jersey hedge fund services€¦ · by richard boléat, principal, channel house financial services...

New mindset lets hedge fundsbloom

Expert Funds put Jersey onthe map

Flexibility attractsstart-up managers

Jersey HedgeFund Services

July 2005

JERSEY Hedgeweek Special Report July 2005 www.hedgeweek.com | 2

CONTENTS

In this issue…03 IntroductionBy Phil Austin, Chief Executive, Jersey Finance

05 Jersey’s new mindset lets hedge fundsbloomBy Simon Gray

08 A credible alternativeBy David Pirouet, Partner, PricewaterhouseCoopers Jersey

10 Integrated solutions with global scopeBy Alan Brint, Head of Relationship Management, Corporate andInstitutional, Royal Bank of Canada (Channel Islands)

12 Expert Funds put Jersey on hedgefunds’ radar screenBy Nick Kershaw, Partner, Ogiers

13 Is Jersey the new Connecticut?By Simon Gray

15 Jersey and Channel House: a natural fitBy Richard Boléat, Principal, Channel House Financial Services Group

17 Putting right the misconceptions aboutJerseyBy Andrew Dann, Channel Islands Managing Partner, Ernst & Young

19 Jersey’s flexibility attracts start-upmanagers By Peter Hart, Managing Director, and Andrew Bennett, Director,Standard Bank Fund Administration Jersey

21 Spirit of flexibility keeps listingsgrowingBy Tamara Menteshvili, Chief Executive, Channel Islands StockExchange

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

Marketing Director: Oliver Bradley, [email protected]

Special Report Editor: Simon Gray

Photographs: Courtesy of Jersey Tourism

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

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

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

©Copyright 2005 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

A more welcoming commercial environmentin Jersey has encouraged hedge fundpromoters to look afresh at the jurisdictionas a centre of excellence for hedge fundsbusiness.

The original springboard for thisdevelopment was the introduction of anenhanced regulatory regime by the Island’sregulator, the Jersey Financial ServicesCommission (JFSC) during the early part of2004. The Expert Fund Guide providedpromoters and other professionals with clear,pragmatic and workable criteria to help themestablish funds in Jersey. The NonDomiciled Fund Guide which followed,introduced a streamlined authorisationprocess for Jersey functionaries acting fornon-Jersey domiciled funds.

Whilst streamlined regulations havesimplified the approval process, this wasachieved without compromising the highregulatory standards associated with Jersey.A considerable amount of consultation wasundertaken between the JFSC andrepresentatives from the Jersey FundsAssociation, before the new Guides andassociated codes of practice wereformulated.

These regulations have combined withJersey’s other long standing strengths, suchas its political stability, tax neutrality, highquality legislative framework and close linkswith the City of London; a range of attributesthat are proving to be an ideal combinationin attracting quality new business.

Jersey, a leading international financecentre for more than four decades, hadalways been a prominent player in deliveringfund services. However, it was recognisedthat the Island’s regulatory model, devisedwhen the Island’s reliance was primarily onretail funds, was not matching therequirements of promoters of alternativeinvestment strategies. The new fundregulations have helped to quickly turnaround this perception.

In a further boost, the Island authoritiesare showing a renewed willingness towelcome quality new business to its shores,the result of a shift in Government policy

designed to help grow the economy by twoper cent per annum in order to generate realeconomic growth. Jersey Finance, inassociation with the Jersey FundsAssociation and supported by the authorities,has launched a promotional campaign toencourage a select group of fund specialistsand wealth managers to consider re-locatingtheir international fund management activitiesto the Island.

Local administrators and other fund andtrust professionals have received numerousenquiries and at least two London-basedhedge fund managers, with portfolios valuedat almost USD1 billion, have announced theirintention to move to the Island this year. Anumber of others are expected to follow.

These statistics and others confirm theconfidence that the funds industry isshowing in its future. Official data compiledquarterly by the JFSC show that in the 12months to March 2005, there had been a56% increase in the growth of assets in thespecialist sector devoted to hedge funds,funds of hedge funds and alternativeinvestment funds in Jersey. The net assetvalue of specialist type funds administered inJersey is approaching £50 billion, nearly halfthe total value of Jersey’s funds industry.

The trends are encouraging and theIsland is poised to become firmly establishedas specialist base for hedge funds businessand an even stronger competitor in thealternative investment funds marketplacewithin the European time zone. ■

Phil Austin

I N T R O D U C T I O N


Introduction

Phil Austin, Chief Executive,Jersey Finance

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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.

The past few years have seen boominggrowth for much of the financial servicesindustry in the crown dependency of Jersey,which was relatively untouched by the stockmarket slump between 2000 and 2003, butthe island’s funds sector, two decades ago apioneer of offshore investment, until recentlyfound itself somewhat left behind.

As the offshore banking, wealthmanagement, and corporate and fiduciaryservices attracted increasing flows of newbusiness, helped by Jersey’s increasingstanding as a well-regulated jurisdiction, thefunds sector was left to lament the outflowof retail business to Luxembourg and Irelandafter the European Union’s Ucits directiveallowed funds to be marketed (relatively)freely from one EU country into another.

Meanwhile, Jersey was largely missing outon the massive growth of hedge funds thatbegan around the turn of the century andthat seemed to dovetail perfectly with thecentre’s existing focus on providing services

to affluent expatriates and to high net worthindividuals and families.

The island’s regulatory regime for fundsremained largely geared to the investorprotection priorities of the retail business,preventing all but the most determinedpromoters from setting up funds foralternative investment strategies. What savedthe sector from slipping into outright declinewas a boom in commercial property andprivate equity vehicles.

But all that changed on February 3 lastyear, when the Jersey Financial ServicesCommission published the Expert FundsGuide. The guide set out a fast-trackauthorisation process and other liberalisationmeasures for hedge and other funds gearedto institutional and sophisticated privateinvestors.

As well as slashing the approval processto as little as three days, the new regimealso introduced a revolutionary change to theregulatory process by shifting responsibility

Jersey’s new mindsetlets hedge funds

bloomBy Simon Gray

O V E R V I E W


for due diligence on funds and theirmanagers from the Commission to serviceproviders, notably fund administrators,managers and trustees.

This represents a major philosophicalchange by transferring the supervisor’s focusfrom individual funds and their managers tothe “competence and probity” of their serviceproviders. The Expert Funds Guide alsoaccommodates other characteristics ofhedge funds, for instance by eliminating therequirement for funds to have a localcustodian as long as they have an approvedprime broker.

The success of the new regime appearsto have taken even some of its backers bysurprise. Up to the end of March this yearsome 60 Expert Funds had been approved,including 25 in the first quarter of 2005. Thebiggest problem, according to some industrymembers, is that the JFSC has at timesstruggled to keep on top of the inflow of newbusiness.

Says Phil Austin, chief executive of theindustry’s promotional body, Jersey Finance:“Over the past year to 18 months we’vesought to create a climate that would attractfunds business. We very much see ourfuture in the alternative funds market, sofrom a legislative and regulatory perspectivewe’ve tried to create a welcoming climate,culminating in the launch of the ExpertFunds Guide. That’s really the backclothagainst which we can sell other activities.”

The change has had a dramatic effect onJersey’s profile in the global hedge fundsindustry. Says Nick Kershaw, a partner withlegal, fiduciary and administrative servicesprovider Ogier Group: “It’s put Jersey on themap in a way. The intermediaries in Londonthat feed work to offshore jurisdictions arerelatively few in number, and three or fouryears ago they wouldn’t even haveconsidered sending a hedge fund managerto Jersey.”

This abruptness of the change is borneout by a recent independent survey carriedout by Legal Week and sponsored by BedellCristin that asked fund managers andintermediaries which jurisdictions they wouldconsider using to set up private equity,property and hedge funds.

Says Kershaw: “Jersey was rated top forprivate equity and property funds, and

second behind the Cayman Islands forhedge funds. I don’t think anyone expects asudden stampede from Cayman to Jersey,but there may be fund managers andinvestors who now prefer Jersey.”

Members of the industry stress theadvantage Jersey gains from a highlydeveloped legal, fiduciary and accountinginfrastructure. It also includes the ChannelIslands Stock Exchange, whose first listingswhen it opened for business in 1998 weretwo hedge funds from Man Investments.

Says the exchange’s chief executiveTamara Menteshvili: “We’ve seen an increasein listings as a result of the Expert Fundsregime. However, it’s not so much a questionof numbers as the quality and type ofsecurities we are trying to attract. We havehigh quality names and a good steadynumber of international issuers that use ourexchange on a regular basis.”

For some practitioners, the Expert FundsGuide was as much about announcing thatJersey was open for business as trying toattract greater numbers of domiciled funds.Says Richard Boléat, principal of theChannel House Financial Services Group:“The introduction of the Expert Fundsregime has been critical to Jersey’sdevelopment, but perhaps not in the way itwas intended to be.

“It was established to make Jersey a moreattractive domicile for hedge funds, but whatit appears to have done is to raiseawareness of Jersey in the hedgecommunity. Now that that this has beenestablished in the minds of managers andtheir advisers, they are starting to think morewidely about Jersey and the services thatcan be offered here.

“It has delivered a large inflow of hedgefund business, but not purely in terms ofdomiciliation. In fact, carrying outsubstantive activities and provision of localfunctionaries is a far more attractivebusiness model for a jurisdiction like Jerseythan simply acting as a domicile, which isjust a commodity these days.”

Boléat and other industry practitioners sayJersey is particularly well placed to winhedge fund business because of its ability tohelp funds meet new standards of corporategovernance and deal with scepticism fromtax authorities about funds’ actual substance

O V E R V I E W


➧ p22

“Carrying outsubstantive

activities andprovision of

localfunctionariesis a far more

attractivebusiness

model for ajurisdictionlike Jerseythan simplyacting as adomicile”

2005 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a limited liability partnership in the UnitedKingdom) or, as the context requires,other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

In the financial services industry, due to increasingcomplexity and fundamental change, choosing theright strategy is important. But it's only the start.Implementation linked to constant innovation will bethe true key to success. At PricewaterhouseCooperswe offer thought leadership to companies throughour multidisciplinary, global approach, helping themto identify the drivers of change and to leverage theopportunities that these present. To find out howwe can help you, visit our Channel Islands websiteat www/pwc.com/jg or www.pwc.com/financialservices

The question isn’t‘Where am I going?’, it’s‘How do I get there?’.*

*connectedthinking

Jersey has been an internationallyrecognised domicile for funds for a numberof years, but when the Ucits directiveencouraged retail business to move toLuxembourg or Dublin, during the 1990s, thelocal industry focused instead on alternativeinvestments.

This strategy has been a great success.According to a recent survey, Jersey is nowregarded by law firms as the top jurisdictionfor private equity and property funds, and forhedge funds it is now second only to theCayman Islands.

The focus on funds geared to institutionsand sophisticated investors led to the launchof the Expert Funds Guide in February 2004,following extensive consultations betweenthe industry, local authorities and regulators.The introduction of a light touch regulatoryapproach and an approval process that cantake as little as three days have madeJersey a credible domicile for hedge fundsand an alternative to the Caribbeanjurisdictions that have dominated theindustry in recent years.

Of course, there’s plenty of competitionfor the growing amount of hedge fundbusiness, especially in the European market.Guernsey and Dublin have reacted to thelaunch of the Expert Funds Guide with theintroduction of the Qualified Investor Fundand Professional Investor Fund regimesrespectively.

But Jersey is already seeing rapid growthin business. At the end of March there were261 Jersey hedge funds with a net assetvalue of just under £23bn, while the numberof Expert Funds had grown to 60, including25 funds launched in the first three monthsof the year. Overall, Jersey had £103bn inassets under administration at the end ofMarch.

One of the factors driving this growth isan increased emphasis on corporategovernance, for funds in general and hedgefunds in particular. At the same time, over

the past year or so the UK Inland Revenuehas made a number of high-profilechallenges to offshore funds, notably on theissue of where management control is beingexercised.

The issue is what substance exists behindthe structures put in place in offshorejurisdictions. The fund may be domiciledthere but often, the Revenue argues, actualmanagement is being carried out fromthe UK.

Jersey is very well placed to help in thisarea because it has the experience andexpertise of the island’s professionalsavailable for the management of fundcompanies, thanks to the existence of along-established fund industry and a high-quality base of administrators, accountantsand lawyers.

This opportunity for fund managers tocreate substantial activities in Jersey that canstand up to scrutiny by outside taxauthorities is being taken a step forward bythe initiative to encourage hedge fundmanagers to themselves relocate to theisland.

The island is particularly well placedbecause in addition to the human resourcesand infrastructure of a top-class financialcentre, Jersey also offers a physicalenvironment and quality of life that rivaljurisdictions struggle to match – all withineasy reach of the City of London and therest of the world. No wonder that these dayshedge fund managers are as likely to bringtheir families to Jersey as their funds. ■

P R I C E WAT E R H O U S E C O O P E R S


A credible alternativeBy David Pirouet

David Pirouet, Partner,PricewaterhouseCoopersJersey

“At the end of March therewere 261 Jersey hedgefunds with a net asset valueof just under £23bn, whilethe number of Expert Fundshad grown to 60”

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™Trademarks of Royal Bank of Canada. ® Registered trademark of Royal Bank of Canada. RBC Financial Group is a registered trademark ofRoyal Bank of Canada. RBC Global Services is the business name of Royal Trust Corporation of Canada. The advertisement is issued andapproved in the UK by Royal Trust Corporation of Canada and Royal Bank of Canada Investment Management (UK) Ltd, London Branch, each ofwhich is authorised and regulated in the UK by the Financial Services Authority. Please note services available from each company may differ.

The global custody and fund administrationindustry is undergoing a period of profoundtransformation. In the past decade,custodians have evolved from theirsettlement and safekeeping roots to becomefull service providers of integrated alternativeinvestments, performance measurement andanalytical solutions – adding value to clientrelationships and increasing their relevancein the world’s financial landscape.

Historically, one of the greatest challengesfor a custodian has been to remain relevantto its clients, and to the marketplace. Thosethat did not innovate or adapt have tended tofalter, exit the business or be acquired.Today’s custodians represent thedevelopment and maturity of an industry.

The two primary drivers of changes in thecustody market have been institutionalclients demanding new solutions for amyriad of complex business issues, and theglobal custodian’s need to diversify andexpand its business mix away from coreservices. There is very little competitivedifferentiation around basic custody services,so providers must continue to find new waysto add value to their client relationships.Value-added services are of criticalimportance to the development of long-termclient partnerships.

Another indication of the industry’schanging face is the extent to whichcustodians and their clients are workingtogether in strategic, mutually beneficialpartnerships. No longer relegated to back-room supplier status, custodians today havea seat at the table, helping to developcustomised solutions that make their clientsmore efficient, effective and profitable.

Channel Islands-based custodians andfund administrators have also seensignificant change in recent years. Toremain in this evolving and dynamic

industry, participants must demonstratecommitment to investing in both people andtechnology.

While technology is a vital component ofany servicing arrangement, fundmanagement remains a relationshipbusiness. For custodians and administrators,it has always been about listening to clientsand understanding their business needsrather than trying to guess what they wantor, worse, shoehorning them into a pre-existing service template.

A dedicated relationship manager is aprerequisite to ensure a one-face relationshipon behalf of the administrator, custodian, orbank; corporate clients can benefit from theintegration of all these services through asingle interface. By avoiding the use ofseparate providers and finance lenders,clients can ensure that the service andreporting they receive is accurate andexactly what they require. Centralised clientservicing brings core facilities together andraises the overall quality of service.

Royal Bank of Canada (Channel Islands) isseeing many of its institutional clientsallocate between two and five per cent oftheir investments into hedge fund strategies,moving money away from traditional betastrategies into the alpha offerings ofalternative strategy funds.

RBCCI is seeing sustained demand fromalternative investment managers for a trulyintegrated custody, fund administration andbanking credit/foreign exchange hedgingcapability. In addition, these service offeringsare expected to be global in nature,spanning structures domiciled in theCaribbean, Europe and the Channel Islands.RBCCI is focusing on servicing this nichethrough a relationship that combinesflexibility and scalability with an intimateunderstanding of clients’ specific needs. ■

R B C F I N A N C I A L G R O U P


Integrated solutionswith global scope

By Alan Brint

Alan Brint, Head ofRelationship Management,Corporate and Institutional,Royal Bank of Canada (ChannelIslands)

The domicile and servicing of hedge funds isnot new to Jersey, but in the past the islandhas not been on the radar screen in anysignificant way for hedge funds work. Thathas all changed with the introduction lastyear of the Expert Funds regime, which hasflagged up that Jersey is open to hedge fundbusiness, but has also made substantialimprovements to the island’s attractivenessto this business.

One of the most important changes is theintroduction of a regime that no longerincorporates restrictions on borrowing orinvestment. This represents an about-turnfrom the previous regime, which in manycases prescribed investment and borrowingrestrictions in the name of risk diversification.These rules have been replaced by totalflexibility.

In the past, trying to set up a highlyleveraged hedge fund in Jersey would havebeen an uphill struggle. In addition, the oldregime required that funds use a Jerseycustodian, whereas the Expert Funds ruleshave removed that stipulation provided thatthe fund has appointed a prime broker.

Other changes have made it significantlyeasier for today’s breed of small,entrepreneurial hedge fund manager to setup funds in Jersey. For example, Jersey’s oldpromoter policy, which discouraged non-institutional fund managers, has beenremoved for the Expert Funds regime. Theway is now open for funds to be set up byboutique-style firms or individuals that haveleft an institution like an investment bank togo into hedge fund management. Anotherrule that has been removed for the new

regime stated that a fund manager could notbe wholly owned or majority-owned by asingle individual.

There has also been a lot of focus on thedrastically shortened time scale forregulatory approval. The whole process hasbeen made a lot quicker through theeffective introduction of a four-day maximumturnaround period for approving a fund,something that would have taken betweenone and two months in the past.

The new regime, which took around ayear to draw up from conception toimplementation and which involved extensivediscussions between industry practitioners,the regulator and the island’s politicalauthorities, represents a big change forJersey in terms of regulatory mindset.

The shift is an acknowledgement thatprovided the fund has professional investors,one can allow them to make their owndecisions about the suitability of the fundand its manager. This stands in contrast tothe one-regime-fits-all approach originallyconceived for retail funds, where theregulator effectively had to protect allinvestors to the same degree under allcircumstances.

While Jersey continues to welcomeinstitutional-style managers, the removal ofthe promoter policy is designed to appeal toa wider range of managers. Fund managersstill need to be approved by the JFSC unlessthey are regulated in an OECD membercountry, but experience has shown that theJFSC is willing to approve fund managersquickly provided they can demonstrate therequisite track record and experience. ■

O G I E R S


Expert Funds putJersey on hedge

funds’ radar screenBy Nick Kershaw

Nick Kershaw, Partner, Ogiers

Jersey could imitate the US state ofConnecticut by attracting hedge fundmanagers seeking the benefits of a morerelaxed lifestyle and improved quality of life,according to officials and financial sectorpractitioners based on the island.

Since the end of last year, Jersey hasbeen looking to attract managers looking foran alternative base to London and the ‘homecounties’ of South-East England by promisingto cut the usual red tape involved inobtaining residence and work permits andbusiness licences.

So far three hedge fund managers withassets totalling USD900m have committedthemselves to relocating to Jersey, and theirprincipals are expected to make the moveover the next few weeks, while another fivefirms are weighing up a decision.

Last April Zbigniew Hermanaszewski andhis three partners in Altis, a USD114mmanaged futures fund with a four-year trackrecord, announced they would relocate toJersey in the summer. Hermanaszewski saysthe decision to quit London was promptedby concern over tax levels and the capital’s“creaking infrastructure”.

On the positive side, he told delegates atthe recent annual conference organised inLondon by promotional body Jersey Finance,the island “is a well-regarded financial centre,it is offshore but not foreign, it has a simplelow-tax regime and good communications.But perhaps most important are intangiblessuch as quality of life.”

According to Jersey Finance chiefexecutive Phil Austin, the organisationlaunched the initiative with the Jersey FundsAssociation in response to indications that anumber of hedge fund managers were nolonger happy being based in the UK andwere looking at alternatives such as Geneva.

“We became aware that a number of

hedge fund businesses were looking tomove away, predominantly because ofpersonal and corporate taxes, and theywanted to move to another well-regulatedjurisdiction,” he says. “But ultimately thedeciding factor was lifestyle for themselvesand their families. We haven’t gone out ofour way to provide incentives such as taxholidays, we’ve just made it a lot morewelcoming and less bureaucratic.”

One cheerleader for the island as a centrefor alternative investment management is IanCadby, chief executive of Jersey-basedLiberty Ermitage. The firm, Europe’s 10thlargest fund of hedge funds manager withassets of USD4bn, set up its first hedge fundin Jersey in 1984.

“Connecticut should be the model forJersey,” Cadby says. “It ticks all the sameboxes – its proximity to markets andresearch, the clean tax structure, and theimprovement in quality of life over London orNew York.”

Richard Boleat of Channel House saysthere is a tax imperative to move if one ormore of a fund manager’s principals is notdomiciled in the UK. “The tax treatment ofearned income of non-domiciled individualsin the UK is significantly less attractive as aresult of an Inland Revenue policy change,”Boleat says, adding: “There’s also a desirefor those from an Anglo-Saxon or commonlaw background to remain in a legalenvironment they understand and arefamiliar with.”

Ogiers’ Nick Kershaw believes Jerseycould quickly achieve critical mass as ahedge fund community. He says: “If we seea few more people coming to Jersey, thatcould be the beginning of a snowball effect.That doesn’t necessarily have to be thewhole operation – it could be just part oftheir functions. ■

M A N A G E R ’ S B O X


Is Jersey the newConnecticut?

By Simon Gray

One step ahead in thehedge fund maze

Let us guide you...At Channel House we provide a turn key fund formation and administration service using a team of in-house and external professionals.

By using our knowledge and experience of the regulatory andoperational aspects of the hedge fund world, we can provide a fully comprehensive and flexible infrastructure for hedge fund managers.

Our portfolio of services includes the following:

• Start-up consultation• Offshore regulatory advice• Co-ordination of professional advisers• Prospectus advice• Jersey feeder and master entities• Fund administration• Fund board representation• Fund secretarial support• Proprietary funds• Middle and back office services• Overseas fund distribution• Jersey inward migration• Private trusts• International pensions• Employee incentive arrangements

If you are in the Hedge Fund maze, make sureyou meet with Channel House.

Channel House Financial Services Group Limited,PO Box 532, Channel House, 7 Esplanade,St Helier, Jersey JE4 5UW.

t: +44 (0) 1534 883800f: +44 (0) 1534 883801e: [email protected]: channelhousegroup.com

Channel House Financial Services Group Limited is regulated and licensed bythe Jersey Financial Services Commission in accordance with the FinancialServices (Jersey) Law 1998, as amended.

Contact us to find out more

Jersey’s ‘light touch’ fund domicile regimewas introduced last year with the aim ofmaking the island a more attractive domicilefor hedge funds.

While the regime has undoubtedly beencritical in raising Jersey’s profile as a hedgefund centre, its introduction has also hadwider-reaching effects and has resulted in alarge inflow of hedge fund business, and notpurely of funds domiciled in the jurisdiction.

So what is the attraction between thehedge fund industry and Jersey?

Jersey’s position is significantly different tothat of the Cayman Islands in a hedge fundcontext. Whilst Jersey’s fund domicile regimeis analogous with Cayman’s, the focus isalso on servicing the permanentestablishment issues that are in the forefrontof asset manager thinking, driven byregulatory, corporate governance and taximperatives.

Managers have to take these factors intoaccount when considering their overallbusiness strategies to ensure that theyremain competitive. They are increasinglylooking to jurisdictions like Jersey that haveease of access, a heavyweight professionalservices sector and a pool of experiencedinvestor relations and asset managementspecialists.

Domiciling funds in the same jurisdictionas asset management and servicing entitiesis a natural corollary. Jersey’s strongcorporate governance and regulatedenvironment, plus its accessibility to Europeand tax advantages, make it a natural fit forthe hedge fund manager.

This model also fits well with ChannelHouse, an independent financial servicesgroup established in 1977. It differs frommany other players in the industry byproviding not only ‘traditional’ services such

as fund domiciliation, administration and fundboard services, but more tailored servicessuch as fiduciary and permanentestablishment work. As a result, it attractslarger, often institutional fund managers,while some smaller or cost-consciousorganisations may go elsewhere.

Jersey enables a lot of things to be donein one place, and the size of the financialresources sector means that Jersey hasstrength in depth to deliver City standardservices within easy reach of Londonairports. Channel House has structured itsbusiness and hired quality people to enablethe group to deliver across the range ofservices required by hedge managers.

Today, Channel House’s hedge fund unitoffers a wide variety of services to around 18hedge fund groups, managing fromUSD100m to USD5bn. This is typical of therange of businesses found in Jersey. Hedgefund firms operating out of Jersey andmanaging USD20m or USD30m are verywelcome, but are untypical.

This is also reflected in a preponderanceof single manager funds using Jersey asopposed to funds of hedge funds. Bundlingtogether hedge assets and distributing themto a wider client base will not in ChannelHouse’s view be Jersey’s primary focus.Although some Jersey-based players, suchas Liberty Ermitage and Ashburton, do thisvery well, most organisations will probablywant an EU compliant platform and look toDublin or Luxembourg as a natural domicile.

Channel House has already facilitated theset up of permanent establishments for anumber of hedge fund groups, and there iscurrently a high level of interest both fromexisting UK-centric businesses and from USinbound entities, so significant growth isexpected. ■

C H A N N E L H O U S E


Jersey and ChannelHouse: a natural fit

By Richard Boléat

Richard Boléat, Principal,Channel House FinancialServices Group

The UK firm Ernst & Young is a limited liability partnership and member of Ernst & Young Global

We provide assurance, advisory and tax services to fund managers and third party administrators based in the Channel Islands. We have detailed knowledge and experience of the fund structures available and of the key industry issues and considerations.

Our services include: Auditing, business assurance and

advisory services

Advising on structuring, including

taxation, accounting (International

Financial Report Standards) and

regulatory matters

Corporate governance advice

Information systems

Internal controls reporting

Introductions to lawyers, fund

administrators and custodians in the

Channel Islands

Investment performance reporting

Obtaining taxation clearances

Review of investment fund documentation

Seeking ‘in-principle’ consent from

the Islands’ authorities for investment

fund proposals

Contacts:Andrew Dann (Partner)

Direct Line: +44 1534 288655

E-mail: [email protected]

John Shenton (Tax Director)

Direct Line: +44 1534 288696


Peter Franks (Partner)

Direct Line: +44 1481 717441


Graham Parrott (Tax Partner)

Direct Line: +44 1481 717490


www.ey.com/funds

www.ey.com/channel_islands

Our Services to the Hedge Funds Industry

!@#

The launch last year of the Expert FundsGuide has given a massive boost to Jersey’shedge fund industry by removing a numberof key constraints on the domiciling andservicing of funds on the island.

But it has also proved the catalyst to setright a number of important misconceptionsthat have dissuaded promoters from usingJersey as a hedge fund centre.

First, it has been a perception that Jerseylacks administrators with the experiencenecessary to service hedge funds. However,there have been a significant number ofhedge funds already on the island for manyyears. In total, about £23bn in assets isalready in hedge fund structures eitheradministered on the island or in Jersey-domiciled vehicles that are administeredelsewhere. That’s a fifth of the total net assetvalue of Jersey funds.

Société Générale, Liberty Ermitage,Deutsche Bank and Standard Bank have hadhedge funds for many years. Now, with theExpert Funds regime as well as the non-domiciled fund rules that provide theopportunity for administrators to servicefunds from other jurisdictions, increasingvolumes of new hedge fund business arecoming to the island.

In fact, this huge influx of new businesshas created a perception in the UK andelsewhere that there are capacity issues thatcould prevent Jersey administrators takingmore work. Again this is unfounded,because there are a significant number ofservice providers that are looking to gear upin terms of both people and systems.

While there’s always a difficult balancing

act to match resources with the flow of newwork, efforts are already underway to ensurethat the capacity exists to accommodatemore hedge funds and other alternativeinvestment vehicles on the island. One wayof resolving this issue has been found byadministrators on the island who can call onextra resources through ties with verysubstantial hedge fund administrationoperations in Dublin.

As a result, Jersey is now very much inthe minds of lawyers in London whospecialise in hedge funds. While a recentsurvey of law firms indicated that theCayman Islands are still the most populardomicile for hedge funds, Jersey is actuallygetting a mention. Two years ago it wasn’teven on the radar screen, but now peopleare talking about us.

It’s also been necessary to overcomemisconceptions in order for Jersey toencourage hedge fund managers to relocateto the island. A number of our clients areconsidering setting up in Jersey, and twohave already done so. There’s no doubt thatthe quality of life and the various fiscaladvantages make Jersey a very attractivelocation.

But there are a lot of other considerations,including schooling. The education systemhere is excellent, but there has been theperception that it’s very difficult for newarrivals to find places for their children. Infact this is not the case - hedge fundmanagers have found no problem in gettingtheir children into schools. This all goes tomake relocation a very attractive propositionfor managers currently based in the UK. ■

E R N S T & Y O U N G


Putting right themisconceptions about

JerseyBy Andrew Dann

Andrew Dann, Channel IslandsManaging Partner, Ernst &Young

Structured support

Standard Bank Fund Administration Jersey Limited is registered with the Jersey Financial Services Commission under permit as a functionary of collective investment schemes and to conduct trustcompany business. Standard Bank Plc, a company authorised and regulated by the Financial Services Authority (“FSA”) and entered in the FSA’s register (register number 124823) has approvedthis document for distribution in the UK. For your protection communication by telephone may be recorded.

Hedge fund services structured for client needs

Standard Bank Offshore is at the forefront in the provision of administration and custodian services to hedge and other

alternative investment funds. Our high quality service will be structured for your needs and delivered through our highly

experienced staff and sophisticated systems.

Our administration and custodian services comprise:

• Advice on structuring • Valuation and accounting • Shareholder dealing

• Transfer agency • Global custody • Fee calculation

• Corporate trusteeship • Full banking services

For further information please contact: Peter Hart, Managing Director, Standard Bank Fund Administration Jersey Limited,

Standard Bank House, PO Box 583, 47 - 49 La Motte Street, St Helier, Jersey JE3 8XR, Channel Islands,

Direct telephone: +44 (0) 1534 881400, Facsimile: +44 (0) 1534 881119, E-Mail: [email protected]

www.sboff.com

Our perspective on the hedge funds sectorin Jersey is perhaps different from those ofmost of our competitors. Standard Bank isan emerging markets bank, with offices andactivities in many locations around the world,and is active in trading in areas such ascommodities, energy and emerging marketdebt. These factors have prompted theestablishment in Jersey of a number of fundsthat invest in these markets, commoditiesand instruments, many of them in recentmonths.

These funds are active in a broad rangeof markets such as Eastern Europe, Africa,the Far East and Middle East. Hedge fund isoften a misunderstood term, but many ofStandard Bank’s Jersey-based funds haveperformance fees, use leverage and dealwith prime brokers, all characteristics of whatare usually called hedge funds, while someof them also use short-selling.

Our alternative asset-based funds include,unusually, a trade finance fund that invests inshort-term trade finance paper, backed byphysical goods of which the fund can takecontrol in the event of default. In total,Standard Bank has some eight funds thatcan genuinely be called hedge funds, withabout USD500m in net assets.

This activity gives Standard Bank in Jerseyan insight into the needs in particular ofstart-up managers who are coming to theisland in increasing numbers. This trend isbeing encouraged by the attitude of manyhedge fund administrators in Dublin, whichalready have well established and maturebusinesses and seem to prefer dealing withonly the bigger and more established

managers. By contrast, Jersey serviceproviders prefer to grow along with theirclients.

At the same time, Jersey benefits from itsflexibility and willingness to accommodate avariety of business models. Some providershere, for example, outsource theiradministration activities to operations inDublin. Standard Bank Fund Administrationwould be happy to deal with a fund whetherit wanted the administration to be carried outon the spot in Jersey or preferred to havesome aspects of its business outsourcedelsewhere.

But equally, we can help a hedge fundmanager starting from scratch to get itsbusiness underway, assist in integration withprime brokers, and provide aspects of aphysical presence such as office space andadministrative or payroll services. This is onlyone of the business models currentlyavailable in Jersey, but offering a one-stop-shop is an important marketing tool for theisland at the moment. Managers can obtaina full range of services from a single provideror pick and choose if they prefer.

It’s important to remember that whilehedge funds may be the buzzword today,both at Standard Bank and in Jersey wehave experience of these types ofinvestment going back many years. In thisrespect, one of the most important aspectsof the launch of the Expert Funds Guide lastyear was in reminding people that you canin fact do hedge fund business here, andthat some people have been doing so forquite a long time. It’s not as though Jerseyhas suddenly leapt onto the bandwagon. ■

S TA N D A R D B A N K


Jersey’s flexibilityattracts start-up

managers By Peter Hart and Andrew Bennett

Peter Hart, Managing Director,Standard Bank FundAdministration Jersey

Andrew Bennett, Director,Standard Bank FundAdministration Jersey

Efficiency...that’s our stock in trade

The CISX provides screen-based trading and the listing of investment funds,

specialist debt instruments and shares in companies.

Our approach is highly personalised, offering fast-track processing

of applications within a highly regulated and innovative marketplace.

Visit our website or contact us for details.

P.O. Box 623, One Lefebvre Street, St Peter Port, Guernsey GY1 4PJ

Guernsey Tel: +44 (0) 1481 713831 Jersey Tel: +44 (0) 1534 737151

Fax: +44 (0) 1481 714856

www.cisx.com

Last year was one of remarkable growth forthe Channel Islands Stock Exchange (CISX),and 2005 looks as though it will maintain thatmomentum.

In the first half of this year, the exchangelisted some 220 new securities, and theintroduction last year of Jersey’s Expert Fundsregime appears to have played a significantpart in the CISX’s vigorous growth.

Today the exchange lists a wide range ofhedge funds and funds of hedge funds fromleading managers including ManInvestments, Thames River Capital, GLGPartners, Collins Stewart, HSBC, Close,Jupiter and Morley. Hedge funds arecontinuing to drive growth in fund listings,alongside other alternative classes such asproperty and structured products.

In May, for example, the CISX listed nofewer than 17 new open-ended funds. In thepast, we’ve mostly seen hedge fundsstructured as closed-ended products, but thetrend toward open-ended funds reflectsincreased interest in funds of hedge funds.

There are definite signs that the fundsbusiness has been stimulated by the launchof the Expert Funds Guide. While not everynew fund that is established is applying tous for listing, there is an evident linkbetween new launches and new listings, anda clear correlation between the introductionof the regime and more hedge fund businesscoming to us.

An important factor in the growth of thisbusiness is the recognition by the authoritiesin Jersey that the expectation level in termsof services has been ratcheted upconsiderably. People want quality, but theyalso want efficiency. They want a jurisdictionthat recognises the difference between retailand institutional business, that really speedsthings along and is not bogged down inbureaucracy. If we don’t meet these high

expectations, the business will goelsewhere.

The presence of the exchange adds to thebenefits for a hedge fund being established inJersey. Of course, any stock exchange listinggives a product visibility and the ‘kitemark’ ofquality through the public disclosure ofinformation to investors, which gives a listedsecurity an advantage over an unlistedsecurity in terms of marketing and distribution.

At this exchange in particular they alsoenjoy the benefits of a one-stop shop. Theissuer aims to do as much as possible inthe same jurisdiction to boost efficiency andto save on costs – not only regulatory costs,but the consolidation of compliance costs ina single jurisdiction rather than being spreadout over several.

From the regulatory point of view, Jerseyoffers a very robust regime, but onetempered with a degree of common senseand pragmatism that you don’t often see inother jurisdictions. That’s mirrored here atthe exchange, where we aim to be asflexible as possible about innovativestructures and how they may fit within ourrequirements.

The CISX listing rules favour a disclosureregime rather than featuring long lists ofprohibitions, although obviously productshave to comply with the spirit of our rules.But there are no overt restrictions oninvestment parameters, accounting standardsand so forth. Flexibility is what productdesigners are looking for, and that’s whatwe offer.

Nevertheless, the listing rules and theexchange’s operations have won recognitionfrom regulators in countries such as the USand UK, reflecting a combination of flexibilityand responsibility that enables the CISX todeliver an extremely professional, high-qualityservice. ■

C I S X


Spirit of flexibilitykeeps listings growing

By Tamara Menteshvili

Tamara Menteshvili, ChiefExecutive, Channel IslandsStock Exchange

in the offshore jurisdictions where they aredomiciled.

He says: “Frankly, there are things that, if Iwas starting with a blank sheet of paper, Iwould do differently, like having whollyindependent fund boards. In other industriescompanies simply wouldn’t get away withsome of the conflict of interest issues thatare still regularly seen with hedge funds,such as managers sitting on fund boards.

“Jersey can say, ‘We’re not going to do itthat way, because it’s not in the bestinterests of investors, and it’s not really inthe best interests of managers either.’ If thetrend worldwide is toward the elimination ofconflicts of interest and strengthening ofcorporate governance, Jersey has capturedthe zeitgeist.”

Says Andrew Dann, managing partner ofErnst & Young in the Channel Islands:“Corporate governance is an increasinglyimportant consideration. You need to ensurethat companies are run in a proper way.Governance should be on the agenda of allhedge fund boards.”

He adds that while this is bolstered by arequirement that funds must have Jerseydirectors, for some this may be viewed as adisadvantage. It may not be an insuperableone: “There is talk of introducing an ultra-expert fund regime that would include verylittle regulation and restrictions. That wouldbe aimed at ultra-wealthy investors whorecognise the risks involved and know it’s upto them to do their homework on themanagers.”

PricewaterhouseCoopers partner DavidPirouet notes that Jersey is in a betterposition than the Cayman Islands to benefitfrom increased scrutiny of offshore fundsfrom the tax authorities. He says: “Therehave been a lot of high-profile challenges bythe UK Inland Revenue to the substance ofsome offshore funds and whethermanagement control is actually beingexercised in the jurisdiction of domicile.”

Jersey has the experience and expertiseof professionals who can demonstrate thecapability of running the fund companies,and, Pirouet says, for European-basedmanagers it is a considerably morepracticable place to hold board meetingsthan the Cayman Islands.

While practitioners in Jersey are keen to

vaunt the advantages the island holds as ahedge funds centre over competitors suchas Cayman, Dublin and Luxembourg, someof them admit they regard Jersey as part of aChannel Islands package with neighbouringGuernsey.

Says Alan Brint, head of corporate andinstitutional relationship management atRoyal Bank of Canada: “We have alwayslooked on the two islands as beingcomplementary, not competitors. Our custodyoperations are primarily based in Jersey,whereas fund administration is based inGuernsey. But the two work side by side inoffering services to funds whether they aredomiciled in Jersey, Guernsey or Cayman.”

The RBC approach, which also uses backoffice capabilities in Toronto and London,reflects the variety of business models seenin Jersey’s fund services sector. Someproviders offer a full range of servicesdelivered by staff on the island, while othersoutsource some or most of the work tooperations elsewhere, mainly in Dublin.

Says Dann: “On one hand State Street hasan office here but outsources everything toDublin, and other fund administrators haveclose associations with Dublin-based firms.Other administrators perform a limitedamount of work here and review and releasethe net asset value, but all the calculationsare done elsewhere. Still others, likeNorthern Trust and AIB, have the

O V E R V I E W


6 ➧

“If the trendworldwide istoward the

elimination ofconflicts ofinterest andstrengtheningof corporategovernance,Jersey has

captured thezeitgeist”

experienced people and systems to providethe capability on the island.

“Many firms have detailed, highly complexcalculations such as performance feeequalisation carried out in Dublin. However,a few players are contemplating increasingthe number of experienced people andupgrading their systems in order to doeverything in the Channel Islands.”

Says Andrew Bennett, a director ofStandard Bank Fund Administration Jersey:“What this demonstrates is the island’s abilityto be very flexible in the service offering itprovides to managers. We deal with fundsthat want the administration to be carried outin Jersey, but equally we could look aftercertain aspects of the fund and have otherservices outsourced.”

The next step for the industry will be toexamine whether and how the Expert Fundsregime needs to be fine-tuned. Says Ogier’sKershaw: “We would like the regulator todrop the requirement for every fund managerto be authorised in an OECD country or bythe Commission itself. In practice I don’tthink the Commission has ever rejected afund manager that met all the other tests.”

Austin says there have long been plans toreview the regime once it has had time tobed down. “We’ve agreed with [JFSC chiefexecutive] David Carse that once the regimehas been in effect for about 18 months, weneed to sit down and analyse how effectiveit has been,” he says. “One question wehave to ask is whether the new funds wouldhave come here anyway, or whether they’vecome because of the Expert Funds Guide.”

He adds that the rules could be tweakedbeneficially in the area of servicing non-domiciled funds (mostly from the CaymanIslands), for which the Commission unveilednew rules in June 2004. “At the momentthere’s effectively double regulation on thesetypes of funds – they’re regulated inCayman, then we apply a regulatoryoverview here,” Austin says.

“We’re saying to the regulator that if afund is domiciled and regulated in Cayman,you don’t need regulatory oversight here, atleast not to the current extent. The wholepoint of the new rules is that the focusshould be on regulation of the serviceprovider, not individual funds. Fundadministrators here are licensed, so

regulation should concentrate on whatthey’re doing.

“Barclays has a banking licence, and theJFSC doesn’t ask to see every bank accountthey open - they simple go in once a year toconduct regulatory checks. We would likethe same principle to be applied to non-domiciled funds, and the regulator issupportive, but of course it takes time towork through.”

Practitioners are confident that Jersey’scombination of a flexible supervisory regimewith a strong underlying commitment to thehighest international standards will continueto attract hedge fund business, especially asgrowing investment from institutions such aspension funds makes regulation moreattractive to fund managers.

Says Boléat: “Clients often ask mewhether strong regulation will make it moredifficult for them to do things. My answer is:‘If you do things properly, no.’ The otherthing they typically want to know is whetherit will cost them more than it currently costsin Cayman. And here again, my firm’s view isan emphatic no.

“We have to offer a competitive platform.We don’t expect people to pay a premium ina jurisdiction that historically is not anestablished hedge fund centre of excellence.Why should we expect them to? We need toprove ourselves and compete effectively, andso far we’ve done that. Building confidenceamong the hedge fund community is anincremental process, of course, but after 15months or so, the jurisdiction’s made aseriously good start.” ■

O V E R V I E W


“We dealwith fundsthat want

theadministrationto be carriedout in Jersey,but equallywe couldlook aftercertain

aspects ofthe fund andhave otherservices

outsourced”

jersey hedge fund services€¦ · by richard boléat, principal, channel house financial services...

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