A question of governance

Over the past few years the hedge fund industry has matured and London's investment managers have become more comfortable with alternatives to the traditional Caribbean hedge fund.

This maturity has grown out of internal and external pressures. The pool of potential investors in hedge funds has increased, and the attention of regulators has become more focused. In recent times, the more traditional investment management houses have also recognised that they and their investors need exposure to hedge funds as an asset class. With this maturity comes added responsibility and, with reputations to lose, investment managers have looked closer to home when choosing the domicile for an offshore fund.

The logistical difficulties of operating a Caribbean structure across the Atlantic mean it is very often difficult for such a fund to demonstrate to HM Revenue and Customs that, although the fund is incorporated offshore with a majority of offshore directors, its management and control are exercised in or from any particular jurisdiction other than the investment manager's.

The more jurisdictions in which the fund could argue to have based its central management and control, the weaker the argument becomes for each one of those jurisdictions. Such funds also  risk being deemed to be domiciled in the jurisdiction of the administrator if it has provided the fund with directors and facilities for repeated board meetings.

At a time of demanding corporate governance requirements, it is becoming increasingly important for directors to attend some board meetings in person. Domiciling an offshore fund in a more accessible jurisdiction allows the investment manager to attend meetings more frequently, visit the administrator in that jurisdiction at the same time, and thus demonstrate that the fund is domiciled in a particular place. Many of Guernsey's administration firms are part of global operations that can outsource to other centres of particular expertise where necessary.

The Channel Islands Stock Exchange (CISX), which is based in Guernsey, is developing a serious reputation for listing both closed and open-ended funds. Since the FSA has approved the CISX  as a designated investment exchange, FSAauthorised firms have been permitted to treat CISX transactions in much the same way as if  they were trading on the UK's recognised investment exchanges.

Consequently, an investment by a UK firm in a CISX-listed security incurs a significantly lower position risk requirement, which further reduces transaction costs. Trading costs are also minimised because there is no stamp duty in Guernsey, and Crest and Euroclear are available for electronic settlements. Finally, compliance costs are reduced for issuers because the CISX is not obliged to implement the EU Transparency Obligations Directive. The CISX is also able to take a more pragmatic approach regarding the independence of directors of listed companies than either the London Stock Exchange or the Irish Stock Exchange.

The critical mass of service providers has allowed the Guernsey Financial Services Commission to lighten its oversight of Qualified Investor Funds that restrict their marketing to professional, experienced and knowledgeable investors. A minimum initial subscription per investor of USD 100,000 will also result in a fund being eligible for this fast-track approval procedure. With the help of their administrator, investment managers that already domicile offshore funds in Guernsey can establish hedge funds much more quickly than in the past.

By Benjamin Wrench Benjamin Wrench is an associate lawyer with Ozannes Corporate

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