Jersey's new mindset lets hedge funds bloom
The past few years have seen booming growth for much of the financial services industry in the crown dependency of Jersey, which was relatively untouched by the stock market slump between 2000 and 2003, but the island's funds sector, two decades ago a pioneer of offshore investment, until recently found itself somewhat left behind.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
As the offshore banking, wealth management, and corporate and fiduciary services attracted increasing flows of new business, helped by <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Jersey's increasing standing as a well-regulated jurisdiction, the funds sector was left to lament the outflow of retail business to Luxembourg and Ireland after the European Union's Ucits directive allowed funds to be marketed (relatively) freely from one EU country into another.
Meanwhile, Jersey was largely missing out on the massive growth of hedge funds that began around the turn of the century and that seemed to dovetail perfectly with the centre's existing focus on providing services to affluent expatriates and to high net worth individuals and families.
The island's regulatory regime for funds remained largely geared to the investor protection priorities of the retail business, preventing all but the most determined promoters from setting up funds for alternative investment strategies. What saved the sector from slipping into outright decline was a boom in commercial property and private equity vehicles.
But all that changed on February 3 last year, when the Jersey Financial Services Commission published the Expert Funds Guide. The guide set out a fast-track authorisation process and other liberalisation measures for hedge and other funds geared to institutional and sophisticated private investors.
As well as slashing the approval process to as little as three days, the new regime also introduced a revolutionary change to the regulatory process by shifting responsibility for due diligence on funds and their managers from the Commission to service providers, notably fund administrators, managers and trustees.
This represents a major philosophical change by transferring the supervisor's focus from individual funds and their managers to the "competence and probity" of their service providers. The Expert Funds Guide also accommodates other characteristics of hedge funds, for instance by eliminating the requirement for funds to have a local custodian as long as they have an approved prime broker.
The success of the new regime appears to have taken even some of its backers by surprise. Up to the end of March this year some 60 Expert Funds had been approved, including 25 in the first quarter of 2005. The biggest problem, according to some industry members, is that the JFSC has at times struggled to keep on top of the inflow of new business.
Says Phil Austin, chief executive of the industry's promotional body, Jersey Finance: "Over the past year to 18 months we've sought to create a climate that would attract funds business. We very much see our future in the alternative funds market, so from a legislative and regulatory perspective we've tried to create a welcoming climate, culminating in the launch of the Expert Funds Guide. That's really the backcloth against which we can sell other activities."
The change has had a dramatic effect on Jersey's profile in the global hedge funds industry. Says Nick Kershaw, a partner with legal, fiduciary and administrative services provider Ogier Group: "It's put Jersey on the map in a way. The intermediaries in London that feed work to offshore jurisdictions are relatively few in number, and three or four years ago they wouldn't even have considered sending a hedge fund manager to Jersey."
This abruptness of the change is borne out by a recent independent survey carried out by Legal Week and sponsored by Bedell Cristin that asked fund managers and intermediaries which jurisdictions they would consider using to set up private equity, property and hedge funds. Says Kershaw: "Jersey was rated top for private equity and property funds, and second behind the Cayman Islands for hedge funds. I don't think anyone expects a sudden stampede from Cayman to Jersey, but there may be fund managers and investors who now prefer Jersey."
Members of the industry stress the advantage Jersey gains from a highly developed legal, fiduciary and accounting infrastructure. It also includes the Channel Islands Stock Exchange, whose first listings when it opened for business in 1998 were two hedge funds from Man Investments.
Says the exchange's chief executive Tamara Menteshvili: "We've seen an increase in listings as a result of the Expert Funds regime. However, it's not so much a question of numbers as the quality and type of securities we are trying to attract. We have high quality names and a good steady number of international issuers that use our exchange on a regular basis."
For some practitioners, the Expert Funds Guide was as much about announcing that Jersey was open for business as trying to attract greater numbers of domiciled funds. Says Richard Boléat, principal of the Channel House Financial Services Group:
"The introduction of the Expert Funds regime has been critical to Jersey's development, but perhaps not in the way it was intended to be.
"It was established to make Jersey a more attractive domicile for hedge funds, but what it appears to have done is to raise awareness of Jersey in the hedge community. Now that that this has been established in the minds of managers and their advisers, they are starting to think more widely about Jersey and the services that can be offered here.
"It has delivered a large inflow of hedge fund business, but not purely in terms of domiciliation. In fact, carrying out substantive activities and provision of local functionaries is a far more attractive business model for a jurisdiction like Jersey than simply acting as a domicile, which is just a commodity these days."
Boléat and other industry practitioners say Jersey is particularly well placed to win hedge fund business because of its ability to help funds meet new standards of corporate governance and deal with scepticism from tax authorities about funds' actual substance.
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