While the British Virgin Islands have been affected by the crisis of the past couple of years, like all international financial centres around the world, it appears to be emerging from the turbulence in good shape and with its fund business remaining robustly competitive with rival domiciles. And as a service provider for which BVI funds represent a substantial proportion of its business, Ifina has also come through the crisis with its business model affirmed.
The BVI has benefited from the fact that its particular appeal to small and start-up funds has made it less vulnerable to the substantial investor redemptions experienced by larger managers, as well as the geographical diversity of the fund promoters it attracts.
Ifina too has been able to emerge largely unscathed because of its own diversification and focus on smaller funds that larger administrators have eschewed in recent years as they concentrated on wooing large funds and managers. As a result, it has not suffered the sharp declines in assets under administration over the past two years that have obliged other service providers to undertake cost-cutting and personnel reductions. The small volume of business lost as a result of the crisis has been rapidly replaced.
The firm has also benefited from policies that were in place well before the hedge fund boom turned to bust. For example, Ifina has always been reluctant to take on fund of funds business unless it also administered the underlying funds, because of the risk involved in dealing with underlying funds for which it cannot rely on NAVs being produced correctly and regularly on time.
Now, like other service providers serving the BVI hedge fund market such as auditors and lawyers, Ifina is starting to benefit from a revival in interest among promoters of new funds. In particular, the firm is attracting enquiries from managers that have left large banking groups or asset managers to strike out on their own, with fresh messages and with new funds that have no history of losses.
At the same time some existing managers are launching new funds because their existing vehicles remain well below the high water marks beyond which they could resume earning performance fees. And asset levels are rebounding because some investors dissatisfied with their funds’ performance overt the past couple of years are not quitting the asset class altogether but reallocating their capital to other managers and strategies.
A key theme for the future is transparency in the industry, which has already improved but has plenty of room to develop further. This was a key theme of seminars organised by Ifina with the involvement of other offshore fund service providers in Zurich and Frankfurt last autumn, and it is a priority that has been endorsed by the BVI financial regulator.
Regulators also attach greater importance to the use of independent third-party service providers, in place of still-common incestuous arrangements where the same financial group is not only the fund’s promoter and investment manager but fulfils key servicing and oversight functions. Before the crisis such arrangements did not seem particularly risky; today their perils are much more obvious.
Supervisory authorities now see the benefits of looking more to administrators to assist them in the control and regulation of funds, because they are the first to know if something goes wrong. However, that will work only if the service providers are genuinely at arm’s length, not if the administrator or custodian bank also happens to be the investment manager.
Derek Adler is a director of Ifina (UK)