Act 35/2003 on Collective Investment Institutions ("Act 35/2003"), implementing UCITS III, introduced a new scenario for the Spanish collective investment institutions ("CII"). In order to develop this Act further, on October 13 2004, the Ministry of Finance published the first Draft Regulation on CII, which included one of the most eagerly-awaited developments: the regulation of hedge funds. However, it established requirements such as the calculation of daily NAV and the impossibility to invest in offshore hedge funds, which rendered the Spanish hedge funds market uncompetitive, since it was too restrictive.

On July 18 2005, a new Draft Regulation on CII (the "Draft") was published. This incorporates some of the industry's demands and establishes a less restrictive regulatory framework by, for example, eliminating the requirement for daily NAV and requiring the funds to provide it quarterly. This Draft will now have to be discussed by the Council of Ministers before its final enactment (expected in October); however, the final wording of the Regulation is expected to be very similar to this Draft since, as we mentioned, all the comments made by the sector and the regulatory bodies have already been discussed and, in some cases, incorporated.

Both alternative investment funds (Free investment Collective Investment Institutions - ie, single manager funds) and funds of alternative investment funds (Funds of Free investment Collective Investment Institutions - ie, multi-manager funds) are provide for.

The principal characteristics of single manager funds and multi-manager funds are the following:

Single Funds - Free investment Collective Investment Institutions

• Whereas (in the first Draft) only institutional investors could acquire single manager funds, the new Draft establishes only a requirement of a minimum investment of €50,000.
  
• Marketing activities can only be carried out when addressed to qualified investors (the earlier version of the Draft established that no marketing activities could be carried out).
  
• Minimum number of unit- or shareholders of 25.
  
• Possibility of subscription and reimbursement in kind.
  
• The NAV must be calculated quarterly. However, if it is required by the type of investments, it can be calculated half-yearly. The subscriptions and reimbursements shall be carried out with the same recurrence.
  
• There is no restriction on investment in any kind of assets, including credit derivatives, irrespective of which are the underlying assets. The only requirement is for the investment policy to follow principles of liquidity, diversification and transparency.
  
• There is no restriction for derivative leverage.
  
• Rules on maximum fee limits stated in Spanish legislation for CII are not applicable.
  
• Possibility of indebtedness up to 5 times the value of the assets of the single manager fund.
  
• Possibility of pledging the assets of the fund.
  
• The risk management system shall include the performance of regular simulations in order to evaluate the effects of adverse market developments on the ability of the fund to fulfil its commitments.
  
• Before acquisition of share/units of this type of CII, the investor shall declare in writing that he is aware of the inherent risks of this type of investment.
  
• The Free investment Collective Investment Institutions have to be registered in a special registry at the Spanish supervisor (CNMV).

Funds of Funds - Funds of Free investment CII

• No limits on investors to whom product can be sold.
  
• Minimum investment of 60% of the assets of the multi-manager fund in other Spanish Free investment CII or other similar foreign funds domiciled in OECD countries or funds whose management has been entrusted to a management company subject to supervision in an OECD country.
  
• Maximum investment of 10% of the assets of the multi-manager fund in a single CII.
  
• The NAV must be calculated quarterly. However, if required by the type of investments, it can be calculated half-yearly. The subscriptions and reimbursements shall be carried out with the same recurrence.
  
• Legislation on maximum fee limits provided by Spanish legislation for CII is not applicable.
  
• The Fund of Free investment CII has to be registered in a special registry at the Spanish supervisor (CNMV).
  
• Before the acquisition of share/units of this type of CII, the investor shall declare in writing that he is aware of the inherent risks of this type of investment.
  
• The Prospectus, Simplified Prospectus and all marketing material shall include information about the special risks that implies the investment in this type of CII.

According to the above, it seems that - finally - Spain should have a flexible regulatory framework for the launch of hedge funds. However, there are still some issues that need further clarification:

1. the scope of the prime brokerage agreements that can be entered into by Spanish hedge funds;
   
2. whether the Spanish multi-manager funds can invest in funds of funds;
   
3. the actual meaning of "management company located in OECD" for the purposes of eligibility for investment by Spanish multi-manager funds; and
   
4. which requirements would be imposed on the Spanish management companies that intend to manage alternative investment products.