Guernsey and Jersey are keen to attract business to the islands - but is the latter ahead of the game with hedge funds?
Visitors to the Channel Islands often leave with fond memories of the golden beaches and quiet country lanes that make them so attractive to the hundreds of thousands of tourists who head there every year.
Whether visitors arrive looking forward to beautiful scenery or wanting to see friends and relatives, it"s likely that their interest remains focused on the physical and social attributes of the islands, rather than the regulatory landscape or the reputation of local professional service providers.
One man"s muck is another"s brass, however, and when it comes to the world of hedge funds, the islands have particular attributes that are proving difficult to ignore.
Taking Jersey alone, the net asset value of funds under administration over the final quarter of 2015 stood just shy of £226bn, with alternative funds business representing 73 per cent of that total. The number of fund promoters in the island has more than doubled since 2011 to 126 and the number of hedge funds has grown to 23 from just a handful two years ago. Crucially, there are 17 or 18 managers active in the island, which means Jersey is not being chosen purely as a domicile or administrative centre.
In the eight years since the financial crisis, we"ve seen an increasing amount of regulation appear in the alternative funds space. Not least are the EU"s Alternative Investment Fund Managers Directive (AIFMD) and the Base Erosion and Profit Shifting (BEPS) project championed by the OECD, which aims to clamp down on the ability of companies to shift profits to low-tax jurisdictions. The result has been an increasing compliance burden on a range of financial institutions, including hedge funds, which may well have played a role in triggering a search for less onerous regulatory environments.
Certainly, Rob Milner, Funds Partner at Channel Islands law firm Carey Olsen, sees Jersey"s regulatory regime as having attractive attributes. "Jersey has hit a sweet spot. The island has both proportionate legislation and access to EU markets [via AIFMD passporting]. This means you can base your manager in Jersey and still have good market access, while knowing that the regulatory regime is both robust and proportionate."
Attractive environment
Moving to either Jersey or Guernsey doesn"t mean that funds are escaping regulation. Quite the opposite - the islands are keen to maintain the confidence of larger jurisdictions by constantly showing that their regulatory environments are as good as you"ll find. However, the increased amount of regulation, among other factors, is making fund managers focus their attention on the issue of jurisdiction.
"There are lots of instability factors, such as MiFID II, Brexit and tax changes, which are making people sit down and look at their current arrangements and what they might want for the future," explains Milner.
It"s natural for companies to seek stability in an unstable environment. This is particularly true of hedge funds, because they rely on attracting and maintaining investors who have little appetite for seeing their wealth put at risk by an ever-changing political landscape.”
"Hedge funds want a pro-business government and high-quality regulation," says Wayne Gallichan, Director of International Trade at Locate Jersey, the States of Jersey"s inward investment arm. "This is particularly important to hedge fund investors. If you"re an investor who has to choose between a low-quality regulatory environment and a high-quality environment, then it"s an easy choice to make."
There is however, more to the hedge fund world than a desire to work within the right regulatory environment. Although Tim Morgan, Partner at law firm Mourant Ozannes, is quite right in describing hedge funds as "system-based rather than people-based", the many attractions of the islands also have a role to play when a fund is looking for pastures new.
"The big factor attracting them is lifestyle," says John Harris, Director General of the Jersey Financial Services Commission, the island"s financial regulator. "You"ve got good schools, beaches, quality housing and, importantly, good access to London. Jersey and Guernsey also have good access to Europe, having successfully navigated the EU"s AIFMD."
The islands" ability to market funds into the EU is a big part of the attraction, according to Morgan, and an area in which both Jersey and Guernsey have stolen a march on their rivals.
"For hedge funds, Europe is a massive part of their market and the Channel Islands were cleared for European marketing in 2015. Cayman and others are still waiting," he explains.
This leap ahead of Cayman is particularly important because, as Morgan says, the islands have had their eyes on their Caribbean counterpart"s success for some time. "The Channel Islands have always wanted to be a European alternative to Cayman, and more recently there"s been an acceptance within the industry that the islands can do everything Cayman can," he says. "Under the pressure of regulatory scrutiny, there are likely to be more European managers interested in the islands rather than Cayman."
Inter-island rivalry
But just as Jersey and Guernsey compete against rivals on the other side of the Atlantic, they are also competing against each other for financial services business. And that made Jersey"s successful courting of hedge fund manager BlueCrest from Guernsey in 2014 all the sweeter.
Coming at a time when Brevan Howard had also announced that it would set up a key office in Jersey, the win played an important role in creating a critical mass of well-known hedge funds operating in the island, putting Jersey firmly on the industry map and creating a neat divide between the two island jurisdictions.
"These guys tend to herd together,” says Milner. “Guernsey stole a march in private equity and listed funds and it has the edge in those fields. In terms of hedge funds, Jersey has the edge."
The hedge fund sector is notoriously tight-knit and word of mouth clearly goes a long way because there"s very little difference between the islands in terms of regulation and legalities.
"The reality is that you can do both closed-ended and open-ended structures in both islands, but over time, expertise develops and you build up experience," explains Morgan.
This expertise is crucial, because no fund can stand in isolation and needs the attention of a range of professionals in order to operate successfully. As Jersey has gained a standing in the hedge fund arena, so the reputation of the islands" professional services industry has grown in stature.
"From a technical standpoint, we have first-class lawyers, accountants and fund administrators, all of whom are wanted and needed by hedge fund managers," says Richard Corrigan, Deputy Chief Executive of Jersey Finance, the island"s promotional body for the financial services sector.
Naturally, as more hedge funds move to Jersey, there"s more work for the island"s professional services. But that"s not the only advantage of the influx. "The main benefit for the island is economic," says Corrigan. "Hedge fund managers don"t just bring over their own talent, they recruit locally and their employees tend to be on higher salaries, creating higher value work for islanders. We"ve seen them bringing over the principals, who tend to be high value and add to the tax take while not drawing from government, meaning that they are net contributors."
As the preference for Jersey has grown, so has the will to develop an appropriate infrastructure. For the regulator, this means ensuring the resources and expertise are available. "In terms of the larger hedge funds with trading elements elsewhere, we work with those regulators to provide a consolidated regulatory environment. If the trading element continues to grow, we"ll expand our own expertise in this area," says Harris.
For the promoter, this means building momentum and ensuring the island is able to provide the necessary services. "St Helier ranks sixth in terms of global significance as a hedge fund centre and we hope to attract five or six more during this year and into 2017," says Corrigan. "There"s definitely a gathering of momentum, and Jersey Finance plans to continue dedicating resources to attracting these types of managers."
At the moment, Jersey appears to be well placed to continue attracting hedge funds managers. And although Guernsey is unlikely to turn away any that come knocking, it suits both islands to have strong reputations in different areas. It enables each to gain momentum and create the positive feedback that in turn makes them more attractive.
But although the picture for Jersey is promising, the island can"t rest on its laurels. Hedge funds are rarely enormous operations, making them fleet of foot and easily able to relocate should the regulation, tax or lifestyle environment change.