Tue, 07/08/2007 - 16:25
At first sight, Guernsey might not appear the obvious choice as a hedge fund jurisdiction, far from the traditional domiciles used by the industry in and around the Caribbean and long accustomed to having to maintain its competitive edge with its larger Channel Island neighbour Jersey.
Yet the island has turned what might have been viewed as drawbacks into advantages. Never initially enjoying the same success as Jersey in attracting traditional retail funds, Guernsey opened its doors to the alternative sector long before it was fashionable. Over the years the jurisdiction has built up an impressive level of expertise not only in hedge funds but funds of hedge funds, property funds and private equity and other, more complex, alternative fund structures and strategies. On the opposite side of the Atlantic from the most popular hedge fund domiciles, Guernsey has set out its stall to managers looking to attract European investors who find it useful to demonstrate a higher level of regulation.
Certainly, Guernsey's hedge fund administration sector is modest in size compared with that of Dublin, but then the aim of the island's leaders has long been to focus on higher value-added work that calls for intellectual capital, as opposed to large numbers of employees, and the industry has never chased low-margin activities that will inevitably find their way to the jurisdiction that can provide them most cheaply.
Instead, Guernsey has looked to gain an advantage by re-examining the way financial services activities, including alternative funds, are regulated. Last year a working party chaired by Ozannes partner Peter Harwood set out the blueprint for a new, coherent, framework for the island's supervisory regimes and a new approach to the fund sector, focusing on fund administrators rather than the products they service.
The first fruit of the Harwood report, the Registered Funds regime introduced earlier this year for closed-ended products, is the latest in a long line of innovations that have helped to keep Guernsey in the forefront of international fund jurisdictions. A decade ago it became the first offshore financial centre to introduce protected cell companies, a structure once scorned by rival jurisdictions but now so successful that it has been copied all over the world and spawned variations such as the incorporated cell company.
The PCC has proved particularly useful to the hedge fund industry by providing the legal basis for an incubation platform which allows fledgling managers to develop their strategy and establish a track record while benefiting from common facilities covering areas such as administration, IT systems and sometimes capital introduction.
Meanwhile, Guernsey has maintained a strong position as a centre of expertise for funds of hedge funds with experience going back more than a decade. The island has had an important asset in the flexible and straightforward approach of the Guernsey Financial Services Commission, winning business from rival jurisdictions where authorisation processes have been perceived, certainly in the past, to be cumbersome and difficult. It has also benefited from remaining outside the European Union and the requirements of legislation such as the Prospectus Directive.
Today jurisdictions around the world are amending their legislation and reviewing their regulatory processes in an effort to win a share of the burgeoning alternative fund industry. But while laws may be rewritten, a true sense of partnership between industry and regulator, expressed in a regime that combines commercial acumen with appropriate standards of oversight, is harder to replicate.
Gavin Farrell is a partner with Ozannes in Guernsey
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