Magazine Issues » April 2015

LEGAL EASE: A new home for hedge fund managers?

Simon Schiler and Niamh LalJersey has long been considered an active player within the private equity and real estate funds sectors but has, to date, had a lower profile in the hedge funds sphere.

However, one of the current trends we are witnessing in Jersey is the inflow of hedge fund managers establishing a physical presence on the island. A number of household-name hedge fund managers now call Jersey home, including Brevan Howard and Blue Crest. With rumours that other hedge fund managers are in the advanced stages of planning to follow them into Jersey, this prompts the obvious question of what are the principal drivers of this trend?

The drivers are both economic and regulatory. Jersey’s established and sophisticated funds services offering also enables the island to offer operational advantages for hedge fund managers relocating their domicile to Jersey. Underscoring this has also been a political desire within Jersey to diversify Jersey’s economy, which has resulted in the introduction of tax regimes and policies that have had the effect of encouraging high-value industries, such as fund management, into the island.

As the UK represents the largest European base for the hedge fund sector, possible UK tax changes are undoubtedly contributing to the growing interest among hedge fund managers to domicile outside the UK. Jersey residents are subject to personal income tax at a maximum rate of 20% on worldwide income. Certain high-net-worth investment managers who become resident in Jersey may (subject to a number of conditions) have a significant proportion of their non-Jersey income taxed at a rate as low as 1%. Additionally, having introduced the “zero-ten” tax regime, the profits of a Jersey-based and regulated investment manager may be taxed at a rate of 0%.  These tax advantages clearly make Jersey an attractive proposition for hedge fund managers.

For hedge fund managers wanting to access European investor capital, the fact that Jersey does not form part of the EU, and Jersey-based hedge fund managers are permitted to continue to access EU private placement regimes, is an attractive proposition. This enables a Jersey-based hedge fund manager to benefit from a reduced disclosure under the Alternative Investment Fund Managers Directive and less of a transparency burden, in particular enabling it to avoid being bound by the remuneration disclosure rules applicable to EU fund managers. Additionally, at the point at which the AIFMD passport becomes available to non-EU funds, the existing availability of fully AIFMD-compliant regulations for those funds “opting-in” to AIFMD means that Jersey will be ideally placed to be able to benefit from this marketing passport, as and when it becomes available.

Jersey is taking steps to adapt its regulatory and legal framework to enhance its attractiveness to hedge fund managers, most recently by the introduction of a new exemption from the requirements of Jersey’s Financial Services (Jersey) Law 1998 (the FS Law) to enable Jersey-regulated hedge fund managers to service qualifying segregated managed accounts (QSMAs) without the need to seek regulation for the conduct of investment business under the FS Law, while continuing to benefit from Jersey’s 0% corporate income tax rate. (Previously, such managers were potentially subject to a more onerous regulatory burden and a 10% income tax rate.) This exemption is available provided that the QMSA’s strategies replicate or comprise elements of the strategies employed by one or more of the hedge fund manager’s Jersey funds.  This change has been welcomed by both existing Jersey-based hedge fund managers and the wider Jersey funds industry, and promises to ensure that this trend for hedge fund managers to relocate to the island is likely to continue for the foreseeable future.

Simon Schilder and Niamh Lalor are partners at Ogier

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