You are an innovative fund manager looking to establish a new hedge fund, investing in a diverse pool of equities with a medium to high risk profile. You are looking to attract a wide range of institutional investors while retaining the option to market it to affluent and high-net worth individuals not averse to taking a financial risk for the potential of high return. Given recent troubles of hedge funds, you are looking to target investors seeking to invest in a fund established in a trusted jurisdiction with a robust regulatory regime. With this in mind, let us explain why Guernsey would suit your needs and suggest a suitable structure.

Why choose Guernsey?

The first question to be considered is what does the jurisdiction offer in terms of reputation and credibility with potential investors? Guernsey has a solid history in operating collective investment funds having been in the business for the past four decades, and with Guernsey based funds being promoted and sponsored by leading institutions in 38 countries it shows no signs of slowing down. The island has a reputation of providing a healthy choice of experienced fund services providers together with flexibility of structure and regulation, a stable government that meets internationally compliant standards, the option of access to the Channel Islands Stock Exchange (CISX) and preferential taxation.

Which legal structure to use?

In short, Guernsey is a jurisdiction with a reputation for providing a regulatory regime with real substance and service providers with high-end expertise. The flexibility of Guernsey's regimes can suit the needs and demands faced from investors and competitors.

Guernsey funds may be structured in the traditional way as companies, unit trusts or limited partnerships. The jurisdiction also offers the potential to structure the fund as a protected cell company (PCC), being a single legal entity with distinct cells, the assets and liabilities of each cell being segregated by law from the assets and liabilities of each other cell. The fund may also be structured as an incorporated cell company (similar to a PCC except that each cell is a separate legal entity, effectively a company within a company).

In short, Guernsey caters for the legal structures commonly used for funds and provides particular expertise with cellular companies. The choice of vehicle will depend on a number of factors (investor preference, familiarity and fund profile to name a few) and the jurisdiction can cater for each of them.

What level of regulation?

Once the vehicle has been chosen, it's a case of determining the level of regulation the fund should be subject to. Funds are regulated by the Guernsey Financial Services Commission (GFSC) under The Protection of Investors (Bailiwick of Guernsey) Law 1987.

Your hedge fund is, of course, open-ended. Guernsey offers four options for open-ended funds, three of those being authorised funds and the fourth being registered.

Authorised funds

Authorised funds are regulated and subject to continuing supervision by the GFSC. Within this category, open-ended funds are classified as A, B or Q funds and are subject to the Class A, B or Q rules respectively.

Class A Class A funds can be marketed to the UK retail mass market through a range of media including national papers and high street banks. It may then come as no surprise that, particularly given the potentially unsophisticated nature of those who may be interested in investing, the Class A Rules are rigorous and focused on producing accurate and timely investor information.

Class B This is the most popular and frequently used product for hedge funds being set up in Guernsey. While remaining investor focused, the rules are not as stringent as for Class A funds and a Class B fund can be marketed to both institutional investors and personal investors routed through an independent financial advisor.

Class Q As the most flexible of the authorised funds in terms of rules, Class Q funds are limited to qualifying professional investors. The qualified professional investor definition is restricted to government bodies, trustees of a trust or a corporate body or limited partnership having net assets in excess of £2m and to individuals with minimum net worth of £500,000 (excluding main resident and household goods).

Registered funds

Registered funds are subject to ongoing supervision, as opposed to regulation, by the GFSC. An open-ended registered fund will be subject to The Registered Collective Investment Scheme Rules 2008. These are generally regarded as being less onerous than the rules applicable to authorised funds and registered funds are more comparable to Caribbean open-ended fund products.

Service provider requirements

A Guernsey open-ended fund, whether authorised or registered, must have a Guernsey resident administrator and custodian trustee (exemptions apply in certain circumstances where an established prime broker is used).

There is no requirement for a Guernsey fund to have a separate investment manager. However, in practice, an investment manager may still be put in place for commercial and risk management purposes. Importantly, there is no regulatory requirement for the fund to have a locally licensed manager, meaning an established manager outside Guernsey can manage a Guernsey fund without having to obtain a separate licence from the GFSC.

What is the process?

Authorised funds

Once you have decided the level of regulation to opt for, the next step is to take the client through the standard three-stage authorisation process that usually takes between six to eight weeks to complete:

  1. Eight weeks to launch – outline consent. At this first step the GFSC is provided with outline details of the fund and, where the promoter is not already known to the GFSC, information in response to the new promoter's checklist. By six weeks to launch outline authorisation is granted by the GFSC.
  2. Six weeks to launch – interim consent. The GFSC is provided with a near final draft of the prospectus. A week to 10 working days later, the GFSC will respond and upon satisfactorily dealing with any queries they may have, interim authorisation will be granted.
  3. Three days to launch – application for formal authorisation. Certified copies of final versions of the prospectus and signed agreements with service providers are submitted to the GFSC. Final consent is obtained within two or three working days. The fund is launched!

Alternatively, if launch timetables are tight, the streamlined approval process, known as the qualifying investor funds (QIF) regime, is an option. The administrator of a QIF is responsible for collecting due diligence on the fund promoter and must make certain warranties to the GFSC as to your fitness and propriety. The QIF process should take no longer than five weeks from starting to launch and the GFSC will grant authorisation for a QIF within three working days of submission of a completed application.

The advantage of the QIF regime is that there is only one step in applying to the GFSC (as opposed to the three stage process outlined above). The time it takes to reach this point is completely within the control of you, your lawyers and your administrator. A fund using the QIF procedure can only be targeted at certain professional or experienced investors.

Registered funds

As with the QIF regime, registration is streamlined and quick. Upon submission of a registration application, which again requires the administrator to make certain warranties to the GFSC as to your fitness and propriety as a promoter, together with certified copies of final versions of scheme particulars and signed agreements with service providers, the GFSC will issue a declaration of registration within three working days.

And the answer is...

So, with the above information, you choose the following:

  1. Legal structure – protected cell company. This will save time and costs when you launch your next fund, which will simply be a new cell in this existing PCC
  2. Regulatory regime – authorised B scheme. This will give your target investors the confidence of a well recognised regulatory regime while retaining the flexibility to adopt the investment profile you are intending.
  3. Process – three stage process: As you intend to market the fund to more than professional or experienced investors, you have decided not to use the QIF fast track.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.