By Simon Gray, BVI Finance – While the popularity of the British Virgin Islands (BVI) as a centre for hedge funds is testament to the ease and cost-effectiveness of establishing funds in the jurisdiction, the quality and sophistication of its legislative, regulatory and judicial framework is also a significant reason for managers choosing to set up their funds in the BVI.
Litigation against hedge funds is a rarity in the sector, but that is not to say that hedge funds are immune from legal proceedings. With the rise of more onerous international regulations, coupled with hedge funds being used by larger, more traditional retail investors for significant portions of their investment portfolio, the potential for legal disputes is always a risk.
Reacting rapidly in a shifting legal environment
By the end of 2018, the majority (55 per cent) of hedge fund investors surveyed globally by Preqin claimed to be “dissatisfied” with fund manager performance after the sector collectively lost more than 3 per cent over the course of the year. And, while markets have rallied thus far in 2019, another market downturn would only increase focus on the quality of hedge fund strategies once again.
Issues including the independence of directors, the performance of auditors and administrators, and the inadequacy of risk disclosures and valuations have also come to the fore in recent months.
At the same time, hedge funds also often have to adapt to shifting regulatory rules. The Alternative Investment Fund Managers Directive (AIFMD) for example, which many BVI-based funds choose to adhere to, now regulates hedge fund managers’ ability to market to investors. Elsewhere, hedge fund managers in the BVI must also ensure they are meeting international market abuse directives as part of the Securities and Investment Business Act 2010 (SIBA).
A tried and tested jurisdiction
With such a complex, ever moving environment in mind, hedge funds based in the BVI can be safe in the knowledge that the law of the jurisdiction is derived from a combination of statute and common law influenced by the laws of England and other Commonwealth jurisdictions.
As one of the world’s largest centres for the incorporation of companies, with about 400,000 active BVI business companies, the courts and legal professionals in the BVI have a deep knowledge of corporate litigation and disputes.
This means that all managers and their investors can be safe in the knowledge that high value complex disputes are fairly adjudicated upon from the Commercial Division of the BVI High Court and the Eastern Caribbean Supreme Court, and from there on to the Privy Council in the UK if needs be.
While hedge fund managers do not expect to have to deal with complex legal disputes on a regular basis, it is a common reality of managing money. Crucially, investors want to be sure that if an issue arises they can be confident that they can rely on the strong and recognised legal system of the BVI for restitution.
Simon Gray
Head of Business Development & Marketing
Simon Gray is a senior financial services’ professional with strong international experience gained in the Caribbean, Middle East and Asia as well as major experience in both public and in private sectors. Combining an investigative background with 25+ years of first-hand experience of international financial services and product innovation and design, Simon has spent much of his working life in the private sector with senior roles including Baring Asset Management and Barclays Wealth. He has previously worked well established organisations including as Director, Supervision (DFSA) within the Dubai International Financial Centre.
