In a period of exceptional growth for the fund industry generally in Guernsey, the hedge fund sector is growing rapidly and maturing, a result of a number of factors including the widening of its definition.

The eternal dilemma of defining what a hedge fund is continues to become more difficult. No longer do managers of funds engaged in event-driven and arbitrage strategies, for example, claim to be the sole purveyors of hedge funds, which now encompass a wide variety of long-only strategies. The descriptions 'alternative' and 'hedge' seem to have merged where there isn't an established distinction as for private equity or property, and even then we have seen the crossover of hedge fund concepts into both of these arenas.

What has driven this scope creep is open to debate. It could be that because alternative strategies are complex, they are akin to hedge funds; it could be their managers are attracted by the 2 and 20 remuneration; it could be a need to be involved with a high-profile and trendy sector; or cynically it could be a deliberate aim by the industry in order to subsume everything that's alternative.

Guernsey, which has long prided itself on its alternative expertise, initially had few directly invested hedge funds, but a much larger number of funds of hedge funds. With this divergence of definition, it could be that the business undertaken for years in other alternative sectors including debt, catastrophe and art is actually indicative of much longer-established hedge funds experience than previously recorded.

Another point of view is that the divergence in definition is a tacit acceptance that the genre has now become mainstream.

In 2005, KPMG and Create released a report highlighting how hedge funds were set fundamentally to impact the wider investment management community. It is interesting now to look back and see just how deeply this has occurred. Early convergence themes were seen between the private equity and hedge fund worlds, but now more traditional managers, for example, are creating in-house boutiques that allow managers to operate as if they were independent hedge fund managers.

Convergence is making the mainstream become more complex, with a knock-on impact on the industry's service providers. Guernsey is far from immune to this trend toward complexity, which is driving change in business models. The administration sector has seen growing merger and acquisition activity, notably the recent State Street deal with IBT.

While many managers in the hedge fund and private equity sectors have set up operations in Guernsey, they still use the services of local administrators. Over the past few years new administration operations have sprung up as offshoots of local banks, trust companies and legal firms, all trying to capture a piece of the cake.

As complexity becomes mainstream and administration more challenging, it remains to be seen how the sector will cope. IT spending and well-trained personnel are a prerequisite to servicing this sector. While Guernsey has an enviable reputation for quality of service and team working with client organisations, it cannot rest on its laurels in the face of competition from much larger organisations in jurisdictions elsewhere.

We will continue to see strong growth in the sector; we may see more consolidation of administration in the medium term; we will certainly see increased use of outsourcing, but we are unlikely to see anything other than a challenging environment for this industry for the foreseeable future.

Neale Jehan leads KPMG's services to the alternative investment sector in the Channel Islands


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