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| Funds: Where next?
| ADVOCATE ANDREW WEAVER
Ogier & Le Masurier |
Jersey’s beneficial tax regime and strong reputation in regulatory matters has for many years made it a premier domicile for the establishment of investment funds.
Initially Jersey’s investment funds industry was focused on the provision of services to funds aimed at retail investors and the big players in this market (such as Fidelity, Invesco and Barclays) made substantial use of Jersey’s investment funds industry. Development in onshore taxation of investors in offshore funds, the introduction of a European Directive (UCITS) governing the marketability of investment funds established in an EU jurisdiction to retail investors throughout Europe and the relatively high cost of doing business in Jersey has over time lead to a migration of most of Jersey’s retail funds to European funds centres such as Luxembourg and Dublin.
As one area of business declined, Jersey’s funds industry has progressively identified new markets. During the 1990s Jersey’s competitive position based on its strong reputation, regulatory regime, depth of expertise in legal, investment, administrative and custody services and tax neutrality led to the development of funds targeted at high net worth and institutional investors in particular in the private equity and real estate fields. Typically these funds were marketed to small numbers of investors and require a hands-on tailored approach both to the establishment and ongoing administration. They are, therefore, highly suited to Jersey’s higher cost but higher value added environment.
However, during the same period we saw the rapid growth of other jurisdictions where the promoters of investment funds took advantage of lightweight regulation and low establishment cost for funds marketed at these ‘expert’ investors. The result is the creation of a number of tiers to the offshore funds industry. Retail funds were and continue to be created and administered from the UCITS-friendly jurisdictions of Luxembourg and Dublin. Lightly regulated funds marketed at institutional investors tend to be created in the Caribbean jurisdictions of the Cayman Islands and the British Virgin Islands. Until this year, Jersey has sat somewhere in the middle, building a strong reputation in the private equity and real estate sectors, as well as providing administration and other services to funds from the Caribbean region where the infrastructure in those jurisdictions was not suitable.
The popularity of alternative investments has been spurred by the volatility in traditional investment markets over the past few years and the stable, relatively low, interest rates that currently prevail over the world’s leading currencies. In particular, absolute return strategies, designed to generate returns for investors regardless of the stage in the investment cycle of traditional investments, have proved especially popular. However, alternative investments such as these are perceived to be the speciality of smaller, less heavily regulated investment managers and are perceived to expose investors to a greater investment risk. In addition, events such as the collapse of Long Term Capital Management in 1998 have raised fears of a systemic risk created by these hedge funds. For these reasons, it is likely to be some time before the holy grail for hedge fund managers, the retail hedge fund, will be authorised by onshore regulators. As a result, the opportunities remain for offshore jurisdictions such as Jersey to exploit the small differences, such as willingness to do business, light footedness and inventiveness.
As a result of the growth in popularity of alternative investments in the private equity and real estate fields and in addition the demand for hedge funds as described above Jersey’s regulator, the Jersey Financial Services Commission, has introduced new regulatory guidelines to allow the establishment of expert funds targeted at expert investors and those with the financial wealth to commit at least US$100,000 in investment. While other jurisdictions have also recognised the popularity among investors for investment vehicles investing in alternative investments, Jersey is now very well placed to build its position in this market. The balanced approach taken by the commission means that Jersey expert funds can be established more quickly to exploit an opportunity in the market than equivalent funds in Luxembourg, Dublin or Guernsey and at the same time investors can take some degree of comfort that an appropriate level of regulation is being applied in comparison to the equivalent vehicles in the British Virgin Islands and Cayman Islands.
Recent scandals involving offshore centres have resulted, and, it can be expected, will continue to result in international pressure to raise standards of regulation. Jersey has been at the forefront here, and has nothing to fear. The more lightly regulated Caribbean jurisdictions can be expected to increase their regulation over time potentially eroding that competitive advantage.
Generally speaking, increased regulation leads to increased cost. To remain competitive, these costs must not be passed on to the consumer, either investment manager or investor. It will be necessary, therefore, for participants in the industry to identify ways to reduce overheads while also accepting greater regulation. However, Jersey is starting from a higher regulation, higher cost position, and the lower regulatory burden of the expert fund regime should, it is hoped, lead to lower costs for the participants in the industry.
Ultimately, those centres that will thrive are those that can demonstrate an appropriate balance between the cost of doing business and the benefits of doing business, including the integrity of the players in the market, adequate but not excessive regulation and a beneficial tax environment. It is by optimising this balance that Jersey will stay ahead of the game.
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