It can be argued that in the past Jersey missed opportunities to enter the hedge fund market when it was still in its infancy. In the 1980s and early 1990s, service providers and advisers held discussions with a number of actual or potential hedge fund promoters, but at that time the island's regulatory model was not ready to accommodate funds with little or no restrictions on the nature and diversification of investments or on borrowing. Since then, however, the island's financial services industry and its regulatory environment have evolved considerably. And the introduction of the Expert Funds Guide at the beginning of 2004 marked the start of a new era in which Jersey not only has equipped itself with the regulatory structure and industry skills to service hedge funds but, thanks to various developments in the global investment industry, it is better placed than ever to do so.
The Expert Fund approach is based on the provision by promoters of a level of disclosure of risk and relevant information that is sufficient for institutions as well as individuals who are either expert investors or have sufficient wealth or investment experience to obtain proper advice. At the same time, the focus of supervision of funds has moved from the Jersey Financial Services Commission to the administrator, which has responsibility for initial due diligence and ongoing oversight, in a clear move away from product-based to service provider regulation. The Expert Funds regime has been taken up extremely quickly. Initially I believed that after having been out of the market for so long, Jersey could not expect floods of new business to arrive and fund sponsors and their advisers to abandon working relationships with practitioners and jurisdictions built up over many years.
In fact, the volume of Expert Funds established in the past two and a half years and the value of their assets have surpassed even the most optimistic forecasts. At the same time, the introduction by the Commission of the Non-Domiciled Funds Guide has boosted the administration in Jersey of overseas funds thanks to the same lighter regulatory touch, where the overseas structure is equivalent to an Expert Fund. But other factors are attracting hedge funds business to Jersey. One is the increasing attention paid by tax authorities in the UK and elsewhere to the structure and substance of hedge funds domiciled in offshore jurisdictions. Over time this may prompt promoters in European time zones to opt for jurisdictions closer than Cayman, to facilitate the running of the structure on an appropriate and proper basis that will satisfy the tax authorities in question.
This may also encourage the use of Jersey as a centre for substantial asset management activity. A number of managers have already established a full presence in the island, and various others are understood to be discussing whether a move would be appropriate and desirable. Jersey cannot match the community and collegiality of St. James's, nor is it likely to attract operations such as prime brokerages. But we have the infrastructure to obtain easy access electronically to prime brokerages in London or elsewhere.
Jersey is no longer sitting behind the defensive wall of its promoter policy - instead the aim is to provide good regulation through good service providers. Now the regulator can look at service providers in greater detail and ensure they are competent and adequately run, the island can move away from product regulation, and in Jersey Finance we have an organisation that is creating a broader understanding of what Jersey has to offer.
By Richard Thomas, partner with Ogier Group in Jersey