Thu, 12/07/2007 - 15:17
Within the hedge fund sector, the Isle of Man is best known for administration, having swelled dramatically the volume of assets it services over the past three years, but the government and industry are not entirely satisfied with being reliant on this single product line.
They have watched as Ireland has become swamped by huge administrators, with all the attendant problems of soaring costs and skill shortages, and questioned whether that is what they really want for themselves. The Isle of Man is a good deal smaller than Ireland, and the likelihood is that it would not be able to cope with a similar deluge.
The alternative is to create a hub that is attractive for fund management firms and investment professionals. Attracting greater hedge fund incorporation would have multiple benefits: it might attract more wealthy individuals to the island, who would then pay VAT on the goods and services they consumed; it would raise the profile of the island, encouraging further investment; and it would keep headcount relatively low, so that pressure on the island's infrastructure would be manageable.
This push is happening now. The Isle of Man Funds Review Group report, published in February, made the luring of more managers an absolute priority. The island already has a regulatory framework designed to encourage the establishment of alternative funds, which can be launched within four weeks with no application or licence fees and no regulatory pre-approvals.
A clutch of well-known and smaller hedge fund managers have already set up in the Isle of Man. Among the best known are Charlemagne Capital, which listed on the London Stock Exchange last year and is currently valued at GBP200m, and Laxey Partners, the activist hedge fund firm that specialises in investment trust arbitrage. Others include Tufton Oceanic Finance Group, London and Capital, Barings, Thomas Miller and Nedbank Investments, and more fund firms could be on their way. Brian Donegan, the business development manager for the funds sector at government promotional agency Isle of Man Finance, says: 'We have a pipeline of business that may come here, but the gestation period is long.' The review recommended the island should position itself as the premier location for the domiciling of specialist institutional funds, focused mainly on the alternative and closed-ended sectors. The need for such a mission statement became evident amid a slowdown in the pace of growth in fundrelated business on the island.
The review noted that while fund assets under administration grew by 35 per cent in 2006, this was largely as a result of rising markets and growth in the number of closedended funds as well as of foreign-domiciled funds administered on the island. In addition, the total number of funds serviced in the Isle of Man, excluding exempt funds, rose only to 330 from 265 in 2005.
Of the 65 funds added last year, 40 were domiciled overseas, predominantly in the Caribbean, compared with just 25 domiciled in the Isle of Man, including seven Experienced Investor Funds. By comparison, in 2006 some 1,232 funds were established in the Cayman Islands, 175 in Guernsey and 142 in Jersey. The result, the review concluded, is that the Isle of Man remains heavily reliant on back office work in which the trend is toward lower-cost jurisdictions, posing an obvious risk to future prosperity. To counter this risk and attempt to attract more management companies, the report recommended the creation of a new specialist fund which will eventually replace the EIF. The fund, likely to be brought into service later this year, will have a USD100,000 minimum initial subscription, the flexibility to base management and administration in other acceptable jurisdictions, no restrictions on investment strategies and a light-touch regulatory approach.
Donegan says there is a real opportunity to attract more hedge funds as managers in London become concerned about the fate of the investment manager exemption, the guidelines that investment managers must satisfy, notably to demonstrate an arm's lengthy relationship with the offshore funds they advise, to ensure that the funds' profit is not taxable in the UK. The rules are one of the factors that have made London an attractive location for hedge fund managers. However, Donegan says: 'The hedge fund community has been rattled by what the Brown administration may do with the exemption. They are also becoming unhappy with the quality and level of outsourcing in the UK. We want to catch them at the gate before they ship out to Switzerland or wherever and tell them we'd love them to come lock, stock and barrel to the Isle of Man. After all, it's only 50 minutes from London by air.' comes in the form of grant aid from the Manx government for firms looking to move there. Fifty per cent of their capital expenditure in the first year in areas such as property, recruitment and hardware can be written off against tax.
While Laxey, Charlemagne and others have already based some of their managers in the Isle of Man, it is only a small proportion of their overall staff numbers. Just as few investment professionals ever moved to Luxembourg, Ireland or Grand Cayman, it is hard to see many moving to the Isle of Man despite income tax rates of only 18 per cent at the top end and a cap of GBP100,000 income tax in any one year.
'It's a hard sell,' admits Charlie Woolnough, senior business development manager at Fortis Fund Services (Isle of Man), which has a large administration hub on the island. 'Fund managers tend to be in London where they enjoy all the facilities of a big city. It's not a move for everyone, but for those who like island life and natural beauty it's a great place.' Adds Anthony Long, a director of Capital International, which offers administration and fund management services: 'The island does not score as highly as, say, the Channel Islands or the Caribbean, which enjoy the weather and a glamorous profile. The island does fall down for young single dynamic individuals.
'It is best suited to a young family or someone in the later stages of their career. At the same time, many people come here by default through their jobs for a notional two or three years but then stay. The restaurants and entertainment generally have improved hugely. The island can really hold its head up in that respect.' If attracting managers in great numbers seems a distant dream, persuading managers based elsewhere to set up funds in the Isle of Man may be a realistic aim. This was one of the drivers behind the Specialist Fund structure, which will allow greater institutionalisation of the Manx fund sector, which was difficult with the existing EIF regime.
The review in February noted that the Isle of Man was the 'only quality location globally with an EIF regime that has no minimum investment restriction. This has resulted in these funds, which are effectively nonregulated, being marketed on a retail basis and thus demands increased regulation to protect retail investors, which is unnecessarily burdensome on institutional business.' Gordon Wilson, managing director of the European fund services business of Caymanbased administrator Caledonian and a member of the review body, says: 'We identified that the Isle of Man needed to have an institutional-focused fund product given the opportunities in the institutional market.' He believes a key component of the new fund structure is allowing funds to be incorporated in the Isle of Man but administered elsewhere. 'This will be a big step for the island, but in order for the new fund offering to be truly competitive, it was seen as an essential component.'
Although Manx administrators may have to fight harder for business initially, Wilson believes they will benefit in the long run. 'The Isle of Man's global share of hedge funds is very small, therefore it's vital that the island raises its profile,' he says. 'There are a lot of funds, particularly in the Caribbean, whose managers and advisors may never think of the Isle of Man for domicile and administration. However, if there are more funds established here, more people will get to know what the Isle of Man has to offer and that it is able to compete globally.' Of course, fund administration is an important part of the Manx hedge fund jigsaw in its own right and will continue to be. With the exceptions of Fortis and HSBC, the administration firms are modest in size,
but this can be an advantage when trying to attract smaller hedge funds whose assets would be a drop in the ocean for the biggest Dublin administrators.
'There are huge opportunities in the hedge fund industry, particularly for those with the technology necessary to service the more complex fund structures,' Wilson says. 'Our technology is benchmarked against the biggest players in our industry, and we are focused on bringing that technology to some of the smaller fund managers of today who will hopefully be the larger fund managers of tomorrow.'
Wilson saw the opportunities in the Isle of Man after working in Grand Cayman for five and a half years. As a director in Deloitte's accounting and insolvency practice in Cayman, working on the Long Term Capital Management liquidation and various other fund collapses, he knew from his experience in suing fund administration companies what the pitfalls were and how to create a fund administrator that was aware of the risks in the industry and offered more than a boxticking service.
'There are many challenges and potential risk areas, for example in illiquid or thinlytraded securities, or in overly complex fund structures,' Wilson says. 'Late filing of financial statements can also be indicative of problems, and this was true in many of the cases we were involved in Cayman. Using this experience, we've tried to develop enhanced controls and make sure our people are alive to the risks. Our remit is to run a tight ship.'
He believes the hedge fund industry has come such a long way in such a short time that it is inevitable there will be those who seek more than their fair share of the pie. 'You need parameters and controls and people who are alive to the risks,' he says. Smaller shops, with experienced personnel, are perhaps better at the detail than the larger ones, he argues. But can they compete with the technology offerings of the bigger service providers? Wilson says they can, but need to be smart about it: 'In fund administration you need cutting edge technology. We did not try to develop this inhouse, opting to buy a best in class system, Advent. And last year we were one of the first fund administration companies to implement Paladyne, a front and middle office system designed to work with Advent.' The two systems running side by side can help achieve higher levels of straight-through processing, automated from the order to execution to the back office. 'At the moment many managers have separate systems from their brokers and administrators,' Wilson says. 'At the worst everything is done three times and reconciled.'
If the island can demonstrate it has both the expertise and technology to rival (or better) its larger competitor in Ireland, and can do it more cheaply, surely it can start to take market share? Woolnough believes Dublin is under pressure, noting that staff turnover in Ireland is very high compared with the Isle of Man and that it does not have such a high ratio of experienced fund administrators. 'The biggest complaint from people who are looking to leave other administrators is that the people servicing their account have left,' he says. The fast growth of Dublin may be a possible reason for the decline in satisfaction among its clients, he believes. Whereas there were only about 10 administrators in Dublin a decade ago, there are more than 50 now. 'Three or four years ago, everyone thought there would be a big consolidation of administrators and there would just be a handful left,' Woolnough says. 'In fact, it's been the reverse.' The outcome is large movements of staff and a growing dissatisfaction among Ireland's client base that may just benefit the Isle of Man.
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