Mon, 08/05/2006 - 07:59
As interest in hedge funds has grown in the United Kingdom and Europe in recent years, a large number of promoters have chosen to locate their funds in Guernsey. This is because the Guernsey Financial Services Commission (GFSC) has adopted policies and regulations that encourage the use of the island as a domicile through two policy changes. By contrast, excessive regulation in other jurisdictions has resulted in hedge fund management companies looking to relocate their managers to Guernsey.
The first policy change introduced relatively recently in Guernsey is to the legal and regulatory framework and is designed to improve the regulatory environment for hedge funds. The other principal change is that there is now a streamlined authorisation process allowing promoters to establish Qualifying Investor Funds within three working days. These changes are outlined below. The GFSC published a framework policy document on February 23, 2004 entitled Hedge Funds: Flexible Approach to Authorisation Policy.
In particular, the GFSC:
쳌¡ is prepared to waive the requirement for a fund to have a locally licensed custodian and will permit the appointment of a prime broker as long as the latter is regulated in an acceptable jurisdiction and has substantial net worth;
쳌¡ does not require a prime broker to offer physical segregation of fund assets from its own assets, even where fund assets held by the broker exceed credit extended by the broker; and
쳌¡ will be prepared, provided that the process is robust, to permit arrangements that allow a preliminary estimation of net asset value for the purpose of allowing subscription monies to be taken into the fund before the final share allocation has been determined, and will also make available appropriate waivers from the operation of the client money rules provided it is satisfied as to the robustness of the estimation procedures to be used.
Recognising that many hedge funds are established for professional and experienced investors, the GFSC re-published a guidance document in April 2006 redefining its streamlined authorisation process for QIFs (first introduced in February 2005), which reduces the authorisation timescale from between four and six weeks to less than three working days once all fund documentation is finalised. Approval is given by the GFSC on the basis of the Guernsey administrator's selfcertification of the promoter and the fund.
QIFs can be established as open-ended or closed-ended funds and as single- or multi-class unit trusts, investment companies, protected cell companies or limited partnerships. They are open to 'qualified investors', defined as professional investors, which includes investors individually investing at least $100,000 (or currency equivalent) following changes introduced recently, experienced investors and knowledgeable employees.
The administrator has an ongoing responsibility to monitor compliance with the matters it has self-certified and to ensure its rationale for the self-certification is clearly documented. The GFSC will consider derogations in relation to the rules relating to the relevant classification of investment funds subject to it having sufficient notice before the QIF application.
The GFSC's change in policy has gone a long way to promote the advantages of Guernsey as a domicile for hedge funds. Consequently, a number of large hedge fund managers are now using the island to domicile hedge funds, and a significant number are also relocating their offices and trading platforms to Guernsey.
By Ben Morgan Ben Morgan is a partner in the Guernsey Corporate Group at Carey Olsen
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