International developments are giving fund managers and practitioners a lot of food for thought: Brexit, the US election, market volatility and an evolving regulatory landscape, particularly as the European Commission continues to consider third party passporting under the Alternative Investment Fund Managers Directive (AIFMD).
With so much international activity it’s understandable that managers, promoters, legal advisers and service providers to hedge funds are focusing on what it means for their operating models and how it might impact their fund structuring options.
As the sixth largest centre for hedge fund management globally, Jersey takes a keen interest in these developments, and the latest figures show that alternative funds business conducted through Jersey is holding up well. At the end of June 2016, for instance, the value of funds under administration in Jersey stood at just over $300 billion (up 2% from June 2015), with the number of funds established in the jurisdiction remaining stable.
For Jersey at least, the overall picture is one of stability. There has been very little volatility in Jersey’s funds figures over the past few years, in hedge or other classes. At the top end, some larger fund managers are continuing to raise significant funds, but there is also a trend for a growing number of smaller, new managers to use Jersey as a domicile for their funds.
In fact, against the shifting global political environment, rapidly changing regulatory landscape and unpredictable market conditions, this stable platform is proving to be, and is likely to continue to be, a key attraction for managers considering their structuring, domiciliation and relocation options.
Brexit is, of course, a key issue but Jersey hasn’t yet seen any significant direct impact. Jersey’s government had a plan in place for the eventuality of a vote for a UK exit from the EU, a plan that is being rolled out to ensure that Jersey is in a strong place and its voice is heard, and listened to, as the UK plans its exit.
From a constitutional point of view and in terms of financial services, Jersey’s relationship with the UK and the EU is largely unaffected by Brexit. Jersey has good, strong and direct connections with the UK and these remain unchanged.
In terms of Europe, Jersey is outside the EU and is able to maintain access to European and global financial markets through a range of existing, directly agreed ‘third-country’ agreements.
Ultimately, Jersey’s symbiotic relationship with Britain means we want them to negotiate a successful agreement with Europe, especially as a large number of the investment managers that use Jersey are based in the UK.
The imminent triggering of Article 50 and the subsequent period of negotiation means it is a waiting game for managers, but Jersey’s stable, familiar and flexible platform may seem to them an attractive option, providing as it does a measure of certainty for new fund launches and helping the jurisdiction sustain its upward trend in inward manager migration.
The AIFMD continues to be a significant regulatory issue for hedge fund managers. Jersey has done everything it can to put itself in the best possible position with the European regulator, the European Securities and Markets Authority (ESMA), to get third-country recognition and ultimately an AIFMDpassport.
The journey towards third-country passporting continues to be a long one, despite Jersey having been given the green light by ESMA in both 2015 and then again in the summer of 2016. Jersey was one of only five jurisdictions to have received this full endorsement.
With the European Commission taking a cautious and prudent approach around extending the passport to any third country, the message from Jersey is that for UK and non-EU managers here it is business as usual, with current arrangements to access European investor markets through existing National Private Placement Regimes (NPPRs) working very well indeed.
For the majority of fund managers, who only market into one or two jurisdictions, NPPRs are ideal, providing cost-efficient access to the markets that managers want. Despite some noise from some onshore jurisdictions, we believe the private placement regime is here to stay.
NPPRs are guaranteed into the UK for three years after the AIFMD passport is introduced, so managers can continue to use Jersey to access European investor markets seamlessly, as they do already. The latest figures show that the number of managers making use of private placement through Jersey is up 37% annually and the number of funds marketing into Europe this way is up 22%. It is Jersey’s standard go-to market approach and it works.
Compared to other European fund centres, Jersey provides quite a different funds offering. Being outside the EU, for instance, means that in Jersey there is greater flexibility for fund structuring when it comes to accessing the European investor market. While some managers may want a fully AIFMD-compliant solution with all the reporting requirements it brings, some may prefer a more flexible platform that still offers high levels of oversight but is faster to market.
This is important, as Europe remains a key market for Jersey’s alternative funds business. In October 2016, Jersey Finance launched new ‘Jersey’s Value to Europe’ research, which found that around one-third of Jersey’s total funds business touches the EU.
At the same time as it offers an EU-focused private placement option under AIFMD, and AIFMD passporting in due course, Jersey is also in a better, more agile position than onshore EU countries in supporting non-EU managers and non-EU funds. Certainly we are seeing growing interest from Asian and US managers looking for a European time-zone jurisdiction for structuring their globally distributed funds.
Meanwhile, the issue of management substance continues to prove a hot topic for hedge fund managers, particularly in light of the action points to emerge from the OECD’s BEPS project.
While some other international finance centres, particularly those in the Caribbean, are having to revisit their models in terms of outsourcing administration and demonstrating real on-the-ground substance, Jersey is in a strong position.
Managers wanting to be based in Jersey will need to show a substantive presence, but this is in line with Jersey’s fund management strategy.
There are now, for instance, in excess of 130 active fund managers in Jersey, a number that has grown 5% annually. Not only does this provide some indication of the appeal Jersey holds for fund managers in a complex global funds environment, but these managers also have a real presence and are creating real value, underlining Jersey’s commitment to adhering to the BEPS substance provisions.
Only in October 2016 did Jersey’s government sign a Multilateral Competent Authority Agreement with the OECD as part of the BEPs project, providing for automatic exchange of information in accordance with country-by-country reporting by large multinational enterprises.
For all hedge fund managers in all jurisdictions, being able to show high levels of commitment to substance is going toprove increasingly important in light of BEPS. Jersey’s model is a sound one.
Beyond the UK and Europe, Jersey faces wider opportunities in other important markets in Asia, Africa and the US. There’s no doubt that the global hedge fund market is increasingly competitive, but these markets are evolving rapidly and there is real scope for Jersey to play a role in supporting the global ambitions of managers in these regions.
For this reason, Jersey remains focused on tackling investor access and jurisdictional awareness issues in overseas markets, and on developing its funds offering and providing innovative solutions to globally mobile hedge fund managers.
With this in mind and in response to market demand, Jersey is developing a new Jersey Registered Alternative Investment Fund (JRAIF), in line with the direction of traffic towards the regulation of managers rather than the underlying investment funds or related vehicles.
This sort of product is expected to be a high-quality option for non-EU hedge fund managers who want to access European investors but who don’t have the resources or scale to establish their own presence in Europe and who prefer to establish outside of the EU itself.
Meanwhile, revisions are also being developed to the Very Private Placement Fund (VPPF) guidelines, to help clarify certain areas of a regime that is very popular for smaller boutique funds.
This is an area of real traction. Last year, for example, Jersey saw a rise in the number of fund promoter clients moving to Jersey specifically in order to avail themselves of the opportunities provided by the VPPF regimes, with many operating within the AIFMD’s ‘sub-threshold’ space.
The feeling is that the new VPPF regime will be equally as robust from a regulatory perspective but also offer the sort of flexibility and speed to market specialist, boutique and start-up funds that managers need – particularly those looking to incubate new strategies.
With Preqin data recently indicating that an unprecedented 79% of investors have concerns around the performance of hedge funds, and against a backdrop of political change, market uncertainty and regulatory trends, finding a stable, cost-effective and high-quality platform for delivering strong returns for investors is going to prove increasingly important for hedge fund managers as we look forward to the rest of 2017.
As managers try to plot a safe course, Jersey’s position of certainty is likely to continue to prove an attractive option.
The Investment Manager Perspective: Ben Dixon, General Counsel and Director, Systematica Investments Limited
The choice of home jurisdiction for your investment management entity is a key and complex decision for any investment manager. A number of factors drive the decision. Investment management structures have become increasingly complex over the years, and the days of a single manager entity based in London and solely regulated by the FCA seem a long time ago now.
Over the years we have seen just about every legal structure and combination of regulatory profiles as the investment management industry has sought to adapt to the rapidly changing legal, regulatory and financial environment it faces. The recent political shifts in Europe with the Brexit vote and the uncertainty surrounding the future of the EU have brought this to the forefront again more than ever.
So what are the key factors for a manager in choosing a home jurisdiction? Looking back over our experiences in setting up Systematica at the end of 2014 I would say the key is stability and working with a regulator that is willing to engage with your particular circumstances. Stability seems even more important now, looking at the political and regulatory uncertainty that may lie ahead, not just for the finance industry.
Our particular group structure is relatively complex but necessary for us to operate across our various office locations. We therefore face several regulators and have registrations with, or are regulated in some way by, each of the FCA in the UK, SEC/CFTC/NFA in the US, FINMA in Switzerland, MAS in Singapore, CBI in Ireland, CSSF in Luxembourg, and last but by no means least, the JFSC in Jersey.
Obtaining your regulatory approval in any jurisdiction always involves working closely with the particular regulator so they understand your business and the regulatory footprint. At each step of the process of setting up in Jersey, throughout the many discussions, the JFSC were supportive, understanding and very commercially minded in their approach to us. Indeed, the managed account exemption rules (QSMA) that Jersey brought in towards the end of 2014 came about in part from discussions with us about the launch of Systematica. The speed with which the JFSC addressed our applications and particular circumstances was impressive and a clear sign of the open approach they take to regulation. The application process is genuinely fast and efficient – we submitted our applications at the end of September 2014 and had three Jersey regulated entities by the end of December 2014, allowing us to launch on time for January 2015. This close working relationship with the JFSC has continued throughout our time in Jersey. All of our interaction with the supervisory team at the JFSC have been efficient and pragmatic. They have taken the time to understand our business and how we work and this has led to better dialogue and understanding on both sides.
From our experience to date, Jersey is a great jurisdiction for the investment management industry: a fast, efficient and commercially minded financial environment with a strong regulator that is growing from strength to strength. The Jersey finance community is also a welcoming and supportive family. The efforts of Jersey Finance, Locate Jersey and the JFSC are rapidly building an excellent regulatory and financial environment in which global managers can base themselves.