When hedge fund domicile shopping, what managers want is a tax regime that doesn’t punish their investors, a flexible investment mandate (authorised as fast as possible) and good fund servicing. Historically, European asset managers’ default option was to look to the Cayman Islands, Bermuda or the British Virgin Islands (BVI).
They would only consider a European domicile if they wanted to avoid scaring off a retail-oriented client base, says Stuart Martin, partner at law firm Dechert. Onshore Europe was out of bounds unless investors required an OECD-member domicile. “The reality is that most institutional investors have no problems putting their money with Caribbean or offshore European funds,” Mr Martin says.
Recently things have changed: the Channel Islands, Ireland, Isle of Man and Luxembourg have worked hard to get a piece of the hedge fund action by streamlining regulation and beefing-up services, and many speak of Malta as a domicile for the future. “Virtually all my clients have funds in both the Caymans and Europe,” says Paul Sutton, who heads the hedge fund practice at management consultant Morse. “And within Europe, it’s important you don’t choose an administrator that closes down either Dublin or Luxembourg.”
Fund of funds manager Key Asset Management is typical. Its long-established BVI-domiciled funds have an Irish Stock Exchange listing and, faced with Scandinavian investors who would have been double-taxed on offshore fund investments, it established Irish versions alongside. They are now looking to add Luxembourg Specialised Investment Funds (SIFs) as well. For administration they have always used Citco in Ireland, and can use its Luxembourg office for SIFs.
“Ireland and Luxembourg are the jurisdictions most likely to be recognised by our investors,” says legal counsel Yunus Mangera. “Ultimately we went for Ireland in the first instance because we knew the auditors and administrators there, and shared a language.”
Location can be important for European managers. Raewyne Kerr, a hedge fund tax specialist at KPMG, says it is “absolutely critical” that onshore fund directors do not attend board meetings in their own domicile, and that it is “helpful”, if not mandatory, to meet in the fund’s domicile – so a 45-minute flight is clearly easier than a nine-hour one. Location is also an administration issue: you don’t want your administrator to be asleep while your investor is trying to trade shares.
“You can be a Europe-domiciled hedge fund, but your investor base might be predominately based in the Far East or US,” Mr Sutton says. “That would drive your selection of administrator, if not your domicile. Somebody like HSBC, JPMorgan or Citi, while they might not have fully integrated the servicing capability they’ve acquired into their traditional model, is able to move that administration around the world for you.”
Ireland and Luxembourg lead the European pack for scalability of fund services. A Luxembourg-domiciled fund is required to have a Luxembourg-registered custodian and administrator. The Grand Duchy ranks top in long-only investment fund servicing and distribution.
In alternatives, Ireland is pre-eminent. “The alternative administration business covers more than 5,000 structures with about €830bn in assets – a significant part of the global hedge fund industry,” says Gary Palmer, chair of the Irish Funds Industry Association (IFIA). “Many administrators set themselves up in Ireland because fund promoters tell them that’s where they need to be.”
Almost two-thirds of the funds listed on the Irish Stock Exchange are in alternatives, and the industry has worked hard to tap the right talent from university networks outside Dublin. “Citco moved some of their operations down to Cork,” says Simon Ewart, CEO of Key Asset Management. “That’s eased some of the pressure in Dublin.”
The Channel Islands also have their own stock exchange, based in Guernsey; and they house the headquarters of some of the large fund administration names used in Dublin.
“We can provide excellent custody services and non-executive director services, and if someone wants to do the fund admin elsewhere, that would be fine under our new unregulated fund regime, which comes in on February 19,” says Robert Kirkby, technical director at Jersey Finance. “We are pretty successful in private equity and property, and administrators who work primarily in these areas have seen seven-figure investment in new systems for hedge funds, ready for the launch of unregulated funds.”
On Guernsey, there is enough administrative capacity to handle the £25bn worth of hedge fund assets domiciled on the island (a Guernsey-based administrator is mandatory), as well as a good share of Caribbean funds’ assets, and the university-status Guernsey Training Agency helps expand that capacity.
The Isle of Man has also been growing its funds industry and is just introducing a new specialist fund structure, which no longer requires a locally based administrator (but there are almost 20 to choose from).
All the European jurisdictions have been working hard to improve flexibility and time-to-market. “The jurisdiction that responds to those needs will be the jurisdiction promoters choose,” says Mr Palmer. “We introduced the flexible qualifying investor fund (QIF) in 1996-97, but the speed-to-market issue needed to be addressed.”
Authorisation in Ireland used to take 8-10 weeks. A new process was introduced on February 14, 2007: get your documents to the Financial Regulator by 3pm and your fund will be authorised the next day. Most Irish hedge funds are registered as QIFs, which have no restrictions on investment strategy or gearing. Professional investment funds (PIFs) have some diversification and gearing limits and do not benefit from QIFs’ one-day authorisation process. It is also possible to set up a retail fund of hedge funds in Ireland, but again, an eight-week authorisation process should be expected. The Financial Regulator does not define hedge funds, but towards the end of last year 1,825 non-Ucits funds were domiciled in Ireland, managing €162bn.
The Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg does define a hedge fund, says Antonios Nezeritis, a partner at Dechert based in the Grand Duchy: 65 single-manager funds with €9.5bn and 336 funds of funds with €52.2bn were domiciled there as at November 2007, and last February’s SIF law was designed to boost those numbers. “The previous law on institutional funds dated back to 1991,” says Mr Nezeritis. “It was not a stand-alone law and all the cross references were to the law applicable to Ucits and UCIs, so the investment restrictions were not that flexible.”
The SIF has no mandatory investment or gearing restrictions. As long as the manager notifies the CSSF within a month of launch, the fund can enjoy pre-authorisation approval, with full authorisation within a couple of weeks. Unlike Ireland’s Financial Regulator, the CSSF does not scrutinise promoters – eradicating checks on things like capitalisation, which often prevented smaller firms domiciling in Europe.
The Jersey Financial Services Commission (JFSC) claimed that 388 “hedge/alternative investment funds” were domiciled on the island last September, managing £53.2bn.
Expert funds have no restrictions on investment mandate or gearing, and the regime’s three-day authorisation process was one of the fastest in Europe before Ireland and Luxembourg made their moves last year.
Jersey is now focusing on flexibility, with an unregulated fund regime due to launch on February 19. This has no requirements for Jersey-based administration or the two Jersey-based directors, as the regulated funds do. “There is a lot of interest, primarily hedge,” says Mr Kirkby. “There are a number of funds already set to launch.”
The Guernsey Qualifying Investor Fund Class B is similar to Jersey’s Expert Fund, and Guernsey is also introducing an unregulated regime. Roger Le Tissier, a partner at law firm Ogier, calls it “a more Caribbean approach”. Eighty hedge funds were domiciled on Guernsey at September 2007, managing £25bn.
The Isle of Man has also made changes, effective last November, resulting in the previous structure favoured by hedge funds, the Experienced Investor Fund, being superseded by Specialist and Qualifying Funds. Neither present any investment restrictions, and both offer pre-authorisation approval.
The specialist fund is likely to be favoured by hedge fund managers because it has no requirement for the manager or administrator to be locally licensed. “We have a lot of new fund enquiries coming in,” says David McGarry, senior partner at KPMG and chairman of the Isle of Man Fund Management Association. “In April we’re taking a big presence to Eurohedge in Paris, as well as an event in New York and Greenwich, CT, to pick up on the interest we’ve had from there.”
The Europeans’ offering is increasingly competitive, but it is debatable whether they will ever compete with Cayman-BVI-Bermuda, rather than sitting alongside Cayman-BVI-Bermuda. “You have to see the domiciles available now as more of a plurality than was the case 10 years ago,” says Mr Martin at Dechert. “But I don’t think any single jurisdiction by itself, just by changing a few rules, is likely to see a vast influx of business.”
