Striking the right balance on regulation
The global economic downturn may have caused investors the world over to tighten their purse strings, but many fund promoters have seized the opportunity to capitalise on the opportunities offered by the new economic environment.
Guernsey has long been regarded as a well-regulated financial centre and has sought to achieve the right balance between investor protection and business efficacy. By applying sensible regulatory principles, the island's regulator has been comfortable authorising hedge funds and funds of hedge funds. Despite the losses suffered by many hedge funds last year, legitimate financial products offering investors an opportunity to spread risk and diversify their portfolios are still welcomed by the Guernsey Financial Services Commission.
Significant weight has been attached to Guernsey's presence on the 'white list' of jurisdictions that have met the internationally agreed tax standards set out by the Organisation for Economic Co-operation and Development. This list was published in April.
Guernsey has decades of experience in providing fund products, and its fund industry is capable of managing and servicing a wide range of alternative investment products. Examples of such products already domiciled in Guernsey include the Bluecrest AllBlue Fund, Marshall Wace's MW TOPS (at launch, the largest publicly-traded closed-ended European hedge fund) and FRM's Absolute Alpha Fund PCC.
The growth of hedge funds in Guernsey has been encouraged by the regulator's relaxation of the rules governing funds that target institutional or expert investors, including its willingness to waive its usual requirement that open-ended funds appoint a Guernsey-resident custodian where a prime broker regulated in an acceptable jurisdiction and with substantial net worth is appointed. The GFSC will not require a prime broker to undertake formal oversight of the fund manager, and is prepared to relax the requirement for physical segregation of the fund's assets from its own.
The regulator has recognised that some types of funds, including both hedge funds and funds of hedge funds, may have difficulty in determining net asset values promptly where time is needed to establish the value of particular assets within the portfolio, such as underlying funds, which can also raise an issue when their valuation dates differs from that of the fund of funds.
The GFSC is prepared to allow preliminary estimations in such situations. As a result, subscription monies could be accepted before the final number of shares to be allocated is determined, and interim redemption monies paid out of a fund subject to final adjustment once NAV is ascertained.
Another area of innovation in Guernsey has been the introduction of Registered Funds and Qualifying Investor Funds. These categories of fund have further streamlined the approval process for both open-ended and closed-ended funds by offering fast-track GFSC registration within three working days of receipt of the requisite documents. The onus falls on the Guernsey fund administrator to conduct due diligence on the fund's promoter and structure, and to certify to the GFSC that the proposed fund satisfies registration criteria.
The regulator has adopted a pragmatic and flexible approach to hedge funds, rather than the more dogmatic approach found in many other jurisdictions. Guernsey's proximity to European financial centres, its reputation for stability, strong corporate governance standards and flexible regulation are all factors that are set to help the island continue to flourish as a domicile for hedge funds and funds of hedge funds.
Andrew Walters is a partner and James Clyne an associate with Ozannes
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