‘Bermuda has long been one of the world’s leading offshore financial services centres,’ says Chris Harkness, Managing Director of Bermuda-based fund administrator Swiss Fund Services.
‘Bermuda has long been one of the world’s leading offshore financial services centres,’ says Chris Harkness, Managing Director of Bermuda-based fund administrator Swiss Fund Services. Historically Bermuda’s financial services industry has always enjoyed a very strong reputation. "Bermuda has a very developed and reputable financial services market,’ says Jessel Mendes, a partner in Ernst & Young’s Bermuda hedge fund practice. ‘I think we are known globally for being a quality jurisdiction with effective regulation, sound infrastructure, talent and an excellent track record for attracting and retaining business,’ he adds.
‘One of Bermuda’s strongest selling points is its highly respected regulatory body,’ says Harkness. ‘Over the past fifty years Bermuda has developed a tightly-knit culture in which the private and public sectors are able to operate with great efficiency. As such, Bermuda offers innovative investment products and flexible client solutions,’ he adds. Harkness recalls an anecdote about a manager asked why they had not chosen Bermuda, but instead went to an alternative jurisdiction. ‘Their response was basically that there isn’t any regulation in that other jurisdiction, whereas Bermuda has a strong regulatory body that both governs and watches,’ he says. ‘In Bermuda, we are quite happy to hear that kind of story,’ he adds, ‘because it shows that the legislation, regulation and oversight is not only working but also attracting the right type of investor and manager – the type that we want to work with.’ Chad Critchley, a partner in Ernst & Young’s Bermuda hedge fund practice, does not believe that the regulation is too onerous. ‘I actually believe it’s flexible and business friendly,’ Critchley says.
‘We have some work ahead of us in getting folks to consider Bermuda as another viable option,’ says Chris Gauk, a partner in Ernst & Young’s Bermuda hedge fund practice,. ‘With recent changes to our funds legislation and many of the local industry players working together to market Bermuda, we are starting to see some success in changing the perception so to truly demonstrate to the world what Bermuda has to offer.’ However, Bermuda’s reputation for quality and regulation has been regarded by some as a double-edged sword in terms of its effect on the growth potential of its fund services industry. The jurisdiction has always been well known for the extent to which it has carried out due diligence on anyone wanting to do business in Bermuda, with the aim of protecting that reputation. Companies wishing to incorporate in Bermuda have had to undergo an extensive and often lengthy checking process. The rigour of Bermuda’s due diligence has allowed the island to maintain its solid reputation over the years, however it has also led to the perception in some quarters that incorporation in Bermuda is a difficult and time-consuming process compared to other jurisdictions. "From my perspective,’ says Gauk, ‘our biggest challenge is overcoming the current perception of how slow and expensive it is to incorporate in Bermuda. That may have been true a few years back but is definitely not so today.’
There is little doubt that a much greater number of hedge funds still incorporate in Cayman than choose Bermuda. Certainly, in the last five years, Cayman has exploded with the incorporation of new hedge funds, leaving Bermuda trailing behind. Many in the fund services industry believe that if it was once the case that a fund could be incorporated in Cayman in a fraction of the time that the same process would take in Bermuda, this is no longer true. Speed, of course, is not the only reason for choosing one jurisdiction over another, however when a manager with a track record and reputation for providing performance has made the decision to strike out on their own, and has a product and investors ready, they want their fund set up as quickly as possible to be able to begin building assets and performance. If they and their lawyers believe that choosing Bermuda will mean a two-month delay, whereas choosing Cayman will be both quicker and cheaper, then it is no great surprise that Cayman is the first jurisdiction that most lawyer and managers turn to.
Over recent times Bermuda has responded to the view that Cayman is the jurisdiction of choice for hedge fund incorporation. The ‘Launch ‘n’ List’ product, available to the hedge fund industry since last year, is a direct response to the growing frustration among practitioners with the length of time they experienced when creating, domiciling and listing a structure. ”Launch ‘n’ List’ was the result of collaboration between the Bermuda International Business Association (BIBA), the Bermuda Monetary Authority (BMA) and the Bermuda Stock Exchange (BSX),’ says Greg Wojciechowski, president and chief executive of the Bermuda Stock Exchange. ‘The procedure seeks to reduce and eliminate duplicate effort, which in turn reduces the amount of time to market,’ he adds.
‘From what I’ve gathered, ‘Launch ‘n’ List’ is gathering some steam in the industry. I would say that ‘Launch ‘n’ List’ has created a buzz,’ says Harkness. Mendes says that he has not yet seen a lot of funds launching and listing, however, in his opinion, the ‘Launch ‘n’ List’ product highlights the innovative thinking within Bermuda. ‘It is fairly new, so perhaps we’ll see more funds taking advantage of it. Having the additional oversight of our internationally recognised stock exchange should be a big plus for investors and managers,’ he says. Others in the industry are a little more cautious when it comes to the potential impact of ‘Launch ‘n’ List’. The growing number of institutional investors incorporating hedge funds into their portfolios will certainly lead to more hedge funds listing, however this will apply more to the medium to large hedge funds and not to the vast majority of smaller funds, where their investor base does not demand that the fund be listed. Also, in much the same way as Cayman is seen as the number one place to consider when choosing a hedge fund’s domicile, both the Irish and Luxembourg Stock Exchanges top the current charts for hedge fund listings, leaving Bermuda in all probability likely to experience only slow growth in the number of hedge funds launching and listing on the Bermuda Stock Exchange.
‘Launch ‘n’ List’ is going some way towards changing attitudes towards Bermuda as a relatively slow and costly jurisdiction for a hedge fund to consider, however perception, as in so many areas of life, is still lagging behind reality. ‘Most of the incorporations are handled by lawyers and legal counsel. Many prefer Cayman because that’s where they know,’ says Harkness. ‘Many people hold the belief that Cayman is both easier and cheaper. Yet that is a misnomer as Bermuda is often less expensive and much less complicated than Cayman,’ he adds.
Although Bermuda cannot compete with Cayman in terms of numbers of fund incorporations, the island does see a significant number of the funds domiciled in Cayman looking to Bermuda when seeking an administrator. ‘Most funds incorporate in Cayman,’ says Harkness, ‘they are miles ahead of anyone else in terms of funds being launched and registered. With only 1,200 registered funds, Bermuda is nowhere near the size of Cayman. However, the majority of Cayman funds are most probably administered from Bermuda.’ ‘Many funds incorporated in other jurisdictions are actually being administered in Bermuda,’ says Critchley. ‘From an administrator’s point of view, we don’t mind where the fund is launched, incorporated or registered, because we can administer just about any jurisdiction,’ says Harkness. ‘While Bermuda may not be th preferred launch site for investment funds, it is certainly the domicile of choice with respect to funds administered,’ he adds.
Of course Cayman is not the only jurisdiction that Bermuda needs to be conscious of in terms of competition. ‘Fund administration in Bermuda is facing more and more global competition coming from onshore locations like London and New York as well as offshore locations like Cayman and the BVI,’ says Harkness. Traditional offshore locations like Bermuda also need to keep a watchful eye on the newer locations, such as Dubai and Qatar, which could present a growing challenge in future years. ‘One of the things that will enable Bermuda to compete globally is its suite of competent third party providers – law firms, accounting firms, auditors and of course fund administrators,’ says Harkness. ‘We have a very developed fund administration industry represented by global and niche players,’ says Critchley.
Bermuda’s administrators have generally been supportive of the recent legislation that states that they must be licensed by the Bermuda Monetary Authority. The widely held view is that the licensing process has not been an onerous one and that Bermuda’s administrators were largely already complying with the licensing standards. In many cases, prior to the legislation being in place, investors carrying out due diligence on a fund administered in Bermuda would ask for details of the administrator’s license, despite the fact that the island did not have a administrator licensing system in place. The fund’s administrators were able to demonstrate that they had all the expected internal procedures, checks and balances in place and that they would meet the licensing standards of other jurisdictions, but the lack of licensing legislation in Bermuda was seen by some investors as a hurdle. According to Harkness, Bermuda’s licensed administrators have added increased credibility, comfort and protection to investors and funds.. ‘The BMA now has the ability to go into an administrator and conduct reviews, which only helps to increase the attractiveness and reputation of our regulated jurisdiction,’ says Critchley.
The introduction of the legislation has certainly not deterred fund administrators from setting up in Bermuda. ‘A lot of those who have been setting up are the boutique style, high client service oriented administrators,’ says Harkness. ‘The markets have been hit quite hard this year, but numbers show that the amount of money coming into the hedge fund industry has continued to increase, hence the increasing need for quality administrators.’
Two advantages that Bermuda can offer are the quality of its operational and technical infrastructure and of its intellectual capital. ‘We have some of the top name law firms in the offshore community, all of the large audit firms and there are approximately 70 licensed administrators in Bermuda,’ says Harkness. ‘It’s not onerous to set up and run a business here – this is a very big selling point for those companies looking to do business with Bermuda and set up businesses here,’ he adds. ‘The intellectual capital of our workforce is also a big advantage,’ says Critchley. Harkness believes that the wealth of experienced people and personnel in Bermuda is second to none. He does, however, caution that with 70 administrators on the island and these numbers more likely to increase than decrease, the task of trying to find and keep quality staff is challenging.
With the constraints of a small local supply of trained accountants, lawyers and experienced fund administration personnel, service providers find themselves having to recruit from overseas, which is also becoming more difficult as the fund service industry itself grows. Bermuda also faces the challenge of being compared as a relocation destination with the other jurisdictions, including the newer attractions of places like Dubai and Qatar. Maintaining a low staff turnover is also a priority for many fund service providers. ‘It’s not so challenging for a small to medium sized boutique company to retain talent because the environment within a boutique company is more enticing,’ says Harkness. It is the larger administrators who feel the pinch more in terms of the sheer numbers of staff they need to recruit and in retaining staff. Indeed, some of Bermuda’s larger administrators are increasingly moving the bulk of their work such as NAV calculations onshore to places like India whilst retaining a share register type group on the island.
Harkness, for one, believes that Bermuda has a bright future. ‘It’s a stable and growing economy and the legislation framework and the government working hand in hand with industry has allowed us to keep ahead of the game in terms of global requirements and what funds are looking for from their providers,’ he says.
