As investment begins to flow back into the hedge funds industry, Jersey believes it is well positioned to attract start up managers as well as anyone looking to re-locate from London.

Jersey’s legal profession is quietly optimistic about prospects for the hedge funds industry. After surviving the restructuring and closures prevalent in the industry, most of the legal profession is reporting an upturn in enquiries for new fund launches, despite the uncertainty still hovering over the final shape of European Union legislation aimed at the industry.

The uncertainty over the EU alternative investment fund managers (AIFM) directive is causing some funds to hesitate launching new products. However, most Jersey lawyers say there is still continued interest in the fund structures offered by Jersey.

Robert Milner, a partner at Carey Olsen, says he is seeing a lot of fund work, albeit mainly in property and other alternative funds rather than hedge funds. He believes the ability now to set up limited partnerships in Jersey will make the jurisdiction more popular. That together with the incorporated limited partnership should help expand alternatives business, he says.

Milner also thinks some managers are attracted to Jersey’s flexible special purpose investment vehicles and in particular the incorporated cell company structures. These, says Milner, are more convenient and easier to administer than creating different share structures to accommodate various investor transparency and redemption terms.

He is also positive about Jersey’s ability to attract work from the Far East. He confirms Carey Olsen has added two partners in its Hong Kong office. Jersey structures are also attractive to Japanese investors, says Milner, and thinks the jurisdiction will develop more products specifically for Japanese investors as well as those in China in future.

“At the moment we are talking about products for the Far East, such as specialist unit trusts and special limited partnerships,” notes Milner. He thinks the combination of Jersey’s existing funds structures and the Jersey Financial Services Commission’s (JFSC) willingness to listen to new product ideas will continue to make the jurisdiction attractive in future.

Despite the upbeat attitude, he expresses some concerns about the AIFM’s ability to throw Jersey off-track. However, he sees Jersey as not just a place where fund structures are set up but as a jurisdiction with real substance. This he believes will bode well for the island state’s future, no matter what the EU directive’s final shape.

According to Ian Gobin, a partner at Walkers, until the final version of AIFM is published, no one really knows how to react. He is sceptical that an industry geared towards professional investors needs such a high level of regulation as the EU seems intent on imposing. He thinks such tight regulation is more appropriate for the retail sector.

His colleague Jonathan Heaney, also a partner at Walkers, thinks whatever the outcome of EU deliberations, offshore tax efficient structures will be needed. “AIFM won’t close down offshore. We will adapt,” he confirms.

“Once the dust settles new legislation is likely to come out of the British Virgin Islands, the Cayman Islands and Jersey and Guernsey,” he predicts. While he think some funds may decide to re-domicile, he does not expect much take-up of that option until the actual details of how third country funds will be treated is settled. He, like many others, is confident that if it is a question of equivalency, Jersey will be able to achieve the standard.

Meanwhile, both say over the last 12 months the more esoteric asset classes have been making a come-back. In particular they see a good start to the year for litigation funds using Jersey’s unregulated funds structure. Other strategies such as commodities and art are also proving popular.

Over at Mourant Ozannes, partner Edward Devenport says the newly merged law firm is totally focused on continuing to grow its funds business. Although some may have thought the disposal of the fund administration business as well as the merger with Ozannes might have distracted the legal practice, “lawyers have all been focused on the funds industry throughout,” he confirms. He says the merger will give the firm a bigger footprint in the Channel Islands and he thinks it will also have a knock-on effect on the Cayman practice.

On new business coming through, Devenport agrees with Walkers that AIFM is “the biggest factor influencing people’s thinking at the moment. The effect of this means people are deferring decisions about what to do until the uncertainty clears as to the use of -
offshore jurisidictions.”

He thinks there is a high likelihood of Jersey and Guernsey gaining equivalency. “There is talk about European funds. But it’s a lot of talk and not much action. Ucits is the most talked-about fund structure. But these are not as easy to run as an offshore fund and Ucits may not suit all types of strategies. As far as new fund promotions, what jurisdiction – on or offshore – and which jurisdiction to choose are occupying minds. There are many fund managers out there who want to progress but are on hold at the moment,” he says.

Colleague Ben Robins, also a partner at the firm and head of funds, agrees some managers are waiting to see if the AIFM directive will be “problematic”. This means some may decide not to raise money in Europe as they think the “price could be too high” and that the directive could lead to “unintended consequences” reiterates Devenport.

If a fund’s investor base is European, then funds will be suffering as European economies are under pressure, suggests Robins. He believes many are now looking at the Far East and Middle East seeing them as “more fruitful markets with more flexibility and opportunities”. He also thinks the move to Ucits hedge fund products aimed at institutional investors could trigger a re-examination of the fund structure by the EU and could lead to changes to differentiate the hedge fund Ucits from the purely retail vehicle. “There are just too many question marks,” he thinks. Devenport agrees, saying he expects Ucits will “find its niche” but believes there will still be room for offshore products.

Both are confident the regulator will continue to ensure the jurisdiction is able to meet any hurdles set not just by the EU but by international groups such as Iosco. “No one is going off in a huff. We will engage with groups. The world has changed. The biggest frustration is that the EU directive’s criteria for third countries has not been set,” says Robins.

In the interim Robins expects offshore to have an advantage as it is business as usual. Devenport agrees that by pursuing the offshore route, the range of funds on offer suggests there is little likelihood of a problem in the future.

While he says there are fewer start-ups and most money coming into the hedge fund industry is flowing into the bigger, established players, he is seeing renewed interest in managed account platforms. “We are definitely seeing an interest in platform-managed accounts. Investors are ultimately more comfortable on a managed account platform than with direct investment into a fund,” he says.

An area where both expect Jersey to see a pick-up in business is in the provision of directors for hedge fund boards. Devenport predicts this will become an important business as access to the domicile for physical board meetings becomes more important.

Both believe Jersey offers a good pool of expertise to draw from. Robins says both Jersey and Guernsey have service providers of real substance that have worked in the industry for a decade or more and would provide real substance on a board.

Kate Anderson at Voisin agrees, pointing out that she has been sitting on hedge fund boards for some time and that the trust and corporate services arm of the group supplies directors for alternative fund boards. She believes this is an area that will expand in Jersey and has already seen more people setting up to offer directorship services.

Ashley Le Feuvre, senior manager of the funds and special purpose vehicle group at Volaw Trust & Corporate Services, believes this is an expanding area, particularly as Jersey is seen as a jurisdiction with good corporate governance.

Anderson believes the JFSC will continue to keep a close eye on the licensing of directors. She says the main concern is to ensure directors have a “reasonable number of appointments and can demonstrate adequate resources” are being devoted to the directorships. “How many hours you spend on each fund is up to the director. How you allocate your time is up to the director. But the JFSC wants to ensure they spend a reasonable amount of time on directorships,” she confirms.

At Ogier, partner Daniel Richards agrees one of Jersey’s strengths is its international reputation as a responsible jurisdiction known for its good corporate governance and believes this will become increasingly important as regulation moves towards appropriate investor protection.

“Jersey is a recognised market and sits at the premium end of the spectrum,” he says. He believes the JFSC’s criteria of a ‘fit and proper person’ for directorships gives investors as well as fund managers comfort that the people being put forward are qualified and have the experience and expertise for the job.

As onshore governments look for substantive business operations for any funds domiciled offshore, Richards thinks Jersey will become even more attractive as a domicile and as a place that can provide directors as well as other service providers, all of which are regulated by the JFSC.

Richards believes the annual visits undertaken by the JFSC to fund service providers as well as the fact that Jersey domiciled funds need at least two directors based on the island, will be seen as good practice by investors and -fund managers.

Although there is a high degree of compliance and regulation, Jersey is open to a constructive dialogue, something Richards believes is important between the industry and regulator.

Richards is seeing a “very strong, continued interest across our jurisdiction” to the formation of offshore vehicles. “From my perspective the future is positive,” he says about the funds industry. As the economy recovers he expects to see renewed flows of capital into traditional offshore jurisdictions. He believes international financial centres like Jersey will continue to play an important part in helping investment capital find the right vehicles.

He expects different jurisdictions to play to their strengths. For Jersey he believes being in an ideal time-zone for European investors and managers will attract more business to the island. In addition he believes the jurisdiction is also well-placed to attract business from the Far East and Middle East. “We are seeing geographical diversification of managers and different managers setting up a physical presence here in Jersey,” he says.

Alex Last, a senior associate and funds lawyer at Appleby, believes Jersey may well be attractive for managers looking to leave London, too, although he cautions that such a decision depends on a number of factors. He believes some fund managers are considering a move but whether they carry through is difficult to justify as relocation is a fairly major step even for a few people. What he thinks may happen is that European start-up managers may begin to consider options outside of London. If that happens he thinks Jersey is not only equipped with service providers with experience and expertise but also has a cultural and linguistic advantage as well as a good lifestyle to tempt hedge fund operations.

He concludes that some people like the idea of relocating but admits the reality can be challenging. If there is intent he thinks managers will find both Jersey and Guernsey sufficient on the infrastructure side and with the capacity to welcome more fund operations.

Last also expects corporate governance to be an important issue for funds in future, too. He believes investors will want to see substance in terms of operations in the domicile of choice and admits it could become a challenge from a governance point of view for European managers operating Cayman--domiciled funds.

While Cayman has “fantastic” products, he believes it is most at risk from any negative consequences of the AIFM directive. Ultimately Last says people will want to have the majority of operations in the same timezones. Where new funds end up being located will depend on a variety of factors. He thinks start-up funds in particular will want to stay close to where their investors are based in jurisdictions with which investors feel -most comfortable.

Last believes Jersey will come high on the list of any fund looking at a European jurisdiction. Although its hedge funds industry is not as large as other aspects of the alternatives industry, it is keen to grow this sector and certainly comes top of the list for being a well regulated jurisdiction with an impeccable international reputation for high standards and good corporate governance.

Jersey extends international reach

Jersey Finance opened an office in Hong Kong in 2010 to support the promotion of Jersey as an international finance centre in the Asia Pacific region. The main role of the office is to act as a hub for Jersey Finance.

It is also a permanent base for Jersey’s finance industry to develop its contacts with leading financial intermediaries, regulators and government officials in Hong Kong and mainland China.

In a separate move the Hong Kong Stock Exchange approved Jersey companies for listings. 

Jersey’s finance industry provides comprehensive corporate listings, fund structuring, debt issuance services and trust services in the Greater China region. Over 25% of the 60 Chinese companies listed on AIM are incorporated in Jersey. There are 86 businesses using Jersey companies for listing purposes on worldwide stock exchanges from London to New York, representing a combined market capitalisation of over £16 billion.

In a separate move Jersey and Guernsey opened a joint office in Brussels to represent the interests of the Channel Islands in the European Union (EU). The office will monitor EU affairs.

‘The EU has a significant impact on many issues that affect the Channel Islands, including financial services, trade in agriculture and other goods and air transport,” according to Jersey’s chief minister Terry Le Sueur. “Jersey and Guernsey are working closely together to develop extended representation in Brussels, so that we can unite to speak with one voice at the heart of Europe,” he added in a statement.

Jersey has also made moves to strengthen local government links with Gibraltar and the Isle of Man. Recent ministerial visits discussed a wide range of issues affecting the jurisdictions, including their responses to the global financial crisis and their reviews of business taxation.

Quick facts about Jersey

Jersey is autonomous in domestic affairs, maintaining its own parliament and administration along with its own fiscal and legal systems.

Jersey shares a constitutional relationship with the UK that has seen the island continue its allegiance to the British Crown since 1204. In 2007 Jersey and the UK agreed a framework for developing the Island’s international identity alongside its domestic autonomy. The island introduced a system of ministerial government in 2006.

The island state’s relationship with the European Union is governed by protocol three of the UK Treaty of Accession to the European Economic Community. The island is not part of the EU for the free movement of people, services and capital but is part of the EU with regard to the free movement of certain goods.

Size: 45 square miles; largest of the Channel Islands, located 100 miles (160 km) south of mainland Britain and 14 miles (22 km) from France.

Population: 90,800.

Constitution: self-governing crown dependency of the UK. Settled UK/EU constitutional status.

GMT timezone: covers India and Greater China close of business and US opening of business.

Workforce: 13,400 professionals (banking, trust and fund
administration and management, accountancy and legal activities). The financial services workforce accounts for 25% of the total workforce and contributes more than 53% of tax revenues.

Banks: 45 of the top global 500 banks; bank deposits at December 31, 2009 were £165.2 billion.

Funds: net asset value (NAV) of funds under administration in Jersey totalled £166.2 billion at December 31, 2009.

Trusts: recognised as a leading jurisdiction for trust business with around 183 licensed trust and company administrators; trust law was used for the Hague Convention on the law applicable to trusts and has been replicated in many other centres.

Company law: company law has been updated and revised in recent years and includes treasury shares.

Service providers: all are regulated and there is a large choice of custodians (depositaries), administrators, accountants and other functionaries.

Management, administration, audit and legal: experience in private equity and real estate with growing capability in hedge, mezzanine, carbon trading and sustainability.

Jersey and European Union tax rules

Jersey expects to gain clarity on its business tax regime as far as the European Union’s (EU) position is concerned. In October 2009 Jersey was advised that some EU member states did not consider the ‘zero/10’ tax regime to be within the spirit of the EU code of conduct.

A review of Jersey’s fiscal strategy has now been extended to include a review of business taxation in order to assess the best long-term economic approach for Jersey.

The EU code of conduct group will start a review in September of Jersey’s business tax regime. The process should provide guidance and insight into what exactly is expected and required. Guernsey will not be included in the review. It will be working to a presumption of a 10% rate of tax.

Jersey has not committed to any tax rates or structures and will not do so until the comprehensive review and engagement with the EU processes have been thoroughly completed.

Tax facts

Funds, feeder funds and carried interest are not subject to direct or indirect taxes during establishment, maintenance or winding up.
No corporation tax, income tax, capital gains tax or withholding taxes.
Investment funds are not subject to complicated irrecoverable VAT on acquisition costs or ongoing administration.
Personal tax rate of 20% and limited indirect taxes.
Majority of FTSE 100 companies use Jersey as the tax-neutral location in which to administer global employee share option schemes.
Zero rate of corporate tax, with effect from January 1, 2009.
No estate or inheritance duties.
No taxes applying to fees or charges for professional services.
No death duties.
Gains on investment disposals are not taxed within the offshore entity.
Income generally taxed at source but no tax in Jersey, provided beneficial owner not Jersey resident.
Flexibility and tax neutrality for pooled investments.