Legal Advice on German Hedge Fund Law 

From a legal perspective, the hedge fund is a sub-type of a general open-ended German special alternative investment fund (AIF) that can engage in significant leverage and/or short selling in accordance with its investment policy; insofar, the hedge fund is not bound by the legal restrictions of the German Investment Code (KAGB) that also implements the Alternative Investment Fund Managers Directive (AIFMD). However, the authorisation to carry out short sales opens up the scope of application of the Short Selling Regulation (SSR), which requires the disclosure of significant net short positions in equities and sovereign debt and prohibits uncovered short sales.

In principle, the hedge fund manager is free to choose his investment strategy and set it out in his investment policy. Typical investment strategies include equity long/short, credit long/short, equity long bias, managed futures/CTA, macro, fixed income arbitrage and distressed/restructuring. In addition to liquid financial instruments, the hedge fund is generally free to invest in any conceivable asset, including real estate and shares in companies that are not traded on a stock exchange, subject to the principle of risk diversification. It can also have the assets held in custody by a prime broker.

In principle, a hedge fund manager requires a licence from the German supervisory authority BaFin to operate an AIF management company (KVG). However, depending on the structure, mere registration may also be sufficient. In any case, the hedge fund can only be invested in by professional and semi-professional investors. Private investors could also invest indirectly in the hedge fund, at least proportionately, via a fund of hedge funds structured as a public fund.