Apr 2006 Guernsey Hedge Fund Services 2006€¦ · Guernsey Hedge Fund Services 2006 ... sector...

Hedge fundmanagers headfor Guernsey

Administratorsthrive asfunds soar

Expertise andflexibility paydividends

Guernsey Hedge Fund Services 2006

Apr 2006

GUERNSEY Hedgeweek Special Report Apr 2006 www.hedgeweek.com | 2

CONTENTS

In this issue…03 Flexibility and expertise promoteGuernsey fund boomBy Peter Niven, GuernseyFinance

05 Comparing apples to applesBy José Santamaria, Royal Bank of Canada

06 Can Guernsey’s business only getbetter?By Simon Gray

08 Hedge fund managers head forGuernseyBy Ben Morgan, Carey Olsen

11 Numbers tell a storyBy Robin Fuller and Kate Stallard, HSBC Securities Services

14 New horizons for shareholders’ championBy Paul Redhead, MeesPierson

17 A question of governanceBy Benjamin Wrench, Ozannes

18 Administrators thrive as Guernsey’sfunds soarBy Simon Gray

21 Meeting global challengesBy Mark Briers, Cable & Wireless

25 Accounting challengesBy Neale Jehan, KPMG

26 QIFs one year onBy Simon Gray

28 Guernsey’s flexibility pays dividendsBy Patrick Firth, Butterfield Fund Services

29 Harwood report promises a fundregulation revolutionBy Simon Gray

Special Report Editor: Simon Gray, [email protected]

Sales Manager: Simon Broch, [email protected]

Publisher/Editor-in-Chief: Sunil Gopalan, [email protected]

Marketing Director: Oliver Bradley, [email protected]

Graphic Design (Special Reports): Siobhan Brownlow at RSB Design

Photographs: Guernsey Tourist Board

Published by: Hedgemedia Limited, 72 New Bond Street, London W1S 1RR

Tel: +44 (0)20 7692 7398 Web-Site: www.hedgeweek.com

©Copyright 2006 Hedgemedia Limited. All rights reserved. No part of this

publication may be reproduced, stored in a retrieval system, or transmitted, in any

form or by any means, electronic, mechanical, photocopying, recording or

otherwise, without the prior permission of the publisher.

Publisher

For Guernsey’s fund industry, 2005 was themost successful year yet, underlining theisland’s pre-eminent position as thejurisdiction of choice for a growing numberof fund promoters.

And there’s every reason for thisunparalleled success to continue, as industryprofessionals work to develop and reform theisland’s legislative and regulatory frameworkin order to encourage further innovation.

Guernsey now has more than £100bnworth of fund assets under administration –with growth of 36% in 2005. Traditional fundsare doing well, but growth in funds of hedgefunds, hedge funds, private equity andproperty funds has been particularlyimpressive. The figures reflect both theprevailing favourable market conditions andthe fact that Guernsey has now become arecognised global fund services provider.

From its administrative heritage stretchingback four decades, Guernsey has in recentyears begun to attract fund managers,enhancing its reputation for fund work andsignificantly adding to the pool of expertiseon the island. There is also a highlydeveloped infrastructure, includingcomprehensive specialist legal andaccounting services, to support the industry.

Guernsey developed its own professionalfunds, Qualifying Investor Funds, early lastyear and has now introduced furtherflexibility by changing the definition of aqualifying investor, to further enhance itscompetitive position in the internationalmarketplace.

The optimism about future growth andsuccess is well reflected by the participantsin this special report. One of the drivers forthis enthusiasm is the root-and-branchreview of the industry’s legal and regulatorystructure that has been conducted this year.

Guernsey’s Department of Commerce and

Employment and the Guernsey FinancialServices Commission jointly commissioned aworking party to reappraise the investmentsector legislation and regulation, under theleadership of a respected Guernseyadvocate, Peter Harwood.

Its terms of reference called on theworking party “to consider the investmentindustry in the Bailiwick of Guernsey and theconditions required for its continuedprosperity”. The review evaluated the legaland regulatory framework, assessing howaspects of public policy relate to the industry,and the working party is expected to makerecommendations for change in its report,which is due to be made public very soon.

It is also anticipated that the report willpropose fundamental changes to the systemof regulation, particularly within theinvestment funds sector, considerablyreducing the number and scope ofinvestment funds that are required to beregulated. Furthermore, it is expected thatthe working party will recommend that thefocus of regulation should be on thelicensed Guernsey administrator.

The working party is also likely torecommend other changes to facilitate theadministration of non-Guernsey domiciledinvestment funds by Guernsey licensedadministrators as a means of ensuring thatGuernsey maintains a vibrant fundadministration sector.

All of this is very good news forGuernsey’s thriving fund industry. Theoutcome of the review is sure to increaseflexibility, boost confidence, and promotefurther growth in this highly dynamic area ofthe island’s financial services business. ■

Peter Niven, Chief Executive,GuernseyFinance

E D I T O R I A L


Flexibility andexpertise promoteGuernsey fund boom

Peter Niven, Chief Executive,GuernseyFinance

I F Y O U W A N T F I R S T - Q U A R T I L E P E R F O R M A N C E

Y O U N E E D F I R S T - Q U A R T I L E S U P P O R T.

London

Jersey

Guernsey

Geneva

Dubai

Brunei

São Paulo

Cayman Islands

Barbados

Bahamas

New York

Miami

Singapore

Hong Kong

Global Custody | Fund Services | Trade Execution | Trustee ServicesBanking | Online Services

Clients of RBC Global Private Banking enjoy an uncommonly high level ofsupport to help them stay competitive in a high-performance world.

Our high-touch partnering approach makes us an integral part of our clients’teams. While you are focusing on market analysis and increasing your portfolioreturns, we take care of administration and other details.

We will help you by developing creative, customised solutions. The kind ofservice solutions that let you concentrate on delivering the top performanceyou and your investors expect.

Toronto

Montreal

Vancouver

Calgary

Houston

Istanbul

Madrid

Tokyo

Buenos Aires

Caracas

Montevideo

Porto Alegra

San Francisco

TM Trademark of Royal Bank of Canada. ® Registered trademark of Royal Bank of Canada. RBC Financial Group is aregistered trademark of Royal Bank of Canada. The advertisement is issued and approved by Royal Bank of CanadaInvestment Management (UK) Limited, London Branch, which is authorised and regulated by the Financial ServicesAuthority for UK business. The services outlined may be provided by a variety of subsidiaries and offices, the servicesmay not be offered in all jurisdictions and may not be available to you.

To find out more, visit www.rbcprivatebanking.com/ci.html

The traditional lines of offshore jurisdictions,custody and fund administration continue toblur. Today’s world is no longer just aboutthe administration of long-only equity, fixedincome, money market, hedge funds andfunds of hedge funds. The sector hasexpanded to include private equity, venturecapital, securitisation, property and insurancestructures. With all these offerings combinedin a single jurisdiction, Guernsey is morethan just a funds centre.

One must appreciate that each of theseproduct segments requires distinctadministrative service competencies and skillsets. In principle, they share somecommonalities around the general conceptsof unit-holder recordkeeping, financialaccounting, the formalisation of periodicmarket valuations, calculation of net assetvalues and reconciliation to a formal recordof cash and investment assets, althoughsome structures will not require the formalappointment of a custodian.

Ironically, this is where the lines blur andthe general market measurement practice ofassets under administration starts to diluteits significance. A fund administration orcustodian survey boasting so many billionsin assets under administration that results ina certain ranking is fairly meaningless unlessput in a proper context.

Comparing the custody and fundadministration requirements of a USD 2bnmaster/feeder hedge fund, fund of hedgefunds or traditional long-only fund withthousands of unit-holders is quite distinctfrom a USD 2bn property, venture capital orprivate equity structure.

Unfortunately, many offshore industrysurveys do not make this distinction, whichleads to a lack of transparency and results inapples being compared with oranges as faras assets under administration areconcerned. Hopefully, more industry surveys

will evolve to create a clear reportingmechanism that incorporates fundcategories, which will then acknowledge sizeof assets where credit is due.

The range of fund categories results in avaried choice of service providers, whetherthey be global custodians, niche boutiqueindependents or the administration arms oftrust companies and legal firms. Here again,Guernsey boasts a robust choice of serviceproviders, each able to deliver its selectproduct offering and cater to its client segment.

When comparing service providers thereare some important questions to ask. Iscustody and fund administration a corebusiness line of the organisation, and isthere a long-term commitment to remain inthe industry? Are the providers global playerswith multi-jurisdictional operational hubs, orniche boutique players with select or singlejurisdiction presence?

What technology systems are used –home-grown Excel net asset valuespreadsheets and Access unit-holder registrydatabases, or industry-recognised third-partyvendor system platforms? Are operationsscalable from both staffing and technologyviewpoints? Does the service provider havethe balance sheet and sufficient contingencyinsurance to cover unforeseen administrativeerrors and associated financial losses?These are all questions that should be posedto any custodian or fund administrator,regardless of jurisdiction domicile.

Of primary importance is the ability tooffer a truly integrated, scalable and client-centric trustee, banking, custody and fundadministration service, against the backdropof a proactive and industry-progressiveregulatory regime. This dynamic combinationis a powerful force that is attracting moreand more fund sponsors, investmentmanagers and institutional clients to domiciletheir structures in Guernsey. ■

R O YA L B A N K O F C A N A D A


Comparing applesto applesBy José Santamaria

José Santamaria is head ofsales and businessdevelopment for corporate andinstitutional business withRoyal Bank of Canada in theChannel Islands

Coming off a record-breaking year for thefunds sector, financial services professionalsin Guernsey believe the island can go on toscale new heights in the coming years,backed by a consensus between industry,regulator and government on a strategy toenhance its global competitiveness whilemaintaining the high standards upon whichits reputation rests.

The QIF funds regime has already donemuch to announce to the world thatGuernsey is not only open for business butis willing to innovate to meet the needs ofthe industry and its clients. Now, industrymembers say, the island is ready to take astep further with a wholesale reform of itsregulatory structure, while at the same timeadjusting its tax system to ensure it does notlose out to Jersey, the Isle of Man, and rivalsfurther afield.

“Guernsey’s got a very good message totell,” says KPMG partner Neale Jehan. “TheQIF regime is now in place, promoters havetaken it up, and a good number of fundshave already gone through that route. On topof that, the funds industry – not just in

Guernsey but everywhere – is growinghugely.

“We’re very well positioned in terms of ourinfrastructure. We have our own stockexchange which is growing fast, and weoffer a very convenient location at least forEuropean managers, a few of which havealready moved their business to Guernsey.And with the Harwood report setting out ablueprint for the future of the industry, themessage now is that it’s only going to getbetter.”

Still, Jehan cautions that so far the islandhas travelled only some of the road towardglobal competitiveness. “Flexibility is key,” hesays. “Guernsey needs to market itself as alocation where you can domicile yourbusiness, run your funds, and everything’shere. But if you have specialist serviceproviders you want to use in otherjurisdictions, I don’t think there should beany restriction, as long as there’s properoversight.

“We’ve got to recognise that the industryis growing hugely, and that on a small islandthere are always going to be potential

O V E R V I E W


Can Guernsey’sbusiness only get

better?By Simon Gray

➧ p9

Investment Funds and Private Equity Team

Carey Olsen is an innovative Channel Islands Law firm thatcontinues to play a leading role in the development of Guernseyand Jersey as international finance centres.

We are the largest Law firm in The Bailiwick of Guernsey withover 120 lawyers in offices in Guernsey, Jersey and London andnow advise on nearly half of all funds administered in Guernsey.

We provide practical and valuable solutions to our clients fromaround the world.

Our dedicated and experienced funds team in Guernsey is headed bypartners Nigel Carey, Graham Hall, Ben Morgan, Andrew Boyceand Fiona Fleming in London.

For further information please contact:

Nigel Carey, Partner e-mail: [email protected]

Graham Hall, Partner e-mail: [email protected]

Ben Morgan, Partner e-mail: [email protected]

Andrew Boyce, Partner e-mail: [email protected]

Fiona Fleming, Partner e-mail: [email protected]

Alternatively visit our website www.careyolsen.com

JERSEY47 Esplanade St Helier Jersey JE1 OBDTel: +44 (0) 1534 888900 Fax: +44 (0) 1534 887744

GUERNSEYPO Box 98 7 New Street St Peter Port Guernsey GY1 4BZTel: +44 (0) 1481 727272 Fax: +44 (0) 1481 711052

LONDON20 King StreetLondon EC2V 8EGTel: +44 (0) 20 7796 3911Fax:+44 (0) 20 7796 4025

INVESTMENT

FUNDS SERVICES

IN THE CHANNEL

ISLANDS

As interest in hedge funds has grown in theUnited Kingdom and Europe in recent years,a large number of promoters have chosen tolocate their funds in Guernsey. This isbecause the Guernsey Financial ServicesCommission (GFSC) has adopted policiesand regulations that encourage the use ofthe island as a domicile through two policychanges. By contrast, excessive regulation inother jurisdictions has resulted in hedge fundmanagement companies looking to relocatetheir managers to Guernsey.

The first policy change introduced relativelyrecently in Guernsey is to the legal andregulatory framework and is designed toimprove the regulatory environment for hedgefunds. The other principal change is that thereis now a streamlined authorisation processallowing promoters to establish QualifyingInvestor Funds within three working days.These changes are outlined below.

The GFSC published a framework policydocument on February 23, 2004 entitledHedge Funds: Flexible Approach toAuthorisation Policy.

In particular, the GFSC:■ is prepared to waive the requirement for a

fund to have a locally licensed custodianand will permit the appointment of a primebroker as long as the latter is regulated inan acceptable jurisdiction and hassubstantial net worth;

■ does not require a prime broker to offerphysical segregation of fund assets fromits own assets, even where fund assetsheld by the broker exceed credit extendedby the broker; and

■ will be prepared, provided that the processis robust, to permit arrangements thatallow a preliminary estimation of net assetvalue for the purpose of allowingsubscription monies to be taken into thefund before the final share allocation hasbeen determined, and will also make

available appropriate waivers from theoperation of the client money rulesprovided it is satisfied as to the robustnessof the estimation procedures to be used.

Recognising that many hedge funds areestablished for professional and experiencedinvestors, the GFSC re-published a guidancedocument in April 2006 redefining itsstreamlined authorisation process for QIFs(first introduced in February 2005), whichreduces the authorisation timescale frombetween four and six weeks to less than threeworking days once all fund documentation isfinalised. Approval is given by the GFSC onthe basis of the Guernsey administrator’s self-certification of the promoter and the fund.

QIFs can be established as open-endedor closed-ended funds and as single- ormulti-class unit trusts, investment companies,protected cell companies or limitedpartnerships. They are open to ‘qualifiedinvestors’, defined as professional investors,which includes investors individuallyinvesting at least $100,000 (or currencyequivalent) following changes introducedrecently, experienced investors andknowledgeable employees.

The administrator has an ongoingresponsibility to monitor compliance with thematters it has self-certified and to ensure itsrationale for the self-certification is clearlydocumented. The GFSC will considerderogations in relation to the rules relating tothe relevant classification of investmentfunds subject to it having sufficient noticebefore the QIF application.

The GFSC’s change in policy has gone along way to promote the advantages ofGuernsey as a domicile for hedge funds.Consequently, a number of large hedge fundmanagers are now using the island todomicile hedge funds, and a significantnumber are also relocating their offices andtrading platforms to Guernsey. ■

C A R E Y O L S E N


Hedge fund managershead for Guernsey

By Ben Morgan

Ben Morgan is a partner inthe Guernsey Corporate Groupat Carey Olsen

capacity constraints, so we need to developa regime that ensures capacity neverbecomes a problem. Flexibility to outsourcewould be a definite advantage.”

Capacity constraints are a long-standingtopic of debate in Guernsey and itscompetitor jurisdictions, many of which arerelatively small island territories with limitedpopulations and even more limited space forliving and working. But today there appearsto be a calmer appreciation of what thismeans for Guernsey.

“In a small jurisdiction where we havelimited resources, there will always beconcerns about capacity,” saysGuernseyFinance chief executive PeterNiven. “That’s one of the areas the Harwoodreport will have looked at in terms of optionsfor the future, perhaps providing theopportunity for outsourcing to otherjurisdictions where they have greaterresources, as long as there are controlsback at base in Guernsey to ensure that thewhole thing is kept together.

“We are looking to provide jobs for localsand people coming onto the island thatprovide more added value and are higher onthe salary scale, which in turn helps the taxtake. But at the same time we must keepthose checks and balances in placeregarding where the other parts of thebusiness are outsourced.”

As chairman of the education sub-committee of the Guernsey InvestmentFunds Association, Butterfield Fund Services(Guernsey) managing director Patrick Firthbelieves that maximising the potential of theisland’s human resources is an importantstep. “There are resource issues in alljurisdictions,” he says, “but we’re keen toensure there is effective training here. It canmake a big contribution.”

Although the island’s parliament has yet totake a final decision, Guernsey is set tofollow territories including Gibraltar, the Isleof Man and Jersey in cutting the basic rateof corporate taxation to zero, with bankspaying a special rate of probably 10 per cent.

This far-reaching tax reform, which is dueto take effect in 2008, is mainly the result ofan international campaign against special taxregimes that allowed offshore companies topay lower rates than domestic firmsincorporated in the same jurisdiction.

Abolition of this type of ‘ring-fencing’ wasexpected by bodies such as the EuropeanUnion and the Organisation for Economic Co-operation and Development to lead to theabolition of offshore company regimes; insteadmost of the jurisdictions affected respondedby reducing the standard tax rate on allcompanies to zero, with a special 10 per centrate levied on certain financial institutions andother businesses such as utilities.

But voluntarily renouncing a large slice ofa territory’s corporate tax receipts leaves agap that has to be filled. While otherjurisdictions have announced plans to raisetheir take from personal taxation or fromindirect taxes on goods and services,Guernsey seems poised to wait until thenew regime is in place and the size of theshortfall is apparent before deciding onmeasures to bring the budget back intobalance.

This attitude has prompted some alarmistand well-publicised comments - admittedlyfrom the Tax Justice Network, anorganisation not noted for its sympathytoward offshore jurisdictions – to the effectthat a few years of the new tax structure willleave Guernsey bankrupt.

Niven is indignant about the reports. “It’squite grotesque to say we’ll be bankruptwithin a few years, and completely wrong,”he says. “In changing our corporate taxstructure, there will inevitably be a gap inour finances in 2008, but what everybody’strying to do is to solve that problem now,when in fact its scale can’t be fullyappreciated until it hits.

“Jersey has decided to introduce a goods

O V E R V I E W


➧ p12

p6 ➧

Guernsey’s fund industry began the yearwith more than £100bn in assets undermanagement and administration. This followsimpressive growth of £26.4bn, or 35.9 percent, in 2005. This record level has beenassisted by positive market conditions andincreased flexibility in the regulation andlicensing of funds, which have encouragedstrong growth in the number of hedge funds,private equity and property funds requiringadministrative, custodial and managementservices within the island.

Guernsey-domiciled open-ended fundsgrew by £14.5bn (43.1 per cent) during theyear to reach a new record total of £48.2bn.Closed-end funds also showed signs ofresurgence, with an increase of £8.2bn (36.0per cent) during the year to reach £31.1bn,also a new record. Non-Guernsey schemes,for which some aspect of management oradministration is carried out in the Bailiwick,increased by £3.6bn (21.5 per cent) duringthe year to a record £20.7bn.

These figures represent unprecedentedgrowth in the industry and a testament toGuernsey’s success as a global fundservices provider. The island’s ability toperform in a highly competitive market andstay ahead of the demands of the industry isset to be reflected in a steady rate of growthin the current and future years.

By the end of the year, 36 QualifyingInvestor Funds (QIF) had been approved inGuernsey since the launch of the scheme onFebruary 7, 2005. Coupled with otherenhancements to the legal and regulatoryenvironment, QIFs have put Guernsey at theforefront of the international investment fundsindustry as its professional infrastructure andpragmatic new regime have togetherencouraged significant new business.

A significant amendment to the QIF regimerecently took place, defining ‘QualifiedInvestors’ as individual persons who make asubscription of USD100,000 or more in thefund, thus enabling them to benefit from thefast-track, self-certified QIF regime.

Guernsey has long been a choice locationfor leading fund promoters, managers,administrators and custodians whoseprofessionalism interconnects with an in-depth infrastructure of fund service providers,including lawyers and accountants. Over theyears this expertise has made it an attractivedomicile for a range of alternative productsincluding hedge funds, funds of funds,property funds, emerging market funds,traditional funds and private equity.

Guernsey’s commitment to remaining inthe forefront of the industry means there areregular opportunities for the GuernseyFinancial Services Commission to meet withagencies such as Guernsey Finance and theGuernsey International Business Associationto discuss where improvements can bemade. Once a regime has been put in place,it continues to evolve organically with theindustry in constant communication with theregulator. The Commission recently updatedthe QIF regime with the aim of maintainingits competitiveness in the internationalmarketplace and its ability to attractinternational fund managers. The GuernseyInternational Business Association continuesto push for further flexibility to develop newinnovative products in order to ensure thatthe island retains its allure as a leadingfunds domicile.

However, the island is also ambitious todevelop its position as a centre for theservicing of sophisticated funds whereverthey may be domiciled. There are manyfactors that contribute to a fund manager’sdecision on where to domicile a fund andwhich service providers to use.

Guernsey’s flexible approach means thatwhere a manager has decided to domicile afund elsewhere, providers work closely withthat jurisdiction to ensure all aspects ofcorporate governance are monitored. Thishelps Guernsey service internationalinvestment managers who by the nature oftheir client base offer products domiciled inmultiple jurisdictions. ■

H S B C


Numbers tell a storyBy Robin Fuller and Kate Stallard

Robin Fuller is managingdirector and Kate Stallard isdirector of sales with HSBCSecurities Services(Guernsey)

and services tax to fill the gap. Guernseyappreciates that there will be a problem andcan roughly calculate its scale, but a lot canhappen between now and 2008. Forexample, last year we saw an unexpectedincrease in the island’s personal tax take,which if extrapolated would mean that theso-called black hole would be smaller thanunder present calculations.

“There will also be an increase inbusiness. We are seeking to move people tohigher added value business, which meanshigher salaries and hence more personalincome tax. With all that going on in thebackground, quite sensibly the authoritieshave decided to use some of the resourcesthat we’ve built up in the contingency fund totide us over for the first two or three years.Once we see the scale of the problem, we’lldecide whether to bring in a sales tax orhow else to solve the problem. We’re justgiving ourselves time.”

Ernst & Young partner Peter Franks notesthat the reform will have little direct impacton funds, which currently pay a taxexemption fee of just £600, However, hesays: “Talking of moving tax rates down to 10per cent for banks and zero per cent forother companies is obviously anencouraging sign, and should attract furtherbusinesses to the island.”

Says Jehan: “The government has takentime to consider various options, and wehope that not only whatever regime comesout of that is competitive, but that our blackhole will be relatively smaller than those inother jurisdictions. Maybe we can tag onsome growth that will avoid the need for

additional taxes, like a general sales tax.“There has been some uncertainty about

what Guernsey will choose, and Jersey andthe Isle of Man have come up with theirproposals a lot earlier. But I think what wewill have in place will have been well thoughtout and will give us a good basis for beingcompetitive against those jurisdictions.”

Robin Fuller, managing director of HSBCSecurities Services (Guernsey), argues thatanother aspect of the planned reform – acap on the maximum tax liability – will help.He says: “We hope ‘tax capping’ will gosome way toward attracting intellectualcapital to the island in the form of the teamsbrought over to run local managers such asFRM.”

Niven says the industry and authoritieswere keen to get the tax reforms finalisedbefore embarking on a sustained effort tolure further hedge fund managers toGuernsey. He says: “The package will go toparliament in late May or June, and oncethat has been agreed, the time will be rightto use it as a springboard marketingourselves to fund managers and start theprocess of attracting them over to the island.”

Apart from Financial Risk Management,local financial services professional Peter dePutron has launched De Putron FundManagement, Dexion Asset Managementhas also set up an operation on the island totake advantage of the attractive tax regime,and Niven says another managementoperation, BBFA, has just been set up.

Says Franks: “We are already seeing a lotmore interest from fund managers indomiciling in Guernsey. In particular, peopleare concerned about the UK tax authorities’focus on whether businesses are being runout of the UK or in an offshore location, andare trying to have more substance in theoffshore location.”

Attracting hedge fund managers is justone of the areas in which Guernsey andJersey find themselves in competition, butmembers of the industry take pains to pointout that the rivalry is far from cut-throat. SaysNiven: “Yes, we are in competition withJersey, but we shouldn’t get too worked upabout it. They may be looking at the sameopportunities, but there is plenty of businessout there for both of us.”

Jehan argues that while the Channel

O V E R V I E W


➧ p15

p9 ➧

Banking

Trust and Corporate Services

Taxation

Investment Management Services

Call it professional curiosity,

but at MeesPierson Reads we want to know all about you

and your wealth. We understand that your wealth

is not just a sum of money, but a reflection of your life.

Of your special identity and unique history.

And only when we know your story in full

can we offer you targeted solutions to match your needs

and meet the challenges of rapid change.

These are uncertain times, but at MeesPierson Reads

we can protect and enhance your wealth.

Tell us your story and get the certainty you are looking for.

Telephone 44 1481 751000 [email protected]

www.meespiersonreads.com

Every fortunetells a story.

Tell me.

Paul Redhead, Director

Time to listen, capacity to act.

The custodian of a fund of hedge fundsplays an important role in protecting itsassets and carrying out oversight of themanager and administrator on behalf of theshareholders. But custodians often carry outa further vital function by providing credit tothe manager for hedging purposes, gearingof investments and to manage settlementtiming, to enable them to stay in the marketwhile waiting to receive the proceeds of aninvestment that is being liquidated.

The custody market in Guernsey is keenand competitive. Along with MeesPierson(C.I.) (part of the MeesPierson Reads groupin Guernsey, and ultimately owned by theFortis Group), there are six major players inthe market, including institutions such asRoyal Bank of Canada, Northern Trust, whichlast year acquired the Barings fund servicesbusiness, and HSBC.

MeesPierson (C.I.) distinguishes itself fromits competitors in two ways. First, as aspecialist custodian, rather than as aninstitution offering a package of services tofunds including administration, the firm isprobably more attractive as a partner toindependent administrators, who can beconfident that MeesPierson is not pitchingfor their own business.

The danger for independent administratorsin choosing a custodian that is part of alarge institution with a comprehensive rangeof services is that once the client hasentered a business relationship with such aninstitution, before long they are being luredby the benefits of a one-stop shop.

The second characteristic that marks outMeesPierson is credit policies that aresomewhat more flexible than those of manyof its competitors. Other custodians can beunwilling to provide the same level of creditwith hedge fund assets as collateral.

As a result, funds could potentially runinto problems in obtaining credit for hedging

and gearing purposes and potentially for themanagement of settlement timing. Eachcustodian has its own particular niche, andMeesPierson appears especially attractive tofunds of hedge funds with a largerrequirement for credit than other funds.

The main issue facing custodians of fundsof hedge funds is that in contrast to custodyof fixed-income and equity funds (which alsorepresents a small proportion ofMeesPierson’s business) is that it is verylabour-intensive. Exchanging faxes is requiredto carry out subscription to underlying hedgefunds, and data is entered manually. There’svery little opportunity for automation, so therequirement for people to administer is high.

Finding the right people is not always easyor inexpensive. Guernsey’s workforce is limitedin size, and the number of skilled peoplelooking for work is extremely small. As a result,demand for staff has pushed wage inflationhigher than normal over the past couple ofyears, although measures to make it easier forthe financial industry to recruit outside theisland have helped to ease the pressure.

The importance of the custodian inoverseeing a fund of hedge funds should notbe underestimated. They check thatvaluations are carried out correctly, monitorthat investments are appropriate and do notexceed predetermined limits, oversee thatrisks are properly spread, and performregular due diligence checks on theadministrator and manager.

The past year has been a particularly goodone for Guernsey funds of hedge funds,which is one of MeesPierson’s corebusinesses. It also acts as custodian forsome non-Guernsey schemes, as theregulations allow, some of which are nowconverting into Guernsey funds. With steadygrowth in the number of funds seekingcustody services, the outlook for the next yearseems as positive as the past 12 months. ■

M E E S P I E R S O N


New horizons forshareholders’ champion

By Paul Redhead

Paul Redhead is a directorwith MeesPierson (C.I.) inGuernsey

Islands are relatively similar jurisdictions,Guernsey moved toward the alternativesector much earlier while Jersey remained aretail funds centre. “Only very recently, withthe Expert Funds regime, has Jersey tried tomove into this market – with some success,”he says. “In the alternatives sector, they’vedone very well in property funds, and hedgefunds are doing reasonably well, althoughunlike in Guernsey the private equity industryis very small.”

Says Franks: “It’s very hard to differentiateyourselves, and these days it has to be onquality of service rather than the legalframework. We’re all quick at catching upwith each other when something new isintroduced in another jurisdiction, so wehave to differentiate ourselves on having theright people to do the job.”

Firth argues that the two centres are asmuch complementary as competitive. “Youhave the Channel Islands Stock Exchangewhich serves both islands, accountancypractices that cover both Jersey andGuernsey, and a number of theadministrators have Jersey operations aswell.”

What both islands are trying to do isconvince hedge fund promoters andmanagers that there are alternatives todomiciling funds in the Cayman Islands,home to probably as many as half of all theworld’s hedge funds and certainly thedominant jurisdiction for offshore vehicles.

Says Jehan: “Traditionally the hedge fundroute has been Cayman domicile and Dublinadministration, but Guernsey has started toget in on that act by servicing Cayman orBVI vehicles. It’s still a relatively small pieceof the market, and going forward I think we’dstill want to focus on domiciling funds locally.

“The hedge fund industry is becomingmore institutionalised, with much biggerinvestors who have very different demandsfrom the kind of investors who were in theindustry to start with. Big US pension fundswill not want to invest in something theycan’t do proper due diligence on.

“Corporate governance is one particulararea where we have something to offer.Guernsey funds don’t have any strictrequirements under the regulations to followany particular corporate governance code,but listed hedge funds tend to put in place a

regime incorporating some aspects of theUK Combined Code, such as an auditcommittee and independent directors, butwithout the requirement to follow the strictUK rules to the letter.”

Jehan believes that greater marketingefforts can help Guernsey can increase itsshare of the funds market. “Lawyers inLondon choose Cayman because it’s easierand they’ve done it hundreds of times. But ifthe investors turn round and say they don’twant Cayman, where do you go? Guernseyneeds to develop its presence and shout abit louder in order to be heard. I don’t thinkit’s ever going to be a Cayman, but it couldbe a lot bigger than it is now.”

GuernseyFinance is doing its best toachieve this through regular promotional tripsabroad and events such as its annual fundsconference in London. Says Niven: “Whatwe’re trying to do, especially through thefunds conference in September, is widen ournet and put the idea into promoters’ mindsthat Guernsey provides them withopportunities.

“A lot of this business comes from thepersonal relationships that the our fundindustry has with promoters, particularly inLondon. We’re only a stone’s throw away -you can virtually do all your business in aday, visit the regulator, see accountants,lawyers and administrators, and once thefund is set up, hold a board meeting withlocal Guernsey non-executives. Once peopletry us, they’ll like the way we do business,and decide to do more.” ■

O V E R V I E W


p12 ➧

ASSURED TRANSACTION HANDLING

For more details on Ozannes’ services please visit our website: www.ozannes.com

Contact us by: e-mail: [email protected] tel: +44 (0) 1481 723466 fax: +44 (0) 1481 727935

PO Box 186 1 Le Marchant Street St. Peter Port Guernsey GY1 4HP Channel Islands

As one of Guernsey’s leading full service law firms, Ozannes provides unsurpassed legal advice from a formidable team

of specialists, all experts in their particular field. Assured transaction handling is undertaken by advocates and lawyers

with the knowledge and experience that is required. That is why Ozannes has consistently been ranked highly in legal

directories covering the offshore sector. In the 2005 Edition of the Legal 500 Ozannes are the only law firm to be placed

in the top tier for each of the six practice areas featured for Guernsey.

Those involved in international finance and investment in this leading offshore centre require professionalism.

They demand excellence. Ozannes delivers legal excellence, naturally.

Over the past few years the hedge fundindustry has matured and London’sinvestment managers have become morecomfortable with alternatives to the traditionalCaribbean hedge fund.

This maturity has grown out of internaland external pressures. The pool of potentialinvestors in hedge funds has increased, andthe attention of regulators has become morefocused. In recent times, the more traditionalinvestment management houses have alsorecognised that they and their investors needexposure to hedge funds as an asset class.

With this maturity comes addedresponsibility and, with reputations to lose,investment managers have looked closer tohome when choosing the domicile for anoffshore fund.

The logistical difficulties of operating aCaribbean structure across the Atlantic meanit is very often difficult for such a fund todemonstrate to HM Revenue and Customsthat, although the fund is incorporatedoffshore with a majority of offshore directors,its management and control are exercised inor from any particular jurisdiction other thanthe investment manager’s.

The more jurisdictions in which the fundcould argue to have based its centralmanagement and control, the weaker theargument becomes for each one of thosejurisdictions. Such funds also risk beingdeemed to be domiciled in the jurisdiction ofthe administrator if it has provided the fundwith directors and facilities for repeatedboard meetings.

At a time of demanding corporategovernance requirements, it is becomingincreasingly important for directors to attendsome board meetings in person. Domicilingan offshore fund in a more accessiblejurisdiction allows the investment manager toattend meetings more frequently, visit theadministrator in that jurisdiction at the same

time, and thus demonstrate that the fund isdomiciled in a particular place. Many ofGuernsey’s administration firms are part ofglobal operations that can outsource to othercentres of particular expertise wherenecessary.

The Channel Islands Stock Exchange(CISX), which is based in Guernsey, isdeveloping a serious reputation for listingboth closed and open-ended funds. Sincethe FSA has approved the CISX as adesignated investment exchange, FSA-authorised firms have been permitted to treatCISX transactions in much the same way asif they were trading on the UK’s recognisedinvestment exchanges.

Consequently, an investment by a UK firmin a CISX-listed security incurs a significantlylower position risk requirement, which furtherreduces transaction costs. Trading costs arealso minimised because there is no stampduty in Guernsey, and Crest and Euroclearare available for electronic settlements. Finally,compliance costs are reduced for issuersbecause the CISX is not obliged to implementthe EU Transparency Obligations Directive.

The CISX is also able to take a morepragmatic approach regarding theindependence of directors of listed companiesthan either the London Stock Exchange or theIrish Stock Exchange.

The critical mass of service providers hasallowed the Guernsey Financial ServicesCommission to lighten its oversight ofQualified Investor Funds that restrict theirmarketing to professional, experienced andknowledgeable investors. A minimum initialsubscription per investor of USD 100,000 willalso result in a fund being eligible for thisfast-track approval procedure. With the helpof their administrator, investment managersthat already domicile offshore funds inGuernsey can establish hedge funds muchmore quickly than in the past. ■

O Z A N N E S


A question ofgovernance

By Benjamin Wrench

Benjamin Wrench is anassociate lawyer with OzannesCorporate

A year after the introduction of the QualifyingInvestor Fund regime opened new vistas forGuernsey’s hedge fund business,administrators across the island are enjoyinga broad-based boom that encompassesother types of alternative investment as wellas hedge funds, and even includes itsresidual retail funds sector.

Fund assets grew at an unprecedentedrate of more than 35 per cent in 2005 topass the £100bn mark, partly down to theintroduction of the QIF regime, but also tostrong demand for two other Guernseyspecialities, private equity and propertyfunds. Peter Niven, chief executive of theindustry promotional body GuernseyFinance,believes that business can only increasefurther as the regime is adjusted in responseto feedback from the industry.

The QIF regime offers a fast-trackprocedure that enables funds to receiveauthorisation from the Guernsey FinancialServices Commission within three workingdays of its application being received, anchange that brings the island into line with

leading hedge fund jurisdictions in theCaribbean such as the Cayman Islands andBritish Virgin Islands.

Just as importantly, the new regime hasushered in a new approach to authorisationand regulation that transfers the burden ofdue diligence and ongoing monitoring offunds onto their administrator. Restrictedcurrently to professional and experiencedinvestors, this structure is set to be extendedto other types of funds in the wake of theHarwood report, a root-and-branch review ofGuernsey’s fund regulation that is due to bepublished imminently (see separate article).

Says Carl Rosumek, deputy director ofinvestment business at the GFSC: “TheGuernsey Qualifying Investor Fund regimewas introduced as a means of streamliningthe approval process for both open andclosed-ended investment funds aimed atprofessional, experienced andknowledgeable investors. The regime appliesto funds of all types; it was not specificallydesigned for hedge funds.

“Under the regime the commission

A D M I N I S T R AT I O N


Administrators thrive as Guernsey’s

funds soarBy Simon Gray

undertakes to grant the required fundapproval within three working days, providedthat an appropriately licensed Guernseyapplicant has certified to the commission thatthe fund will be restricted to professional,experienced and knowledgeable investors,that the applicant has conducted duediligence on the promoter and associatedparties and has found them to be fit andproper, and that the applicant is satisfied asto the fund’s economic rationale and thedisclosure of any risks associated with theinvestment vehicle.”

Says Niven: “The QIF regime is just over ayear old, and we recently tweaked it toinclude a provision that investors placingUSD 100,000 into a fund will be treated asqualifying investors, which other jurisdictionsalready have done. We felt we wanted to seehow the regime bedded down before westarted to extend it, but we’ve now starteddoing that.”

Niven sees the changing regulatorystructure and a planned reform ofGuernsey’s tax system as elements of apackage that will not only boost the island’scompetitiveness as a centre for thedomiciliation and servicing of alternativeinvestment funds but could also lead tohedge fund managers choosing the island asa base for their operations.

He says: “The past 12 months has been agood year for funds, and the number of

funds that have gone through the QIF regimehas started to build up. But once we getthese further building blocks in place, we willhave a springboard from which to boostproperty, private equity and hedge funds. It’searly days yet because people are stillgetting familiar with the concept, but oncewe start to implement the Harwoodconclusions we’ll see business really start toescalate.”

The changes include moves to ease theisland’s rules on the role of custodians, abugbear for hedge funds in manyjurisdictions. Says Benjamin Wrench, anassociate lawyer with Ozannes Corporate:“Guernsey has become much more attractivefor hedge funds as a result of the GFSCrelaxing its previous requirement for open-ended funds to appoint Guernsey regulatedcustodians, provided that a reputable primebroker has been appointed.

“The GFSC no longer requires those primebrokers to take on formal duties of oversightover the fund, and waives the obligation tohave segregation requirements for the primebrokers holding the fund’s assets and forsubscription and redemption monies. Agrowing number of prime brokers have takenadvantage of this, including Goldman Sachsand JP Morgan.’

Robin Fuller, managing director of HSBCSecurities Services – which providesadministration and custody services to morethan USD 20 billion of assets in Guernsey –believes that the island’s success is down toa combination of factors, including itsacknowledged professionalism and expertisein providing services to fund promoters fromaround the world.

He says: “Coupled with otherenhancements to our legal and regulatoryenvironment, QIFs have put Guernsey at theforefront of the international investment fundsindustry. Guernsey has always had a positivereputation, and such unprecedented growthis a tribute to the high standards ofstreamlined regulation and service provisionthroughout the island.”

According to Patrick Firth, managingdirector of Butterfield Fund Services(Guernsey), the strength of the QIF regime isthat it is internationally competitive whilemaintaining the level of regulation Guernseyhas always prided itself on. “There are some



➧ p22

and reach around the world

we’ll help you build a safeand solid base in the islands

Cable & Wireless in the Channel Islands combines global strength with local expertise to

give your business the telecommunications services you need.

With vast experience and partnerships with the world’s leading innovators, we’ll help you

use technology to improve your business processes and customers’ experience.

Contact: Guernsey +44 (0) 1481 700700 www.cwguernsey.com

Access to financial markets depends oncommunications systems that enableinformation to be shared and transactions tobe made across the globe. The experienceof Cable & Wireless in financial centresacross the world, from London to Hong Kongand the Cayman Islands, helps it tounderstand and deliver the requirements offinancial institutions.

Operations at Cable & Wireless areconducted on a truly global scale with itsnetwork infrastructure extending from the UKand continental Europe to North America andthe Asia Pacific region. In 2006, businesses inGuernsey will be directly connected into thisglobal network following a £6.5m investmentby Cable & Wireless in a new cable andtechnology project called HUGO.

HUGO stands for High-capacity, Undersea,Guernsey Optical-fibre and will deliver thecapacity and connectivity that financialcompanies need to run high-speedapplications cost effectively. Via HUGO,telecommunications services in the islandwill be resiliently and directly connected intothe Cable & Wireless global backbone,providing the gateway to the US, Europe andAsia, as well as the UK. Connectivity inGuernsey will be on a par with the majorinternational business centres around theworld such as London, Hong Kong, NewYork, Sydney, Tokyo and Paris.

Project HUGO is part of the company’splans to revolutionise communications servicesthroughout the Channel Islands. These planswill see new mobile, broadband and businessservices developed alongside the core networkinfrastructure, providing significant businessopportunities both locally and internationally.The opportunities are driven by a sharp focuson customers’ requirements.

Every business is unique in terms of itsobjectives, whether they operate as a hub

for others, as a spur from a central officelocated elsewhere, or as an e-business withservers hosted remotely.

In Guernsey, our solutions include:■ Voice, data and business continuity

services.■ Advanced hosting, IP connectivity and

applications.■ Broadband and internet services.■ Mobile and messaging services supported

by more than 250 international roamingagreements.

IP technology in particular is increasinglybringing voice, data and video together in aconverged network.

As the only Cisco Premier Partner inGuernsey, Cable & Wireless works withCisco, the leader in networking technology, tobring the benefits of convergence to financialservices companies. This means offeringend-to-end IP networking solutions thatenable the convergence of all types of data,including messaging, voice, video and webcontent, on a single network infrastructure.

The security of data is vital because ofthe threat of hackers, viruses and othermalicious attacks. Cable & Wireless offersstate of the art solutions to defeat themodern phenomenon of distributed denial ofservice attacks via the internet. Equipmenton the Cable & Wireless global internetbackbone can detect such attacks and blockillegitimate traffic, while allowing the flow oflegitimate transactions to continue and theweb site to remain operational.

Advances in communications and in therequirements of financial services meaninnovation and leading-edge skills are vital.Investment by Cable & Wireless in world-class telecommunications continues tosupport the local businesses and ensure thatGuernsey remains a world-renowned centrefor financial services. ■

C A B L E & W I R E L E S S


Meeting globalchallenges

By Mark Briers

Mark Briers is commercialdirector of Cable & WirelessGuernsey

places where it’s quicker to get a fundauthorised,” he says.

“What the QIF regime does is givecertainty to authorisation by the regulatorwithin three working days as long as theservice provider has signed off on the duediligence. The industry is happy that itprovides another weapon in the armoury,and the regulator’s announcement that aminimum investment of USD 100,000 is anindication of a qualifying investor has alsobeen well received.”

Says Fuller: “Service providers can nowoffer an additional service to internationalfund managers who frequently operate tovery challenging timetables. The new regimeallows the licensing of funds within a threeworking day period, and Guernsey serviceproviders are able to support the process ofintegrating what can be highly complexstructures in a relatively short period of time.”

He insists that the self-certification offunds by service providers does not actuallyinvolve a shift in responsibility.“Administrators have always worked inpartnership with the GFSC in ensuring highstandards of regulation and corporategovernance are met. The new regime onlyhighlights the work licensed serviceproviders are doing on behalf of the fund aspart of normal compliance procedures.”

Adds Firth: “To the extent thatadministrators already discharge their duties interms of the due diligence, there should be noimpact on them. It falls into the broadspectrum of work we were doing already. Itformalises it and brings it into a slightlydifferent format, but the actual work required ispretty similar to what we were doing before.”

Industry observers note that Guernsey’sfund administration industry, like thatelsewhere, has seen consolidation in recentyears, most notably with the acquisition lastyear of Baring Financial Services Group,which includes Guernsey International FundManagers, by Northern Trust. But the sectoris also seeing new start-ups.

Says Fuller: “The growth rate of the fundindustry as a whole will continue to drivecorporate activity, including consolidationsand start-ups. As the levels of fundadministration continue to increase, wewould expect to see further global playersenter the market as threshold levels become

more appealing, and more specialist fundslook to Guernsey as their chosen domicile.”

KPMG partner Neale Jehan notes thatGuernsey’s broad mix of administrators,ranging from big international serviceproviders that are part of global bankinggroups to niche providers specialising indifferent areas of the alternative investmentmarket, vary in their ability to outsource workto other jurisdictions.

He says: “The international serviceproviders clearly have capacity in otherjurisdictions and may choose to outsourceretail-type administration to a centre ofexcellence elsewhere, but if you move downthe scale there are mid-tier administratorsthat tend to be locally-owned businesses,and may not have the ability to outsourcewithin their own group. These firms mightwant the flexibility to outsource to specialistproviders elsewhere.

“Right at the bottom there are a largenumber of new entrants. The growth in theindustry has brought many new start-upadministration entities that are offshoots ofexisting financial services businesses thatpreviously did not specialise inadministration, and that are generating a lotmore capacity, at the smaller, more nichelevel. Whatever regime comes into placeneeds to cater to all the businesses, whetherthey’re international or very local.”

Jehan notes that since many companies inthe market are part of international groups,there is no guarantee that consolidation willfollow the logic of administration business.“Consolidation is likely to be driven at ahigher level than fund administration,” he



p19 ➧

says. “There may be consolidation amongsome of the local businesses, but I don’tthink that will happen for a few years yet.”

Says Franks: “The global players arebecoming a lot more international in the waythey run their businesses. We’ll find there’smore pressure on groups to do the vanilla stuffin lower-cost jurisdictions, while the valueadded business in which a Guernseyadministrator can add value will continue to beperformed here, But this is obviously subject tothe regulatory framework in place and to howmuch you can do in less costly locations.”

Conversely, Guernsey administrators arecontinuing to win business from fundsdomiciled in other jurisdictions. Says Fuller:“This helps Guernsey service internationalinvestment managers, who by the nature oftheir client base have to offer productsdomiciled in a number of jurisdictions.”

Butterfield Fund Services is probably thelargest provider of administration services tonon-Guernsey schemes as measured byassets. Says Firth: “We can provide additionalbenefits for managers based in the UK orEurope, not only from the time zone point ofview, but also increasingly as regardscorporate governance. It’s increasinglybeneficial to be able get over to Guernseyquickly and to hold board meetings here.

Says Niven: “Cayman does extremely wellin terms of funds, a lot of which come out ofthe US, and I’m not sure we’re trying tocompete with that kind of volume. You canset up a fund in Cayman and not a greatdeal happens there, but investors more andmore are looking at corporate governance, athow these funds are run.

“They want some solidity, they want theability to identify who’s running what andwhere they’re doing it. In Guernsey we’ve builtup a lot of expertise and have put together allthe various component parts of the fundsindustry, including a very good cadre of non-executive directors. We’ve established anexcellent track record over many years.”

That track record includes theestablishment of the Channel Islands StockExchange, which opened in Guernsey in1998 and whose first listings, out of a totalthat recently passed 1,000, were hedge fundslaunched by Man Group. Today theexchange, which enjoys official recognitionfrom the UK and other jurisdictions, is used

by many managers to list their funds.It also includes protected cell companies,

a Guernsey innovation more than a decadeago. Says Wrench: “Illustrative of Guernsey’sleading edge as a funds domicile, theprotected cell company was pioneered onthe island and subsequently has beenadopted by most offshore financial centres. Itis particularly suited to funds of hedge fundsbecause it provides a statutory basis for ring-fencing assets and liabilities within each cell.”

Last year Guernsey’s protected cellcompany ordinance was amended to extendits application, previously limited to insurancecompanies and investment funds, to anycompany that is administered by a firmregulated by the GFSC. Says Franks: “ThePCC legislation has been used by fundshere for a long time, because it works quitenicely with umbrella funds.

“Over the years the PCC has proved aneffective model. A legal case that wascoming up was going to test whether thatcellular structure worked in a court of law,but because there was an out-of courtsettlement, we never got to see that proof.The challenge for PCCs has always beenwhether the ring-fencing provisions wouldstand up in a court of law, but since everycountry has one now, it’s more acceptedthan it might have been 20 years ago.

‘We’ve had PCCs so long now that whenpeople think of protected cell companies, theythink of Guernsey. Jersey is currently playingcatch-up by introducing PCC legislation, so itwill be interesting to see the dynamics of thaton the Guernsey marketplace. It has beenone of the drivers of competition betweenGuernsey and Jersey in the past.”

In general, though, Guernseyadministrators are sanguine about theircompetitive prospects. Says Fuller:“Guernsey is an established fund domicilewith an internationally recognised butpragmatic regulatory environment.

“We would like to build on a vision ofGuernsey as a domicile of choice rather thansimply somewhere to establish a fundsadministration. Its geopolitical position,standards of corporate governance andskills-based economy should make it ajurisdiction of choice for European fundmanagers and managers of funds with aEuropean investor base.” ■



With local and global teams of experienced andhighly-skilled professionalswe can offer a range ofservices to meet the needsof your hedge fund business and its funds.

For more details of how we can help, contact Neale Jehan, KPMG Channel Islands Limited, 20 New Street, St Peter Port,Guernsey GY1 4AN. Telephone 01481 721000.

www.kpmg.guernsey.gg

©2006 KPMG Channel Islands Limited, the Channel Islands member firm of KPMG. All rights reserved. Image supplied courtesy of VisitGuernsey.

Local context in a global

environment

AUDIT � TAX � ADVISORY

In a dynamic environment stemming fromchanges in international accountingstandards, hedge fund administrators,investors and managers all need tounderstand that the accounting challengeshedge funds can pose should not beunderestimated.

This is especially true for a jurisdictionsuch as Guernsey, which allows funds toused any recognised form of GenerallyAccepted Accounting Principles, at a timewhen UK accounting standards are evolvingtoward the international (IFRS) principles,which themselves have changed, and whenhedge funds are also facing new accountingrequirements in the United States.

The main issue affecting funds is achange in the way the fair value ofinvestments should be determined. Underthe UK and IFRS accounting principles, thefair value of a listed investment is its bidprice, and for non-listed investments there isa requirement to use some kind of acceptedvaluation techniques.

Before this new approach, the accountingrules simply required administrators todetermine the market value of an investment.For listed instruments this allowed a mid-price to be used, while the administrator of afund of hedge funds could take prices fromthe administrator of the underlying fund.

This has major implications in particularfor administrators of funds of funds, which invaluing underlying investments must nowconsider the structure of the fund inquestion, whether it is open- or closed-ended, how instruments within the fundshould be priced, and what is a realisticexpectation of the price that could beobtained on exiting the underlying fund.

Another issue involves hedge funds thatuse derivatives. Managers of such funds thatuse synthetic positions involving perhapsfour or five options would price the positionas a whole, since that is the way theirstrategy works. However, the accountingrules now require a bid value to be placed

on each option separately, which could leadto volatility in the fund’s financial statements.

This may also result in a discontinuitybetween the regular periodic valuationsprovided by the manager and the fund’sannual accounts, because the regularvaluations – daily, weekly or monthly – areliable to be carried out under a different setof principles from those that govern theannual financial statements.

For investors, this may mean that monthlyvaluations use mid-prices or whatevertechnique is set out in the fund’s prospectus,while the year-end accounts use the newaccounting standards, resulting effectively ina different NAV per share.

Eventually it may become best practice foradministrators to use the same accountingbasis for monthly valuations and annualfinancial statements, but there’s no movetowards this visible at present, and in themeantime it remains acceptable to reconcilethe divergence between the two in theannual financial statements.

There’s also the issue of whether it ispracticable for a fund of funds administratorto do anything apart from accepting theestimated price from the administrator of anunderlying fund at month-end in order tocalculate their own NAV for the purposes ofdealing.

Meanwhile, in the US, auditors of somefunds are now required by the SEC as part oftheir audit to obtain independent price quotesfrom third parties for all investments where aquoted price is available. While this goesagainst the traditional audit method of testingon a sample basis, it is designed to capturea situation where a manager is pricinginvestments with no reference to the market.

This may be relevant to simple hedgefunds, but for the more complex sectors thiscould have a huge impact as no two peopleare likely to price a complex strategy in thesame way. Fortunately there’s no sign atpresent of this approach being applied byregulators on this side of the Atlantic. ■

K P M G


Accounting challengesBy Neale Jehan

Neale Jehan is an executivedirector with KPMG ChannelIslands in Guernsey

The Guernsey Financial ServicesCommission has unveiled changes to theQualifying Investor Funds regime, which wasintroduced on February 7 last year.Henceforth, any individual investing at least$100,000 or its equivalent in a fund willqualify as a professional investor, alongsideexperienced investors and knowledgeableemployees, the other categories to whichinvestment in QIFs is restricted.

A minimum investment criterion wasconsidered for the QIF regime during initialdiscussions in August 2004, according toCarl Rosumek, deputy director of investmentbusiness at the GFSC, but at that time anindustry working party comprisingrepresentatives of the fund sector and theregulator decided not to adopt it.

However, in a review earlier this year,various participants requested that theposition was reconsidered, and the workingparty agreed to its inclusion. “It is too soonto say whether the additional criterion willbroaden the appeal of QIF funds,” Rosumeksays. “It is perhaps a test that is simpler forfund operators to assess, whereas the otherqualifying criteria involve a certain element ofjudgement.”

Between February 7, 2005 and April 7 thisyear the GFSC approved 43 QualifyingInvestor Funds, comprising 14 authorisedopen-ended collective investment schemes,20 closed-ended investment funds and ninenon-Guernsey domiciled open-endedschemes for which the commission’sapproval is required.

While hedge funds and funds of hedgefunds constitute the largest single category offunds approved under the regime with 14, ithas also attracted considerable interest fromadministrators of venture capital/private equityand property funds looking to take advantageof the fast-track application process.

During the 14-month period thecommission approved a total (including theQIF applications) of 53 open-ended collectiveinvestment schemes, 90 closed-endedinvestment funds and 53 non-Guernsey

schemes. Approval also was given for thecreation of 231 new classes of open-endedumbrella or multi-class funds.

Rosumek notes that while the QIF regimerequires licensed service providers toconduct due diligence and certify to theregulator that the promoter and associatedparties are “fit and proper”, the commissionexpects licensees to have conducted duediligence on promoter clients beforecommencing to act for them in any fundapplication.

“The major difference is that under theQIF regime the licensee specifically has tocertify to the commission that it hasperformed the relevant due diligence andhas considered all of the issues set out inthe guidance document,” Rosumek says.“The monitoring of licensees’ proceduresand controls relating to the taking on of newbusiness forms part of the commission’sroutine oversight of regulated firms.”

The GFSC has made a point of re-emphasising the due diligence obligationsincumbent on licensed service providers.Says Rosumek: “Commission staff assesslicensees’ application due diligence as partof their post-facto monitoring of licensees,and at the conclusion of each specific fundreview, feedback is provided to the licensee.

“Having experience of the regime goingback over a year, the commissionconsidered it appropriate to re-emphasisethe due diligence obligations which licenseesundertake to ensure that standards do notfall and that the jurisdiction is not exposedunnecessarily. The concept of licensees,service providers and fund promoters beingfit and proper will remain paramount, definedas a requirement for integrity (or honesty),competence and solvency.”

The working party that drew up the QIFregime is also responsible for examiningpotential future changes. The commissioncurrently has no plans for furtheramendments, but it is ready to raise anyrequests from licensed service providers orother industry participants for consideration. ■

Q U A L I F Y I N G I N V E S T O R F U N D S


QIFs one year on

Butterfieldus fundi servicium

Acanthistius Brasilianus

Abudefduf saxatilis

There’s an ideal size for a fund administrator. At Butterfield Fund Services, we’re small enough to offer

the rapid, personal service you may not get from those at the top of the food chain.

Yet with a well-established financial institution behind us, we have enough weight to offer additional services

like banking, custody, money market funds, lending, trust and foreign exchange.

You’ll find us in the well-regulated waters of Bermuda, The Bahamas, the Cayman Islands and Guernsey.

For more information, please contact:

Head Office – Bermuda – Andrew R. Collins Tel: (441) 299-3954, E-mail: [email protected]

The Bahamas – Heather Bellot Tel: (242) 393-8200, E-mail: [email protected]

Cayman Islands – John C. Lewis Tel: (345) 914-5592, E-mail: [email protected]

Guernsey – Patrick A. S. Firth Tel: (44) 1481-737756, E-mail: [email protected]

Small enough to be quick. Big enough to swim with the big fish.

Services provided by subsidiaries of The Bank of N.T. Butterfield and Son Limited.

www.butterfieldbank.com

It should come as no surprise that Guernseyis so much in demand as a domicile for abroad range of alternative investment funds,including private equity, property and hedgefunds, as well as a residual core oftraditional long-only retail funds. Over theyears, one of the most importantcharacteristics demonstrated by the island’sfunds industry is its flexibility.

That was first demonstrated more than adecade ago when the implementation of theEuropean Union’s Ucits legislation made theChannel Islands less attractive, at least tothe European market, as domiciles for retailfund vehicles.

Although this did not end Guernsey’s roleas a domicile for long-only funds, one thatcould yet receive a fresh impetus fromchanges in the international regulatoryenvironment, it did require the island’s fundsindustry to examine new directions andopportunities, initially leading to theintroduction of traditional long-only specialistfunds as B schemes, and more recentlydemonstrated by a reappraisal that coincidedserendipitously with the rise to prominenceof the alternative investment industry.

The range of funds serviced in Guernsey,domiciled both on the island and in otherjurisdictions, is matched by the breadth of itsskill base. This is now paying dividends, as isdemonstrated by last year’s increase of morethan one third in the total volume of assetsunder administration in Guernsey. While theestablishment of the Qualifying Investor Fundregime undoubtedly boosted hedge fundinflows, the overall total also benefited fromvigorous growth in the island’s well-established property and private equitybusiness – and from continued expansion inthe servicing of non-Guernsey funds.

What the QIF regime has successfullydone is to counter any misconception that

Guernsey is purely a centre for funds ofhedge funds, important though this businessis to the island. Last year’s changes to fundregulations have also reinforced thejurisdiction’s reputation as a good place todo business by underlining its capacity forinnovation and self-renewal.

The QIF regime is part of a long Guernseytradition of trail-blazing in the internationalfinancial services sector that included theinvention of the Protected Cell Companyconcept more than a decade ago. The PCC,which among other advantages allows a singlecorporate structure to contain multiple units orcells that are not legally affected by eachother’s insolvency or liquidation, has sincebeen copied by jurisdictions around the world.

The PCC offers cost benefits for a variety ofpurposes in the financial industry. Until arecent change in the law its use was restrictedto the funds sector, where it offers a structurewell suited to the umbrella fund concept, aswell as to the insurance sector, where it iscommonly used for captive insurers andreinsurers set up for smaller companies. Theuses PCCs can be put to have now beenbroadened, and Guernsey will shortly alsohave an Incorporated Cell Company vehicle.

As with every leading internationalfinancial services jurisdiction, Guernsey isconstantly examining ways to add thegreatest possible value within the constraintsof a small island. The high level of expertiseand flexibility of the industry’s workforce hasproved vital by enabling limited resources tobe deployed to best advantage.

The growing number of experts both inthe private equity field and in the hedge fundsector is set to benefit the island as thealternative asset management businessevolves in the future, since many of theseskills are easily transferable into differenttypes of administration. ■

B U T T E R F I E L D F U N D S E R V I C E S


Guernsey’s flexibilitypays dividends

By Patrick Firth

Patrick Firth is managingdirector of Butterfield FundServices (Guernsey)

Guernsey is on the brink of what manyindustry professionals believe may be arevolution in the way funds are authorisedand regulated, following the publication –expected imminently – of a report from aworking party led by leading Guernseyadvocate Peter Harwood. Although fulldetails of the report have not yet beenreleased, it is understood to put flesh onconcepts that members of the industry havebeen discussing for some time.

With members of the government andofficials from the Guernsey FinancialServices Commission having taken part inthe deliberations of the working partyHarwood led, their endorsement of therecommendations is seen as all but aformality, and some observers believe themeasures could be enacted into law as earlyas this autumn.

Says KPMG partner Neale Jehan: “Wehope that what will come out of theHarwood report will be a completely newregime that will leap Guernsey close to beingthe pre-eminent offshore jurisdiction. There isgeneral support for the fact that we need tochange the regime, so everyone’s waiting forthe report to arrive and ready to debate it.”

Ernst & Young partner Peter Franksargues that the proposals contained in thereport will contribute to “a phenomenal stepchange in the perception of Guernsey” overthe next 12 months that will build upon theisland’s image of being innovative and opento new ideas, underlined by the introductionof the QIF regime last February and otherlegislation over the past year.

Says Franks: “The Harwood report stemsfrom a government-led initiative around 12months ago to look at the whole regulatoryand legal framework and identify the

changes that would be required toencourage the future growth of Guernsey.That means that a lot of the existing legalframework will be pushed aside andreplaced by new frameworks that willencourage business to flow here.”

At present the report is being digested bymembers of the industry and the politicalauthorities. Says Guernsey Finance chiefexecutive Peter Niven: “The report’srecommendations will go a long way towardchanging the way we regulate funds in theBailiwick, and will provide another layer ofopportunity on which the industry cancapitalise, on the strength of the momentum ithas gathered over the course of the past 12months.”

“The industry itself sees this as a greatopportunity. Certainly by September, whenwe hold our annual funds conference inLondon, we’ll have started down the road toimplementing the Harwoodrecommendations. That will be an ideal timeto showcase the industry.”

H A R W O O D R E P O R T


Harwood reportpromises a fund

regulation revolution

It is understood that a key proposal is tocreate a distinction between regulated andregistered funds. Regulated funds will consistof traditional Ucits-type funds as well asGuernsey’s existing class B schemes, whichare frequently used for alternative investmentfunds. These funds will be required to havetheir administration carried out in Guernsey,and their promoters and managers will besubject to full due diligence by the GFSCwhen the funds are set up,

By contrast, registered funds domiciled inGuernsey can have their administrationperformed in other jurisdictions. This regimeis similar to the Qualifying Investor Fundstructure in that once the administrators havenotified the regulator that they havesatisfactorily carried out due diligence work,the fund will be free to do business.

Observers say the distinction betweenregulated and registered funds mirrors thecurrent different treatment of closed-ended andopen-ended funds, with the latter subject to amuch higher degree of regulation. However,that distinction would disappear under theHarwood proposals by combining the Controlof Borrowing Ordinance with the Protection ofInvestors Law into a unified funds law.

By contrast with other jurisdictions thathave enacted separate pieces of legislationfor each type of fund, such as retail funds,private equity and property, Harwood and hiscolleagues have taken the view thatsimplicity is the best approach, advocating asingle law and providing regulatoryexemptions to different types of fund throughschedules to the legislation.

The proposed structure will be

revolutionary, industry members believe,because it will “collapse totally” theinvolvement of the regulator in theauthorisation process. Instead of waiting sixweeks or even six months for regulatoryapproval, they say, fund promoters will beapproved to start doing business as soon astheir application has been submitted by theadministrator to the GFSC.

This change is a vital one for Guernseybecause it brings the island into line with rivaljurisdictions such as the Cayman Islands thathave benefited from a fund approval processthat takes as little as a couple of days. Theprinciple of an accelerated approval processwas first introduced with the QIF regime lastyear, but the Harwood proposals wouldextend it to other types of fund with fewerrestrictions on whom they can market to.

Similarly, the Harwood working party isthought to recommend that administratorsshould be able simply to notify thecommission that they are taking on non-Guernsey funds, ending the requirement forthem to seek permission to do so.

The report is also expected to proposebringing the rules into line with standardindustry practice by allowing the safekeepingand oversight roles of a fund’s custodian tobe split. This would enable custody to beperformed anywhere in the world as long asa custodian in Guernsey was responsible forensuring that the fund’s assets were in place.

The Harwood report is one of a numberof initiatives that aim to improve thecompetitiveness of different area ofGuernsey’s financial services industry. Aworking group for the fiduciary sector hasalready published proposals that are set tointroduce the civil law concept of foundationsinto Guernsey law, in a symboliccounterpoint to Switzerland’s adoption lastyear of the common law concept of trusts.

Rapid action to implement the Harwoodrecommendations is expected, sincerepresentatives of the industry, the regulatorand the government have already signed offon the proposals within the working group,and according to some estimated it could allbe implemented into law by October. Withgood ideas copied swiftly in the offshore world,time is of the essence. Says Franks: “There’sno point in putting your cards on the table andwaiting for someone to overtake you.” ■

H A R W O O D R E P O R T


Apr 2006 Guernsey Hedge Fund Services 2006€¦ · Guernsey Hedge Fund Services 2006 ... sector...

Documents

Transcript of Apr 2006 Guernsey Hedge Fund Services 2006€¦ · Guernsey Hedge Fund Services 2006 ... sector...