Originally published in the HFM Week Guernsey Report, 2009, distributed May 2009
Ian Headon talks to HFMWeek about the role Guernsey plays in Northern Trust's global business model and the challenges in store for the hedge fund industry.
In a jurisdiction renowned for quality fund administrators, Northern Trust stands out from the crowd. Founded in Chicago in 1889, the firm traces its origins in Guernsey back to September 1972. Today, it employs over 350 people across its Guernsey business operations, making it one of the island's largest employers in the financial services sector.
As part of a global operation, Northern Trust administers hedge fund and fund of hedge funds (FoHF) assets worth $51.5bn (as of December 2008). With this in mind, Ian Headon, Northern Trust's product manager for hedge funds and FoHFs, Europe, Middle East and Africa, recently spoke to HFMWeek to give his thoughts on some of the industry's pertinent issues.
HFMWeek (HFM): Could you give us a feel for Northern Trust and its presence in Guernsey?
Ian Headon (IH): Northern Trust in Guernsey provides fund administration, custody, banking and fiduciary services to a global client base that includes hedge funds, FoHFs, private equity, real estate and infrastructure funds and traditional asset classes. This office operates as a key part of a global network spanning international offices in 15 locations in North America, Europe, the Middle East and the Asia- Pacific region.
However, perhaps the best indication of Northern Trust's position within the Guernsey hedge fund industry is provided by the highly regarded Lipper Guernsey Fund Encyclopedia. The publication recognises the firm as the jurisdiction's largest fund administrator and custodian.
HFM: What role does Guernsey play in Northern Trust's global business model?
IH: One of Guernsey's key attributes, and a significant business advantage for Northern Trust is the talent pool, enabling us to build a remarkably strong team in Guernsey, with industry leading experts in key disciplines.
Northern Trust now has over 350 people in Guernsey, many of whom have up to 20 years' experience in the industry. Our strong staff retention levels contribute to the depth of expertise and experience across the business with many of our local staff playing a leading role in managing local and global functional activities.
Another significant contribution that Guernsey makes to our global funds business is the governance culture. Thanks to our extensive client base in real estate and private equity, and the corporate secretarial and governance frameworks inherent in those strategies, Northern Trust staff are intensely focused on corporate governance.
Northern Trust is committed to providing the client, the board and investors with a world-class governance regime. For example, our private equity business is built around the collection, documentation and processing of proper instructions. This disciplined and highly controlled approach is something that we have leveraged in order to shape our approach to good governance, clear communications and robust controls.
This approach has also been applied to our FoHFs, hedge funds and other fund strategies – particularly important in this economic climate and in the light of market events. Ultimately, the Guernsey model provides the template for corporate governance structures in our funds business globally. Obviously the asset classes behave differently but the disciplined approach to governance and a robust control environment is something that informs our global funds business.
HFM: Independent administration is becoming an increasingly valued commodity. As a global asset servicing firm, are you seeing more emphasis in the current climate on independent oversight?
IH: There is nothing inherently wrong with self-administration, and the appointment of an independent administrator does not guarantee fraud prevention, but international best practice provides that the appointment of quality third-party service providers is a key part of a quality governance framework.
It remains a source of interest to us that the culture in Europe differs from that in the US. It is absolutely standard in Europe for a European-managed hedge fund to appoint an administrator whereas in the US, many funds self-administer. In that regard, it is interesting that the EU has moved ahead of its US counterparts in proposing additional regulation in the funds space.
A growing number of funds across the Atlantic are now looking to an independent administrator to satisfy investor pressure, and Northern Trust has found itself in a position to benefit. Although independent oversight must not be considered the panacea for all problems underlying the hedge fund industry today, its influence can inevitably provide a degree of comfort to investors. Our overall message is that the appointment of an external administrator will play a significant role in the industry going forward.
HFM: How have the market conditions impacted on Guernsey's hedge fund/FoHFs servicing industry?
IH: As the industry experiences increasing challenges from the global market conditions, there is an even stronger push from the institutional investors for managers to demonstrate a genuinely transparent and controlled operating environment.
Guernsey, with its long-standing background in servicing alternative investments, can demonstrate the highly established corporate governance framework and processes demanded by investors. Some of the larger service providers such as Northern Trust can offer an integrated approach to fund administration, custody and banking/secured credit needs offering a highly co-ordinated and robust approach to meeting complex day-to-day operational needs.
HFM: Is the island continuing to meet the regulatory needs of the global hedge fund/FoHF industry?
IH: Guernsey continues to innovate and evolve its regulatory environment in response to the needs of fund managers, promoters and their investors. The introduction of the 'authorised' and 'registered' fund regime increases the toolbox of options in terms of approval options and supervisory levels while building on the island's reputation as a pragmatic, funds jurisdiction.
Figures from the Guernsey Financial Services show the value of Guernsey's open-ended hedge funds/ FoHF collective investment funds industry was £29.6bn as at 31 December 2008, demonstrating how the island is now a significant global player.
HFM: What challenges lie in store for Guernsey's hedge funds industry? How will they affect Northern Trust going forward?
IH: The proposed EC directive regulating alternative investment fund managers has potential ramifications for Guernsey as a non-EU jurisdiction, presenting both opportunities and challenges. It proposes that any fund within the EU needs to appoint a trustee and administrator based in the EU as well as including some distribution limitations. The proposed directive, aimed at non-UCITS vehicles managed within the EU, is at draft stage and is still subject to amendment. It remains to be seen how the directive is shaped over the next six to nine months through negotiation and lobbying and how individual jurisdictions apply its provisions.
Regardless of the outcome, I am confident that Guernsey will continue to provide the thought leadership that has put Guernsey in the strong position it occupies today.
In terms of the alternative funds industry at large, while it has clearly been a difficult 18 months, our clients are beginning to show signs of growing confidence. In anticipation of this, the firm is continuing to invest in its hedge funds, FoHFs, private equity, infrastructure and real estate servicing operations in Guernsey. For this reason, I expect Guernsey to continue to remain at the very centre of Northern Trust's global fund strategy for many years to come.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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.