The domicile and servicing of hedge funds is not new to <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Jersey, but in the past the island has not been on the radar screen in any significant way for hedge funds work. That has all changed with the introduction last year of the Expert Funds regime, which has flagged up that Jersey is open to hedge fund business, but has also made substantial improvements to the island's attractiveness to this business.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
One of the most important changes is the introduction of a regime that no longer incorporates restrictions on borrowing or investment. This represents an about-turn from the previous regime, which in many cases prescribed investment and borrowing restrictions in the name of risk diversification. These rules have been replaced by total flexibility.
In the past, trying to set up a highly leveraged hedge fund in Jersey would have been an uphill struggle. In addition, the old regime required that funds use a Jersey custodian, whereas the Expert Funds rules have removed that stipulation provided that the fund has appointed a prime broker. Other changes have made it significantly easier for today's breed of small, entrepreneurial hedge fund manager to set up funds in Jersey. For example, Jersey's old promoter policy, which discouraged noninstitutional fund managers, has been removed for the Expert Funds regime. The way is now open for funds to be set up by boutique-style firms or individuals that have left an institution like an investment bank to go into hedge fund management. Another rule that has been removed for the new regime stated that a fund manager could not be wholly owned or majority-owned by a single individual.
There has also been a lot of focus on the drastically shortened time scale for regulatory approval. The whole process has been made a lot quicker through the effective introduction of a four-day maximum turnaround period for approving a fund, something that would have taken between one and two months in the past.
The new regime, which took around a year to draw up from conception to implementation and which involved extensive discussions between industry practitioners, the regulator and the island's political authorities, represents a big change for Jersey in terms of regulatory mindset. The shift is an acknowledgement that provided the fund has professional investors, one can allow them to make their own decisions about the suitability of the fund and its manager. This stands in contrast to the one-regime-fits-all approach originally conceived for retail funds, where the regulator effectively had to protect all investors to the same degree under all circumstances.
While Jersey continues to welcome institutional-style managers, the removal of the promoter policy is designed to appeal to a wider range of managers. Fund managers still need to be approved by the JFSC unless they are regulated in an OECD member country, but experience has shown that the JFSC is willing to approve fund managers quickly provided they can demonstrate the requisite track record and experience.
By Nick Kershaw
Nick Kershaw, Partner, Ogiers