Historically Jersey has not attracted the same large numbers of single-manager hedge funds that have been domiciled in jurisdictions such as the Cayman Islands, in large part because it did not have suitable regulatory regimes in the early 1990s when the business commenced its rapid expansion. Over the past decade, however, hedge fund business has grown rapidly in the island, including the domicile in Jersey of large and prominent managed account platforms such as that of Lyxor as well as a number of funds of hedge funds.
The development of hedge fund business is due in large part to changes in regulation. Jersey now offers a complete spectrum of regulatory options ranging from Recognised Funds (heavily-regulated retail funds) to completely unregulated funds at the other end of the spectrum, with Expert Funds or Listed Funds offering light-touch regulation in the middle. The barriers to hedge fund business that existed 10 years ago are now all gone.
The island's emergence as a hedge fund centre has also been boosted by external developments. Jersey was delighted to be included on the OECD's 'white list', a significant differentiator from other jurisdictions that is appreciated by investors. Still, the announcement was no great surprise, since Jersey has long supported international moves on tax transparency and began concluding tax information exchange agreements (Tieas) in 2002.
Tieas already in place have helped to benefit Jersey's financial services business. For example, Germany has said it will endeavour to ensure that Jersey is treated as fairly and favourably as other third countries under EU directives or regulations, particularly in relation to equivalence with EU standards and access to its markets. Similarly, Jersey-domiciled vehicles may be exempted from France's 3 per cent annual real estate tax, previously an obstacle to the establishment in the island of pan-European real estate funds.
Jersey is awaiting the outcome of its most recent assessment by the International Monetary Fund as well as the Foot review of UK crown dependencies and overseas territories, but there is no reason to expect that their conclusions will be anything but positive. The island is also carefully monitoring the progress of the draft EU Directive on Alternative Investment Fund Managers, which despite concern within the industry may also present opportunities for Jersey.
As drafted, the directive will require Jersey to obtain recognition that its fund regulatory regime is equivalent to EU standards. The island has regulated managers and other fund service providers since 1988, and with the narrow exception of Unregulated Funds, all its fund products are regulated, a more rigorous position than many other competing jurisdictions. Many uncertainties remain in respect of the EU directive that will only be resolved as it is finalised, but Jersey is ready to engage with the EU at an early stage to ensure recognition for its regulatory regime.
Meanwhile, speculation abounds that increasing numbers of hedge fund managers may decide to leave London in response to higher tax rates and recent changes to the taxation of non-domiciled individuals in the UK. Various hedge fund management groups have already set up a genuine physical presence in the island, and that trend appears set to continue as word gets around the alternative investment community that the Jersey regulator is comfortable with and understands hedge funds, while the political authorities are committed to welcoming new high added-value businesses.
Edward Devenport is a partner with Mourant du Feu & Jeune in Jersey