Tom Carey and Ben Morgan of Carey Olsen tell HFMWeek how Guernsey has maintained its solid reputation following the implementation of AIFMD.

The real impact of the EU Alternative Investment Fund Managers Directive (AIFMD) is beginning to be felt globally. Some jurisdictions (and fund managers) are positioned more favourably than others to ensure they are ready to make the most of the opportunities available while avoiding the pitfalls that usually accompany more regulation. Carey Olsen investment fund partners in Guernsey, Tom Carey and Ben Morgan, proffer the view that Guernsey is ideally placed, and has sensibly addressed the AIFMD, to be the jurisdiction of choice for European funds.

There are few of those working in the funds sector, and particularly European hedge funds, who have not gone some way to getting to grips with the tenet of the AIFMD. However, where there has been a shortage of detail has been in just exactly what jurisdictions are doing practically on the ground to provide solutions that will not vex the fund management industry unduly. Guernsey is certainly the first, if not the only, non-EU jurisdiction to adopt a dual regulatory regime for Guernsey structures where fund managers have the ability to opt in to the AIFMD equivalent Guernsey rules or to operate entirely outside the AIFMD regime. If fund marketing is wholly conducted outside the EU, and management of a fund is not being conducted in the EU, the AIFMD will have no bearing on the operation of the manager's business or the fund it manages.

Indeed, several hedge fund managers have, or are establishing, a sizeable presence in Guernsey; in most cases to ensure that no part of their business is subject to the AIFMD although there are some who are actively looking at opting in to Guernsey's equivalent rules. The reputation and size of some hedge fund managers means that they will attract European investors without needing to actively market in the EU and therefore avoid being subject to the AIFMD under reverse solicitation arrangements. Alternatively, where marketing by a Guernsey manager takes place, the limited reporting and disclosure requirements under the AIFMD are not regarded as unduly onerous and, crucially, the manager is not subject to the other provisions of the AIFMD. Guernsey's own regulatory regime, which captures all fund managers, is regarded by its £200bn plus industry as a better fit for alternative fund managers The real ace in the hole for Guernsey has been its ability to service heavily regulated and, often, complex structures and is home to a very large number of London listed funds.

Guernsey has never been regarded as the jurisdiction of choice for letterbox fund managers. Guernsey's regulatory requirements, and other issues relevant to its offering as a funds jurisdiction, have meant that a fund manager has always needed to be fully engaged in discharging its functions in Guernsey. The same goes for all service providers. Consequently Guernsey has always had a large community of auditors, including the Big Four, lawyers, administrators and bankers. There are also big depositary operations in Guernsey with a growing number of non-financial asset depositaries also looking to service AIFMD structures.

This means that Guernsey is well positioned to look after structures which may need to adapt to regulatory challenges and prepare for passporting under the AIFMD which is due to be extended to Guernsey and other third countries in 2015/16.

Guernsey's proximity to Mayfair has meant that there has been a steady growth of intellectual capital into Guernsey over the three decades it has been home to hedge fund managers. More recently there has been a noticeable influx of individuals with portfolio and risk management expertise which means Guernsey will be able to expand its offering to non-EU managers. It is anticipated that there will be an increased demand for individuals with risk management expertise in Guernsey in order to ensure that Guernsey managers can avail themselves of investment advice and support from EU managers without their entire operations being dragged into scope for AIFMD purposes.

The Commerce and Employment Department of the States of Guernsey is also very supportive of fund managers looking to build a permanent establishment on the island and policies have been put in place to facilitate the establishment of these businesses. A growing market is also developing in serviced and commercial office space and landlords are investing in properties to service that demand. The government has also been focused on improving key infrastructure for business and has recently tasked the competition authority with a review of broadband connectivity.

By way of example of this political support in response to increasing demand for limited liability partnership structures in Guernsey, and following the successful adoption of such structures in other jurisdictions, the States of Guernsey have recently approved draft legislation which introduces limited liability partnerships (LLPs) to Guernsey. The draft law is expected to receive Royal Assent and come into force prior to July 2014 and Carey Olsen has already begun to advise fund management clients in particular on the potential uses and benefits of such structures to their business. In contrast to other jurisdictions an LLP in Guernsey will be able to be formed for any lawful purpose. Their inherent flexibility means that LLPs are likely to prove a popular choice in a number of different commercial scenarios.

Professional services firms that have historically structured themselves as partnerships or limited companies will be attracted by the limited liability and flexible management arrangements afforded to members of an LLP, and it is for such firms that LLPs have proved particularly popular in the UK. In addition to such staffed businesses, LLPs are likely to be ideally suited to special purpose "ManCos" and general partner vehicles, particularly in light of the recently introduced changes to the UK's Partnership Accounts Regulations.

Similarly LLPs are likely to prove popular for real estate joint ventures and other investment "clubs" where participants will be attracted by the ability to take an active part in the management of the LLP and its investments without giving up their limited liability. Indeed, the ability to tailor the economics of LLPs will also make them attractive as simple asset holding vehicles even in the absence of any active investment management. Guernsey will continue to offer the best off shore solutions for fund managers both through proportionate and internationally-compliant regulation and a political environment which supports and encourages the industry.

An original version of this article appeared in the HFMWeek Guernsey Report 2014, May 2014.

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