Originally published in the HFM Week Guernsey Report, 2009, distributed May 2009
Gavin Farrell of Ozannes outlines how Guernsey is perfectly set up as a European alternative to the traditional Caribbean hedge fund domiciles
Guernsey is a renowned European offshore jurisdiction, which offers a sound alternative to the Caribbean structure for establishing hedge funds. Indeed at a time of demanding corporate governance requirements, especially in light of the recent requests for greater regulatory oversight of hedge funds and the consequences of the Madoff experience, it is becoming increasingly important for some form of control over fund assets to be exercised and for directors to attend board meetings in person in order to query, among others, those custody arrangements.
This has led to a review of safekeeping procedures of assets and to domicile an offshore fund in a more accessible jurisdiction, allowing the investment manager and board to attend meetings more frequently and visit the administrator and custodian in that jurisdiction at the same time.
Guernsey has always been recognised as a well-, but not over-, regulated offshore jurisdiction with an infrastructure which lends itself to servicing clients on a full service basis. In terms of Guernsey products, hedge funds can either be open or closed-ended. The vast majority of hedge funds tend, however, to be authorised open-ended schemes, thus providing investors with a right to redeem their shares during the lifetime of the scheme, albeit restricted in practice through long redemption notice periods, redemption gates, redemption fees and/or other limited rights of redemptions.
Recent reforms in Guernsey have reduced the burden of regulatory approval in the case of hedge funds by setting these up as registered funds or qualifying investor funds. Such funds will benefit from a 'self certificated' and expedited process. In such cases, the Guernsey Financial Services Commission (GFSC) undertakes to issue appropriate fund authorisation, if the application is successful, within three working days of receipt of the relevant application documents. In addition, any required incorporation and licensing of a management company to the fund may also benefit from a fast-track approval regime. In circumstances where the fund does not wish to benefit from the 'self-certificated' regime, and prefers to go through an authorisation process and review of documentation by the regulator, the procedure continues to follow the three-stage process, the outline, interim and final stages.
Outline stage: requires the completion of a form setting out the basic details of the fund's structure and objectives together with details of all parties involved. Hedge funds will need to be administered by a Guernsey fund administrator and therefore the principals will need to have already chosen its local administrator. The Guernsey administrator can, however, delegate to administrators based outside of Guernsey if required by the commercial terms of the structure.
Interim stage: will see the filing of the near final draft prospectus with a form containing a checklist of the disclosure requirements in the prospectus. The GFSC has maintained a policy of fast tracking an application by combining the interim and outline stages, provided that both forms and relevant documents are filed together. This fast-track procedure would be advantageous for those funds that do not qualify as registered.
Final stage: once the GFSC has reviewed the draft prospectus and related forms, and has obtained satisfactory responses to its queries (if any), the filing of the final prospectus and certified copies of constitutive documents and material contracts disclosed in the prospectus are required. The granting of full approval will then be considered by the GFSC.
If the entity responsible for the fund's establishment is not already known to the GFSC, additional documentation and time to conduct due diligence on that promoter will be required at the time of, or before, the outline stage.
A welcome relaxed approach
In the past, open-ended funds in Guernsey have had to appoint Guernsey-regulated custodians. In February 2004, the GFSC relaxed its rules for hedge funds, the need for such relaxation being deemed to be particularly appropriate in the case of funds targeting institutional and/or expert individuals. Examples of this new relaxed approach include the waiver of the obligation to appoint a Guernsey custodian where a reputable prime broker has been appointed (although the GFSC will not require those prime brokers to take on formal duties of oversight over the fund manager) and the waiver of the obligation to have segregation requirements for prime brokers holding the fund's assets and for subscription and redemption monies.
As noted above, the GFSC has made changes to Guernsey's investment fund regulations with the registered regime. These changes have further streamlined the approval process for both open and closed-ended funds. The principal effect of the changes is that the onus will fall upon the licensed Guernsey fund administrator to conduct due diligence on the fund promoter and the fund structure, and to certify to the GFSC that the proposed fund satisfies the criteria for authorisation. The standard three-stage process will therefore not be applicable. Providing the fund administrator confirms to the GFSC that the criteria are met, the GFSC will grant the required approval within three working days. These changes should significantly accelerate the regulatory approval process.
As with many of the leading hedge fund jurisdictions, Guernsey plays host to a range of third-party service providers including approximately 40 different entities providing fund management, administration and custodial services to the industry.
Many of Guernsey's administration firms are part of global operations that can outsource to other centres of particular expertise where necessary. In addition, Guernsey is situated approximately 40 miles flying time south of London and, as a result, is an accessible jurisdiction for the holding of meetings as well as satisfying prudent corporate governance and fiscal 'arbitrage'.
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.