A Hedge Fund Hotspot: Five Key Aspects of the DIFC Hedge Fund Regime

March 17, 2023

It is no secret that the Dubai International Financial Centre (DIFC) is having discussions with over 50 hedge funds regarding the establishment of asset management and fund operations in the DIFC. Considering the rapid and continuing growth of the hedge fund sector in this Middle East business hub, this LawFlash provides an overview of the DIFC hedge funds regime for managers looking to establish these funds in the DIFC.

The DIFC is emerging as a favorite destination for hedge fund managers who are drawn by its ease of doing business, low tax environment, and positioning as a global business platform. This growth is in part due to broadly available incentives (including low tax and good weather) but also the DIFC’s user friendly funds regime, with legal structures and a regulatory regime based on English common law and financial services regulation (with specific adaptations) and which requires relatively low licensing fees and capital requirements for hedge funds domiciling a domestic fund in the DIFC. It is also conveniently located geographically at the intersection of the Americas, Asia, and Africa with 80% of the world’s population within an eight-hour flight of the United Arab Emirates.

Here are the five key aspects of the DIFC hedge fund regime for institutional investors.


There are three regulatory categories for funds established in the DIFC, as specified by the Collective Investment Rules (CIR) issued by the Dubai Financial Services Authority (DFSA). From least intensively regulated to most intensively regulated, these categories are as follows: (1) qualified investor funds, (2) exempt funds, and (3) public funds (these are offered to investors by way of a public offer—or target retail clients—so are not outlined below). DIFC investment funds may additionally be classified as a specialist fund, one category of which is hedge funds.

Qualified Investor Funds

Qualified investor funds (QIFs) in the DIFC may only be offered by way of private placement and may only be subscribed by professional clients. In addition, the initial subscription to be paid by each investor in a QIF must be at least $500,000. To establish a QIF, a fund manager must notify the DFSA at least 14 days prior to the initial offer of interests in the QIF. The DFSA generally acknowledges the notification within two to four business days, after which the manager can proceed to offer and accept subscriptions. QIFs are not required to undertake reporting as frequently, are subject to fewer requirements relating to the content of their offering documents, and are not subject to specific requirements relating to conflicts of interest or investor meeting procedures.

Exempt Funds

Similar to QIFs, exempt funds in the DIFC may only be offered by way of private placement and may only be subscribed by professional clients. However, the initial subscription to be paid by each investor in an exempt fund must be at least $50,000. Exempt funds are subject to the same applicable DFSA process as QIFs. Unlike QIFs, exempt funds are subject to nearly all of the same CIR as apply to public funds, with the principal exception that oversight requirements and regulatory investment and borrowing limits do not apply to exempt funds.

Hedge Funds

Hedge funds are a specialist class of fund under the CIR. A hedge fund has some or all of the following criteria: (1) a broad mandate giving its manager flexibility to change strategy, (2) the aim of achieving absolute returns (as opposed to returns relative to the market), and (3) the use certain techniques such as (a) the pursuit of absolute returns or “alpha,” (b) short selling, (c) derivatives for investment purposes, (d) economic or debt leverage (including leverage embedded in financial instruments), (e) the acquisition of distressed debt with a view to its realisation at a profit, or (f) “high-yield” debt securities.

The DIFC does not impose any investment or leverage restrictions on hedge funds, which gives hedge fund managers a broad flexibility to design a product that works for their strategy or strategies. Certain mandatory disclosures are required in the hedge fund’s prospectus, and there are specific rules relating to prime brokers, which may only be appointed for QIFs or exempt funds and which must be eligible custodians (i.e., an authorized firm licensed to provide custody services in the DIFC or in certain limited circumstances foreign entities that the DFSA acknowledges as equivalently authorized). If using a prime broker, certain additional prospectus disclosures are required and the DFSA rules require certain collateral caps and set off rights in the prime broker agreement.

To address the risks inherent to its strategy, a hedge fund manager must make sure to separate the investment management process from the valuation and asset pricing. This is generally achieved by the appointment of a third-party administrator. The DIFC also expects hedge fund managers to have proper regard to certain best practice standards and guidance set forth in the DFSA Hedge Fund Code of Practice.


Managing a Collective Investment Fund

This regulated activity is where an asset manager (1) is legally accountable to the investors in a collective investment fund for the management of the property held for or within such fund; or (2) establishes, manages, or otherwise operates or winds up a collective investment fund. For these purposes, a collective investment fund requires the pooling of multiple investors’ contributions with the management of such pooled capital being undertaken by a third party (the fund manager).

Single investor arrangements will fall outside the scope of this regulated financial service activity, as will commercial businesses or joint ventures where each investor has an active, rather than passive, role in the venture. This licence is generally limited to managing QIFs and exempt funds, in which case the regulatory capital requirement is the higher of $70,000 and three months of the fund manager’s annual audited expenditure.

Managing Assets

This regulated activity is where an asset manager manages on a discretionary basis assets belonging to another person. This licence is relevant for those asset managers who operate single investor products, such as separately managed accounts or funds-of-one, where the asset manager retains investment discretion. In addition, this is the licence used by DIFC asset managers operating foreign (non-DIFC) funds.

Because this licence is not restricted to institutional investor products, it has higher application and annual fees, higher regulatory capital requirements, longer processing timelines and additional compliance obligations as compared to a licence for managing a collective investment fund restricted to QIFs and exempt funds. The regulatory capital requirement is the higher of $500,000 and three months of the asset manager’s annual audited expenditure.

Advising and Arranging

“Advising and arranging” can include advising on financial products (which includes most debt and equity securities, including convertible and derivative instruments), and arranging deals in investments. Broadly speaking, “arranging” means making arrangements with a view to another person (whether as principal or agent) buying, selling, subscribing for or underwriting an investment or financial instrument, whereas “advising” is providing advice to a person on the merits of buying, selling, subscribing for or underwriting an investment or financial instrument.

This is often used in a cross-border structure where the hedge fund and the fund/asset manager are established outside of the DIFC, and the DIFC entity only provides investment advice. The regulatory capital requirement is the higher of $10,000 and six weeks of the adviser’s annual audited expenditure.


The DIFC offers the following vehicles for purposes of establishing a domestic fund: (1) investment companies (including protected cell companies and incorporated cell companies); (2) limited partnerships; and (3) investment trusts.

Investment Companies

An investment company may be either a public or private company and may take the form of a company limited by shares or a cell company (as discussed below). Further, an investment company may be open ended, which allows for operation of a fund with regular subscription and redemption processes. An investment company may either have a sole corporate director act as its fund manager, with such director to be licensed directly by the applicable regulator, or have an external fund manager.

Cell Companies

A protected cell company (PCC) is a corporate structure in which a single legal entity is comprised of a core and several cells that have separate assets and liabilities. A cell of a PCC is not a body corporate and has no legal identity separate from that of its cell company but is treated as a company. As such, a cell of a PCC may enter into an agreement with its cell company or with another cell of the company that shall be enforceable as if each cell of the company were a body corporate that had a legal identity separate from that of its cell company.

An incorporated cell company (ICC), while similar to a PCC, adopts a fundamentally different approach to cells: each cell is incorporated as a separate legal entity (with a separate legal personality) without the cell company needing to have any shareholder relationship with the relevant cell. PCCs and ICCs are useful structures that enable fund managers operating multiple strategies to legally separate assets and liabilities of each strategy (on a per cell basis) while operating under common management.

Limited Partnerships

A limited partnership is a body corporate (with legal personality separate from that of its members) in which one or more general partners have unlimited liability for the debts and obligations of the limited partnership and exclusive authority to operate the limited partnership, and one or more limited partners each have liability limited to the amount of their capital contributions to the limited partnership but may not participate in the management of the limited partnership.

Investment Trusts

Investment trusts are not separate legal vehicles but contractual arrangements whereby legal and beneficial ownership of the trust (or fund) property are separated as between the trustee and investors, respectively. This structure is not commonly used for hedge fund structures in the DIFC.


As of the date of this LawFlash, the fees payable to the two DIFC authorities in connection with forming a hedge fund manager and a hedge fund structured as an open-ended investment company are as follows:


Fees (USD)

Payment Type

Fund Manager

DIFC Application for Incorporation of Private Company



DIFC Commercial Licence Registration



DIFC Annual Commercial Licence Renewal



DFSA Application for Fund Manager Licence to Manage QIFs and exempt funds*



DFSA Fund Manager Licence Annual Fee



DFSA Application Fee for Each Authorised Individual


One-off - per individual


DIFC Application for Incorporation of Open-Ended Investment Company (DIFC)



DIFC Commercial Licence Registration



DIFC Annual Commercial Licence Renewal



DIFC Filing of Annual Confirmation Statement



DFSA Fund Notification



DFSA Fund - Annual Fee


Annual (first period pro rata from registration)

* Should additional regulatory permissions be required (e.g., managing assets or advising/arranging), additional fees are applicable.


It is possible for a DIFC asset manager to operate or advise a foreign fund, and in this case the foreign fund is not required to be classified as or meet the requirements relating to the DIFC fund categories. In addition, fund managers established and licensed outside of the DIFC (but in a “recognized jurisdiction”) may be approved by the DFSA to operate DIFC funds.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following:

Alishia K. Sullivan (Dubai / Abu Dhabi)