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Following the introduction of the unregulated fund regime in February this year, Jersey’s fund industry has been able to boast as wide a range of investment options as any offshore jurisdiction. With this in mind, HFMWeek gathered four of Jersey’s leading fund experts to discuss the island’s progress
Nigel Strachan has been with Kleinwort Benson for seven years and his role is head of business development for corporate clients in Jersey.
HFMWeek (HFM): What are Jersey’s strengths as a funds centre? What does it offer potential fund managers that other offshore domiciles lack? Andrew Weaver (AW): Jersey is, in some ways, all things to all men. In terms of fund products it can offer a range of options, from a totally unregulated fund for highly sophisticated or institutional investors, through lightly regulated vehicles (such as the Expert Fund) all the way to UCITS equivalent Recognised Funds. It also offers, on the island, a wide variety of expertise in fund service providers, both institutional and independent, who can provide administration, custody, banking accounting and legal services. These service providers are highly sophisticated and operate to the highest levels of quality and responsiveness. Steve Wilderspin (SW): Jersey’s main strength as a funds centre is the depth and breadth of experience of professional service providers. The fund industry in Jersey has been built over 30 years, starting with traditional retail funds then evolving as a centre of choice for private equity and property funds. Recently, hedge fund managers have been attracted to Jersey as they have recognised this experience and also because Jersey can offer a ‘one-stop-shop’ to host fund domicile, residence and administration, management company operations and the personal affairs of principals. ‘Incubator’ services are available to establish an initial real presence on the island without expensive infrastructure. Nigel Strachan (NS): Short flight times from London and a robust financial services infrastructure are among a host of benefits that Jersey affords its fund clients. As a fund jurisdiction, Jersey’s strengths include: • A great location in terms of time zone for European and US managers looking to have an offshore presence close to Europe; • being well regulated, supported by top-tier international banking groups – Jersey can provide access to global treasury services for foreign exchange and other products, access to global custody systems and online securities settlement, online electronic banking and other sophisticated financial services and facilities that support the diverse requirements of the fund promoter; • strong representation on the island from the big four accountancy firms; • the island has built up an experienced range of fund administrators, both as part of the services supplied by major custody banks and from boutique groups; • circa 12,000 people work within Jersey’s long-established finance industry, delivering the breadth and depth of services that have helped to position the island as a location of choice for funds businesses. Through the legislative changes and recent regulatory enhancements, Jersey is now well placed to establish itself internationally even more widely as a centre of excellence for fund services;
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Andrew Weaver is a partner at Appleby and heads the Funds and Investment Services Team in Jersey. He specialises in real estate, hedge and private equity funds.
Steven Wilderspin is a chartered accountant and MD of Active Services (Jersey). Active provides regulatory, management and business support services and Steven acts as an independent fund director.
Mark Chambers joined Ozannes in 2007 as a partner to boost its rapidly expanding team. He specialises in banking, corporate, commercial, structured finance and investment funds.
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JERSEY FOCUS
• in addition, clients have access to comprehensive legal support from experienced law firms that can advise on legal structures that will best suit an investment strategy, together with advice on seeking appropriate regulatory approvals. Jersey’s lawyers work closely with law firms in the world’s major centres, such as New York, London, Tokyo and Hong Kong. Mark Chambers (MC): Jersey has numerous strengths to offer as a funds jurisdiction. These include: A Standard & Poor’s rating agency (sovereign rating of AAA); a world-class finance centre with political and economic stability; good infrastructure; established and experienced service providers; a strong framework of statutory laws; neutral tax treatment; a strong and flexible regulator (the Jersey Financial Services Commission); and familiarity of Jersey’s commercial laws. Also, the recent changes in regulation of fund functionaries mean that it is easier to do business in Jersey with a one-off authorisation required for the conduct of any functionary business. HFM: The recent financial turbulence is forcing an increasing number of fund managers to liquidate assets, ultimately driving values down. How significant is this turn of events and how are funds coping? SW: Obviously, this turn of events is significant, particularly in sectors of the industry that were thought to be lower risk, such as property funds. In this environment we can see the stresstesting of service providers as they react to events. In these circumstances it is crucial that those charged with ultimate responsibility for the funds, the directors, are capable of taking wellconsidered, clear and decisive action. Directors have to be monitoring the performance of the fund, administrator and manager, and pro-actively manage problems when they arise. Fortunately, Jersey has a pool of directors that can deal with these situations. As well as practising lawyers, accountants, administrators and investment managers, there are an increasing number of professional independent directors who devote their whole time to their board positions. MC: We have certainly seen a number of funds suspend valuations and dealings due to market turbulence. Ultimately, the degree to which a fund is affected depends on its underlying asset classtion needed without the intrusion of regulation which may not be suitable for the particular circumstances. However, parties can gain comfort from the fact that any service providers operating in Jersey will be subject to the full ambit of the Jersey regulator’s powers and codes of practice. MC: The regime has certainly proved attractive to promoters. Our office has seen an increased number of enquiries and instructions to establish unregulated funds over the past few months. Its principle benefits are the speed with which a fund can be established and launched, particularly from the perspective of the exchange-traded category of unregulated funds, which enables listing on a number of recognised exchanges. The regime allows clients to dictate the speed by which the structural and offering documentation can be drafted. The introduction of the regime enables Jersey to compete with other offshore jurisdictions which offer a form of ‘registered’ fund product, and means promoters are free to choose the functionaries to the fund as they see fit. We feel that this is an exciting area of growth, even in turbulent financial conditions. NS: The regime has been successful in attracting certain hedge fund managers that would have historically used Cayman but are now able to use Jersey. The island not only provides a prime location for funds governance but also all the benefits previously listed. HFM: Have the advantages that the unregulated fund regime offers European fund managers helped Jersey make ground on European industry leaders Luxembourg and Dublin? NS: Time will tell. The suite of fund products that Jersey offers is very comprehensive and gives promoters a number of options, both in terms of structure and regulatory regime. The fund industry continues to grow, despite the credit crunch, with a number of promoters now looking at investing in distressed assets. AW: It is a little too early to consider the impact in this area. When it comes to fund servicing, the historic advantages of Luxembourg and Dublin are being squeezed; capacity issues and additional expense mean they have become victims of their own success. The surge in new fund administration businesses establishing in Jersey over the last 18
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months shows that the market participants certainly think the future is very bright. As for fund domicile matters, Jersey has an outstanding range of options discussed above and the efforts of the JFSC and the Jersey government to obtain international recognition are likely to further improve the outlook. HFM: What challenges do you see Jersey’s fund industry facing in the coming year in order to sustain stability? MC: The recent financial turbulence has made it more difficult for promoters to meet the capital-raising targets that they have set within their desired timeframe. This is likely to have a knock-on effect on the number of funds established over the next few months – a common characteristic of the funds industry worldwide. In addition, established funds may experience difficulty finding liquidity in order to meet redemptions and possible suspensions of valuations and dealings, so existing structures will continue to be tested for their resilience to market conditions. However, we are seeing a number of unregulated funds looking to invest in alternative asset classes, which will offer new opportunities in the coming months. SW: Given that the strength of Jersey’s fund industry relies on the people it employs, the key challenges are to recruit the best people and to retain them in difficult and stressful market conditions. Industry participants and the regulator also need to continually question how they can make doing fund business in Jersey easier and more efficient without increasing risk. AW: Government intervention in financial markets and support for banks in difficulty will lead to increased national debt, resulting in a need for greater tax take for onshore jurisdictions – this is likely to result in further attacks on offshore jurisdictions as those governments fail to recognise the need to simplify and re-order their own tax regimes. The semi-nationalisation of international banking and financial institutions may increase the influence of government policy on the capital markets and have a corresponding impact on the fund industry globally and in Jersey. The election of a new president in the US (and the increased Democratic hold over Congress) are also likely to have some impact, although this may be less immediate to Jersey than it will to the financial centres closer to the US. NS: The key is to remain flexible and be able to adapt to the ever-changing financial landscape. As certain asset classes fade, others will rise to become more popular. The key for Jersey is to maintain an infrastructure that can support the varying demands of fund promoters. We have done so successfully so far. ■
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es. This has had a significant impact on funds, particularly where asset classes are relatively illiquid and are creating a strain on the ability to fund redemptions. This is a global phenomenon rather than something particular to Jersey-based funds, and may remain pertinent for some time yet. We have witnessed a marked increase of work in respect of distressed debt-related funds and internalisation of management function for closedended funds. NS: The third quarter of 2008 saw a number of hedge funds facing record redemption notices as investors looked to liquidate their positions. That coupled with prime brokers increasing margin calls put pressure on hedge fund managers to liquidate underlying positions creating significant downward pressure on stock prices. AW: Difficulties with valuation are leading to margin calls and suspension of redemptions and potentially to the need to wind-up the fund. A winding up may take months or years while the positions are realised, unless investors receive distributions in kind (and even these are likely to be contentious, with investors disputing whether they have been fully redeemed and are liable to claim the status of unpaid creditors). We are seeing hedge fund clients affected by the credit crunch principally in terms of their exposure to what were intended to be liquid investments which could not meet the stated redemption provisions; the legal ramifications are principally disputes over the rights and wrongs of suspended redemptions, and how, or in which fo-
rum, these disputes should be resolved (whether by offshore or onshore regulators and courts). HFM: How successful has Jersey’s unregulated fund regime proved? What are its key benefits? SW: Jersey’s unregulated fund regime has completed the regulatory spectrum of fund products that can be domiciled in Jersey. At one end of the spectrum, fund managers can now launch completely unregulated funds to sophisticated investors, broadly those who can invest a minimum of US$1m; at the other end is the recognised fund for retail investors. In between there are other options for expert investors, private structures or listed funds. Twenty-six unregulated funds have been launched up to the end of September; a good number given the market conditions. The key benefits with this regime are its simplicity and its flexibility. A qualifying fund just has to make a simple filing prior to launch and it can engage service providers in any jurisdiction. It does not have to have a Jersey administrator, manager or even Jersey directors. Obviously Jersey service providers argue that they are ideally placed to provide these services. AW: The regime has proved very successful already. It can be expected that the success of the expert fund (591 separate investment pools established under this regime since introduction in 2004) will be repeated. The key benefits are that eligible investors and fund managers can establish between themselves the most appropriate balance of legal and operational protecwww.hfmweek.com
The suite of fund products that Jersey offers is very comprehensive and gives promoters a great number of options
SW: A completely unregulated fund product is attractive to a fund manager relative to other options in Luxembourg or Dublin; however, a fund domicile is driven by a number of factors, not just regulatory considerations. The success of the regime alone will not necessarily mean a huge increase in Jersey’s market share of the fund servicing business, simply because it allows unregulated funds to employ service providers in any jurisdiction. Any ground made up on Dublin and Luxembourg will have to be won by Jersey’s service providers competing on the quality of their service. The fund industry in Jersey is confident it can meet that challenge. MC: I would agree that this has placed Jersey more firmly on the map as a competing jurisdiction with other European fund jurisdictions and international finance centres. The cost of establishing a fund here is comparable to those in other European jurisdictions and we have the ability to bring funds to market quickly. We also feel that the unregulated funds regime adds a further element to the suite of fund products that allow Jersey to cater for different types of promoters and investors. Generally, Jersey has seen a marked increase in the influx of funds and this is backed up by the statistics issued by the JFSC. Most of these funds tend to be structured as expert funds or, more lately, unregulated funds, so we, at Ozannes, feel Jersey is making ground on its immediate European rivals.
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