This article was originally published in HFM Week Guernsey Supplement, May 2007.
Guernsey’s investment fund industry is booming. The substantial growth that was a feature of 2005 continued throughout 2006, pushing levels of business to record highs and this has largely been driven by a surge in alternative asset classes, including hedge funds.
The Island is now very well known as an administrative centre but the depth of expertise, strong corporate governance, convenient location and fast-track consent process for funds targeting experienced investors have made Guernsey increasingly popular with promoters and managers seeking a base for their funds and in particular alternatives.
Notwithstanding these huge flows of business, work is ongoing to further enhance Guernsey’s funds environment. For example, in February this year the Island introduced a new streamlined consent process for registered closed-ended funds that will be particularly attractive to promoters and sponsors looking for a hedge fund domicile. Guernsey is by no means resting on its laurels.
Booming Funds Industry
Figures from the Island’s regulator, the Guernsey Financial Services Commission (GFSC), show that:
- The value of funds under management and administration in Guernsey increased by £30.2bn (30.2%) in 2006 to end the year with a new record high of £130.2bn.
A breakdown reveals that:
- Guernsey domiciled open-ended funds grew by £8.4bn (17.5%) during the year to finish 2006 at £56.6bn.
- Guernsey domiciled closed-ended funds rose by £17.4bn (55.8%) over the 12 months to reach £48.5bn at the end of the year.
- This took the combined value of these funds past the £100bn mark for the first time – reaching £105.1bn.
- Non-Guernsey schemes, for which some aspect of management or administration is carried out in the Island, rose in value by £4.4bn (21.2%) to reach £25.1bn at the end of 2006.
Fund approvals also ran at record levels during 2006:
- There were 48 new open-ended funds and 127 new closed-ended funds, making a combined 175 – 62 more than in the previous 12 months.
- Of these, 51 were Qualified Investor Funds (QIFs), which is the fast-track consent process for funds targeting experienced investors that was introduced early in 2005 and through which 27 funds were established that year.
Market conditions have undoubtedly played a part but primarily it indicates how Guernsey is being viewed as a jurisdiction of choice for alternatives. Indeed, while traditional funds remain well represented in these increased business flows, it is the popularity of alternatives such as hedge funds, private equity, property and more esoteric asset classes such as timber, wine and fine art that have played a major part in this growth.
Hedge Fund-Friendly Environment
Guernsey has a funds industry where nearly four decades of experience in providing investment products and services has helped establish a sector with a substantial depth of expertise, making the Island a particularly attractive location for the administration of funds and especially alternatives such as hedge funds. This expertise, coupled with strong corporate governance, a convenient location and a fast-track consent capability for funds targeting experienced investors, is also making the jurisdiction increasingly popular for the domiciling of alternatives.
Today, there are more than 45 administrators in the Island, with a significant number specialising in alternative funds. The majority of the funds that they service are Guernsey open and closed-ended funds, which are now promoted and sponsored by leading institutions in 45 countries. These funds can be established through a range of flexible investment vehicles such as unit trusts, PCCs, ICCs and limited partnerships, which the administrators are skilled at using.
Guernsey’s administrative heritage is increasingly being complemented not just by the availability of custody services but also fund managers and in particular those specialising in hedge funds, ranging from larger organisations like Financial Risk Management (FRM) to more boutique operators such as BBBSA Strategic Management Limited.
The fact that the Island has a broad-based financial services industry means that there are on-island banking, fiduciary and insurance providers, legal advisers, auditing and tax advisers, stockbrokers, together with the Channel Islands Stock Exchange (CISX).
Guernsey also boasts a large pool of experienced and qualified non-executive directors. There are no direct rules on the make-up of the board for funds domiciled in the Island but it makes practical sense that the majority of directors would be located locally. Taking this approach also helps provide clear delineation between the onshore investment management and the offshore overall management and control of the company. Finding the required personnel is made easy in Guernsey, which as a result has rightly acquired a reputation for strong corporate governance.
Domiciling (and for that matter administering) a fund in Guernsey, particularly for investment managers in the UK, is also made easier by the Island’s convenient location. Situated between Europe and UK it is in a time zone that allows business to be conducted with both the US and the Far East during the same day. Travelling to the Island is quick and easy as there are frequent air and sea links to both Europe and the UK, with flights from London taking less than an hour. In addition, an extensive array and high volume of business can be carried out face-to-face and in a short amount of time because of the close proximity of key institutions and businesses on the Island. Guernsey is therefore an ideal one-stop shop for funds.
Simpler And Quicker
Guernsey cemented its position at the forefront of the international fund and in particular alternatives industry when in it introduced QIFs early in 2005. This self-certification regime, which enables short authorisation times for funds targeting experienced investors, has become increasingly popular.
With a thriving funds industry it might be easy for the Island to be complacent. However, industry, the regulator and government established a working party led by leading Guernsey advocate Peter Harwood to undertake a root and branch review of investment funds sector legislation and regulation. The Harwood Report, as it was christened, made a number of recommendations, including the creation of a ‘registered’ funds route where the focus of regulation would be on the licensed Guernsey administrator rather than the individual investment funds as products.
A registered regime was introduced for closed-ended funds from 1 February 2007. Taking this avenue means that the GFSC will grant the required fund consent within three working days if the Guernsey licensed administrator can show that it has carried out sufficient due diligence to be satisfied that the promoter and associated parties are fit and proper. This is a development of the approach taken by the Commission in respect of QIFs. The remainder of the proposals from the Harwood Report will be implemented when legislation is enacted later in 2007.
The Right Conclusion
Guernsey’s fund industry is flourishing, with alternative asset classes such as hedge funds playing a significant part. Renowned as an administrative centre, the Island’s substantial depth of expertise, strong corporate governance, convenient location and fast-track consent process for funds targeting experienced investors has made it increasingly popular for the domiciling of alternatives such as hedge funds. The Island’s progressive attitude also ensures that developments such as the registered funds regime keep it at the cutting edge of the international fund industry.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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