August 2007

FUND CENTRES: Offshore Wars

The Isle of Man has introduced a 0% corporate tax rate to attract more asset management business. Angelique Ruzicka looks at how competition between offshore centres is intensifying 07_08_fund_centresThe Cayman Islands remains the dominant offshore centre in the hedge funds sector. In September last year it registered its 8,000th hedge fund, making it home to two-thirds of the world’s entire industry. The Cayman formula is simple. Matthew Judd, partner at London-based law firm, White & Case, says: “The Caymans is an obvious choice – you can’t go wrong. They do things very quickly, they have good lawyers and auditors, and you don’t need to have local directors or use local administrators.” RCM, the fund management firm owned by financial services giant Allianz,  finally settled on the Cayman Islands to domicile its hedge funds. “We looked at the Caymans, Luxembourg and others,” says Neil Dwane, CIO Europe at RCM. “But we went for the Caymans in the end because it’s easier to launch a complex product there and there are fewer taxation issues. There is also easy access to lawyers, and all the familiar bits of infrastructure are present.” Currently, few anticipate any offshore European centres coming close to having the power to attract hedge funds and their administrators like the Cayman Islands, but some jurisdictions are seeking to challenge it for other investment management business. Jersey and Guernsey
Jersey has set itself apart as a specialist, catering mostly to private equity and property funds. The figures provided by Jersey Finance  in March this year show that the net asset value of funds under administration and the total level of bank deposits were approaching the £200bn (e297.7bn) milestone. Increasingly, the island is also attracting hedge fund managers and administrators. LaSalle Global Fund Services expanded its global fund administration business into Jersey in June this year to service locally domiciled hedge funds and other alternative investment funds. “There are a number of factors that attracted us to Jersey,” says Michael Rothwell, managing director of the firm’s Jersey business. “We found that it fitted with the global role of our business. We recently opened offices in Chicago and the Caymans and in late 2007 we hope to set up in Hong Kong and Singapore. Jersey is a key jurisdiction for alternatives, with experience in credit derivatives and hedge funds. “We believe Jersey will further expand for hedge funds, Jersey has greatly eased its regulatory burden and made it easier to set up alternative funds and its reputation has grown. They have immense expertise and resources and Jersey will always hope to compete with Cayman.” Simon Howard, investment funds lawyer of Appleby in Jersey, adds: “Jersey has around £46bn in hedge fund assets and that reflects well considering we are late entrants into the hedge fund space.” The Cayman Islands may well have the upper hand over many other European jurisdictions, but industry commentators appear to be at least impressed by Jersey’s progress. According to some commentators, Guernsey is not quite as advanced as Jersey at serving hedge funds, but lately it has gained some notable attention since private equity firms KKR and Apollo established themselves in the region. Ben Morgan, partner at law firm Carey Olsen, says: “We only scratch the surface when it comes to catering to hedge funds, but Guernsey is now on people’s radars. We have seen lots of US firms wanting to domicile in Guernsey, such as KKR, which listed on Euronext and is domiciled in Guernsey. More are jumping on the KKR and Apollo bandwagon and as a result we are speaking to even more private equity houses.” The Isle of Man
Even the smallest jurisdictions are unconcerned about the sheer battle they face to attract alternative managers and administrators. Undaunted by the successes of larger jurisdictions, the Isle of Man has pledged to achieve its target of reaching $100bn (e72.35bn) in assets under management by 2010 and is looking to attract high performance fund managers by creating a more favourable regulatory environment for investment. Brian Donegan, director of foreign investment, Isle of Man Finance, says: “The island is promoting itself to hedge fund managers and administrators. In 2003 we had $5bn (e3.6bn) in funds under administration and now we have $55bn (e39bn). For 2009/2010 forecast is to have $100bn (e72bn) in funds under administration. On the hedge fund manager side we have ambitious plans and forecasting $50bn (e36bn) by 2010 in terms of assets under management, but we now have between $15-16bn (e10.8bn-e11.6bn).” The way the Isle of Man hopes to attract more business is by attempting to persuade people that it is a far more attractive venue than the Channel Islands and onshore centres such as London. “Managers can have a client-facing office in London but they can then have everything behind wrapped in an Isle of Man company and can qualify for 0% tax. We have introduced a 0% corporate tax and that has devastated our competition as none of them have that in place, although some have said they will introduce it,” says Donegan. Luxembourg versus Dublin Within the EU, Luxembourg and Dublin, of course, are the established centres of excellence for cross-border financial services. When it comes to hedge funds, Dublin is particularly well known as a centre for hedge fund administration, while Luxembourg has lagged behind it a little. “Hedge funds typically use Irish administrators. Half of European hedge funds are listed in Dublin while about 5% are London listed. It’s easier to get a listing on the Dublin stock exchange as they are not as prescriptive as London,” says Judd of White & Case. “Dublin is the hedge fund administration winner by a long way, while Luxembourg is second on volume of business,” adds Martin Cornish, senior legal lawyer of Katten Muchin Rosenman Cornish. But Luxembourg could slowly gain some headway on Dublin now that it has relaxed some of its rules. “There was an unwritten rule that a bank had to make the investment ‘good’, and it was a significant showstopper for setting up in Luxembourg. But now that it’s been done away with, it should create a more even playing field,” adds Cornish. Meanwhile, Luxembourg is the leading domicile for traditional investment funds and is considered by a number of industry commentators to be the ideal location for Ucits funds. In June this year, Axa Investment Managers joined forces with Diapason Commodities Management and launched a Ucits 3 Luxembourg-domiciled hybrid commodities fund. “Luxembourg is making life easier than Dublin; increasingly everything we do is veering toward Luxembourg. Luxembourg is better on tax and some of the infrastructure is more cost effective. For Ucits funds, without a question, Luxembourg is the place,” says Dwane of RCM. Malta makes its mark
Although Malta could never hope to rain on Luxembourg’s parade as the number one choice for setting up Ucits, this small, adaptable EU domicile is trying to compete on the international stage. In 2006 the Malta Financial Services Authority (MFSA) licensed 26 retail funds, of which 22 are Ucits schemes registered in Malta. Last year Barclays Capital launched a Malta-registered Ucits 3 fund and Fidelity launched and registered its Fidelity MultiManager Sicav in Malta in February 2006. Some industry commentators expect to see more financial institutions follow Barclays and Fidelity. “Malta is making headway and has become friendlier than Luxembourg and Dublin. The approval process for funds is quicker and simpler. With Dublin and Luxembourg the locals say that funds can be set up in three months but in our experience it takes longer. The regulator doesn’t vet as much as regulators in Dublin and Luxembourg do. It’s also far cheaper to launch a fund in Malta than in Dublin and Luxembourg,” says Cornish. But Malta still has a long way to go to capture the hearts and minds of the financial industry. “We considered Malta for a US hedge fund and real estate firm, but they were put off because it’s a new concept and the infrastructure is not tested well enough to provide confidence in local audit functions,” says Judd of White & Case. As the Channel Islands are not part of the EU, Jersey and Guernsey don’t qualify as jurisdictions for Ucits 3 funds. But institutions do have the choice of launching Ucits-equivalent funds. Stephen Kearns, director of product development at Jersey fund manager Ashburton, says: “They are constituted as recognised funds under Jersey-regulations. As such they are entitled to apply for and have been granted approved scheme status by the UK’s FSA [Financial Services Authority] because they are deemed to have an equivalent level of investor protection to UK-authorised unit trusts and Oeics [open-ended investment companies]. The critical aspect of this is that the statutory investment restrictions are very similar to those imposed on Ucits.” The battle for business
It is certain to become even more difficult to choose between jurisdictions as rules are chopped and changed in the battle for business. But ultimately, choosing the right jurisdiction will come down to the type of client the financial institution caters to, especially when it comes to institutional investors. Many large institutional investors are very careful about investing in funds that are domiciled in lesser-known jurisdictions. Andrew Lodge, managing director of Nedgroup Investments, a fund of funds provider, says: “What large institutional investors want to know is whether the fund is in an environment that is well regulated. Pension funds, for instance, will only invest in quality stock exchanges that are reputable. Cayman is a well trodden route and it is one that works for hedge fund managers. Why would they move from the Caymans? Setting up funds can be done quickly and cheaply in the Isle of Man too, but then you have to sell it to the market and it’s not known as a hedge fund jurisdiction,” says Lodge. © fe August 2007

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