investors.

These rules provide extra safeguards for retail investors and include requirements for full engagement with unitholders about proposed changes to the fund.

LTAFs that are not considered 'limited protection LTAFs' must have arrangements for the conduct of unitholder meetings.

Retail investors in these types of LTAFs also have restrictions on what types of payments and charges can be taken from their units.

To determine suitability, it's essential to understand the different types of investors and their corresponding protection levels.

Here's a breakdown of the protection levels and corresponding investor types:

Regular investor updates must be provided in the event of a suspension of dealing for retail investors in LTAFs with full protection.

One-off promotions are a key consideration for firms looking to promote non-mainstream pooled investments. Firms must have regard to their duties under the Principles and the client's best interests rule.

To promote a non-mainstream pooled investment to a retail client using a one-off promotion exemption, a firm should consider whether the promotion is in the client's interests and fair to make on that basis.

The one-off promotion exemptions permit promotion under certain conditions, but the FCA views promoting a non-mainstream pooled investment to a retail client who is not a certified high net worth investor, certified sophisticated investor, or self-certified sophisticated investor as unlikely to be appropriate or in the client's best interests.

3A firms must not communicate or approve an invitation or inducement to participate in, acquire, or underwrite a non-mainstream pooled investment if it's likely to be received by a retail client.

The restriction doesn't apply to units in unregulated collective investment schemes, which are subject to a statutory restriction on promotion in section 238 of the Act.

A TP firm is included in the definition of a firm in this context, unless the rule already applies to them as a result of GEN 2.2.26R.

Gibraltar-based firms are also included, unless the rule already applies to them as a result of GEN 2.3.1R.

One-off promotions can be a way for firms to promote non-mainstream pooled investments to retail clients. However, firms must have regard to their duties under the Principles and the client's best interests rule.

Firms should consider whether the promotion of the non-mainstream pooled investment is in the interests of the client and whether it is fair to make the promotion to that client on the basis of a one-off promotion exemption.

The one-off promotion exemptions permit the promotion of investments to clients under certain conditions. These conditions are outlined in PERG 8.14.3 G to PERG 8.14.13 G.

Promotion of a non-mainstream pooled investment to a retail client who is not a certified high net worth investor, a certified sophisticated investor or a self-certified sophisticated investor is unlikely to be appropriate or in that client's best interests.

Firms should be cautious when considering one-off promotions, as they may not align with the client's best interests.

Here are some key points to consider when evaluating one-off promotions:

The LTAF was initially launched as a Non-Mainstream Pooled Investment (NMPI), a sub-category of the high-risk investment NMMI category. This categorization was later changed to a Risk Managed Managed Investment (RMMI), which is a more suitable category for the LTAF.

The FCA made this decision based on the LTAF's strict regulatory requirements. These requirements include strong governance and disclosure rules.

The LTAF is required to employ a prudent spread of risk in its investment strategies. This means that the fund managers need to be cautious and thoughtful in their investment decisions.

The LTAF is also required to be managed by a full-scope UK AIFM. This ensures that the fund is managed by a professional with the necessary expertise and resources.

Fund Exposure Limits are a crucial aspect of investing in Long Term Asset Funds (LTAFs).

A NURS Fund of Alternative Investment Funds (NURS FAIF) can invest up to 35% of the value of its scheme property into a single LTAF.

The investment restrictions also apply to funds that operate limited redemption arrangements, which means they can only invest more than 50% of their scheme property in LTAFs if they meet certain liquidity requirements.

To ensure they can meet their redemption obligations, NURS FAIFs must be satisfied that the liquidity, redemption policies, and dealing arrangements of any LTAFs in which they invest are adequate.

A firm promoting a non-mainstream pooled investment (NMPI) to a retail client must not communicate or approve an invitation or inducement to participate in the investment if it is addressed to or disseminated in such a way that it is likely to be received by a retail client.

Firms should have regard to their duties under the Principles and the client's best interests rule when promoting units in a qualified investor scheme to a retail client.

The retail client restriction does not apply to certified high-net-worth investors, certified sophisticated investors, and self-certified sophisticated investors.

The FCA's "Dear CEO" letter expects a due diligence process connected with client categorisation that prevents investors with a lower-risk appetite from gaining access to high-risk investments that do not match their objectives.

Firms marketing long-term asset funds (LTAFs) to retail investors will need to provide risk warnings and summaries, conduct an appropriateness assessment for all retail investors, and require unadvised retail investors to confirm that their exposure to investments subject to the RMMI rules is limited to 10% of their investable assets.

LTAFs open to mass market retail investors are subject to additional rules providing further protection for these investors, including full engagement with unitholders about proposed fundamental or significant changes to the fund and restrictions on what types of payments and charges can be taken from LTAF unit classes made available to retail clients.

Here are the types of investors that are exempt from the retail client restriction:

An LTAF is an FCA-authorised open-ended fund vehicle that can invest in a range of permitted investments, including real estate and loans.

LTAFs are designed for long-term investments, with a focus on illiquid assets that are not easily sold or traded. This is in contrast to other investment vehicles that prioritize liquidity and short-term gains.

A key feature of LTAFs is their borrowing limit, which is capped at 30% of the fund's net asset value (NAV). This means that LTAFs can't take on too much debt, which helps to manage risk.

Here are some key characteristics of LTAFs:

Investors need to have a sound understanding of risks of investing in an LTAF. This is crucial to make informed decisions.

Recategorisation to RMMI means that firms marketing LTAFs to retail investors will need to provide risk warnings and summaries, which will focus more on liquidity risk. Liquidity risk refers to the risk that the investor may not be able to sell their investment quickly or at a good price.

Firms will also need to conduct an appropriateness assessment for all retail investors. This assessment will help determine if the investment is suitable for the investor's needs and goals.

Unadvised retail investors will need to confirm that their exposure to investments subject to the RMMI rules (including LTAFs) is limited to 10% of their investable assets. This involves a declaration that the investor has not in the last 12 months (and will not in the next 12 months) invest more than 10% of their net assets in RMMIs.

Here's a breakdown of what's included in net assets for these purposes:

Note that advised clients will be subject to a suitability assessment instead of an appropriateness assessment.

The LTAF is a unique investment vehicle that offers several key features. It's an FCA-authorised open-ended fund vehicle that can invest in a range of permitted investments, including real estate and loans.

One of the defining characteristics of an LTAF is its investment strategy, which must be to invest mainly in long-term illiquid assets. This means that LTAFs are well-suited for investors who are looking for a more stable and long-term investment option.

LTAFs are designed to be held for the long term, with a mandatory notice period of at least 90 days for redemptions. This means that investors who want to withdraw their money from an LTAF will have to give the fund at least 90 days' notice.

Here are some key features of LTAFs at a glance:

Only full-scope UK AIFMs can act as AFMs of LTAFs, and they must demonstrate to the FCA that they possess the necessary expertise and skills for their proposed investment strategies.

The LTAF has a borrowing limit of 100%, which is a significant advantage over the Non-UCITS Retail Scheme (NURS) with its 10% limit.

A NURS can invest in real estate and unregulated schemes, but it's subject to stricter regulations and investment restrictions.

The Qualified Investor Scheme (QIS) is another option that can invest in real estate, but it's intended only for professional clients and sophisticated investors.

The LTAF offers a broader investor base than the QIS, making it a more accessible option for a wider range of investors.

Here's a comparison of the LTAF with the NURS and QIS:

The LTAF, NURS, and QIS are all subject to AIFMD, which means they must comply with the Alternative Investment Fund Managers Directive.

Investing in a non-mainstream pooled investment vehicle can offer a range of benefits, both monetary and non-monetary.

One of the most significant monetary benefits is the potential for higher returns, as seen in the example of the "Hedge Fund" which reported a 20% annual return. This is because non-mainstream vehicles often invest in alternative assets that are not correlated with traditional markets, reducing risk and increasing potential for growth.

Non-monetary benefits include tax advantages, such as reduced capital gains tax rates, as mentioned in the "Tax Implications" section. This can be a significant advantage for investors who want to minimize their tax liability.

Investors in non-mainstream vehicles often have more control over their investments, as seen in the example of the "Private Equity Fund" which allows investors to participate in decision-making and have a say in the investment strategy. This can be a major advantage for investors who value autonomy and flexibility.

Another benefit of non-mainstream pooled investment vehicles is the opportunity to diversify your portfolio, as mentioned in the "Diversification" section. By investing in alternative assets, you can reduce your reliance on traditional markets and spread your risk.