It's a fund, Jim, but not as we know it
How interesting it has been over the past 12 months to see how Jersey's revised professional investor regime, implemented at the beginning of 2004, has spawned not only explosive growth in new fund formation but also in the types, complexities and routes to market of those funds, and indeed in some of the captive entities which serve them.
Simple straightforward funds, as we knew them, have been replaced by a wide range of hybrid entities that blend aspects of structured debt, classical hedge strategies, real estate, private equity and conventional long-only strategies in order to deliver more alpha, often at the cost of investor liquidity. Time will tell whether liquidity-adjusted alpha strategies will deliver superior returns to those available elsewhere, but the search for undervalued asset classes and fresh emerging markets continues apace, and investor appetite apparently remains undimmed. Having positioned itself as a viable alternative to the Cayman Islands as a hedge fund domicile, Jersey now also finds itself attracting a slew of hybrid structures, often closed-ended and with market listing needs. These needs have been satisfied not only by the Channel Islands Stock Exchange, but also by listings on AIM and Euronext. We are currently looking at the viability of a ual AIM/OMX listing, and other exchanges such as the NYSE and NASDAQ are also in the frame, with the objective of tapping specific investor classes.
This is not to say, of course, that classical hedge strategies are dead. We have already provided services to new fund launches in 2006 that have raised more than USD3bn from predominantly US institutional and hedge fund investors. One of our earliest Jersey-domiciled single manager hedge fund clients took assets through USD1bn only last month.
One specific area where we are seeing the greatest changes is in the way in which managers are paid. Invariably, investors are unwilling to accommodate the classic 2/20 model where underlying investment performance is only measurable over years rather than weeks. This begs the questions as to the right technique for illiquid strategies. The PE model has great attractions, particularly given that it remains generally much more tax-efficient for managers both within and outside the UK. However, it can be complex for non-PE investors to fully understand. Equally, how does one deal with what are apparently long-term strategies that become short-term due to the bundling and selling off of longterm risk into the capital markets? We have already seen the first fund with both PE and 2/20 fee characteristics, and we expect to see more.
The implications of this diversity for the Jersey funds industry are profound. High business volumes look set to be the norm, and the battle for talent is hotting up. Technology platforms will be key to efficient client servicing, and these platforms must be able deliver across the hybrid space. This presents challenges for existing service providers who have built or developed strategy-specific solutions, and considerable industry investment is underway. The continuing development of innovative corporate and partnership legislation will also play a key role. The introduction of incorporated cell companies has already had a significant impact, with managers seeking to build fund platforms that are efficient across a range of asset classes, strategies and liquidity profiles.
Boldly going where no jurisdiction has gone before? No, but certainly at the front of the fleet!
By Richard Boléat Richard Boleat is a director of Capita Fiduciary Group based in Jersey
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