Originally published in the HFM Week, Guernsey Report, June 2008
Wayne Bulpitt of Active Group discusses the meaning of hedge funds as an asset class and current trends in the ever changing investment market
HFM Week (HFM): What are the different types of asset classes available in the current market?
Wayne Bulpitt (WB): Guernsey is currently host to a whole range of investment vehicles including traditional equity funds through to alternative asset classes, hedge funds with their various derivative fund guises, debt funds, guaranteed products, closed-ended private equity vehicles for venture capital, as well as other areas such as emerging markets and technology funds. Quite simply, if you wanted to set up a classic retail securities fund, a physical commodity fund, a property fund or a specialist private equity fund you could do them all from within Guernsey.
The island has a mature regulatory environment which has evolved to cater for the demands of sophisticated and alternative investment managers. Asset wise, there is not a lot we can't do in Guernsey in today's market. The regulators are open to new ideas, as long as the promoter is of the utmost standing, and the experience and quality of the commercial infrastructure in the island is an attractive appeal to those specialist promoters seeking to create the funds of their choice.
HFM: What asset classes are performing particularly well or poorly?
WB: I think a lot of firms have had to take a hard look at property recently. But diversity within this sector would appear to be easing the downside. International property offers opportunities in jurisdictions where the asset class is still on the up, and commercial property with its more consistent rental income stream has perhaps suffered less in general than residential property. Interestingly, we've been asked to establish more property funds during 2007 than any other single asset class.
In Guernsey as a whole, given the substantial growth that was the hallmark of 2006 and early 2007, it appeared that the island might not be able to sustain its pace, especially with the changes on the world economic scene, and most notably the subprime crisis. However, business flows have remained more than robust well into 2008. The value of total funds under management and administration reached £204bn by the end of March 2008, an increase of 14% over the quarter and 45% year-on-year. Traditional funds remain well represented but the major driver of growth has been the increases in alternatives such as funds of hedge funds, property and private equity, as well as more esoteric asset classes such as fine wine, fine art and timber.
Guernsey firms have responded to this growth in alternatives by developing their capabilities to facilitate the more difficult administration of these funds. Guernsey will continue to enhance its regulatory and legal framework to attract business. Certain hedge funds have struggled recently but I don't think that would come as a surprise to many considering the turbulence in the markets. It appears that the more aggressive and highly geared hedge funds have experienced these downturns. Indeed the more 'hedgelike' the hedge funds have behaved, the easier they will have sailed the current turbulence.
HFM: It has been said by many in the industry that hedge funds have become a separate asset class. Do you agree with that statement?
WB: I would agree that the rise of the hedge fund has driven publicity and availability surrounding these products to levels more attainable than ever. Many former 'traditional only' investors will now be considering, if not participating in, hedge funds; and the phrase 'hedge funds' is now a commonplace term in the dialogue of even the less sophisticated investors. Guernsey has experienced a rise in hedge funds with pure derivatives funds accounting for 7% of the total number of the classes within the 190 open-ended multi-class funds in Guernsey as at the end of 2007.
Even the definition of what a hedge fund is might be changing. It would appear that gone are the days when a hedge fund was purely a vehicle for the super rich, interested in alternative derivative products, with a lean to hedging against any potential losses in those derivatives. It seems far more commonplace now for hedge funds to be more aggressive, and less concerned with downsizing the risk of the bear market. I'd say that the hedge fund has certainly evolved into a mature standalone asset class and has a more than interesting future ahead of it; it has certainly found a good home in Guernsey.
It is worth also noting that the UCITS 3 directive allows hedge funds to be sold to the retail market in Europe within certain restrictions. The new UCITS rules allow the use of derivatives up to 100% and for more than just efficient portfolio management, as well as the use of leverage up to 200%. This demonstrates the continually evolving financial world market; today's alternative investments become tomorrow's retail fund.
HFM: Would you say firms are administering fewer fixed income assets due to the market conditions?
WB: Market conditions in the past three years have promoted growth in areas other than fixed income certainly. Guernsey is being approached with a good deal of interesting and alternative projects. I would say that this is indicative of the market conditions today and I would say it is a sign that the alternative has become more normal.
HFM: Is a particular asset class becoming more prominent in the current climate, and what are the more attractive asset classes to administer?
WB: From our perspective we would definitely say alternative assets and fund of hedge funds are forming the bulk of our new fund proposals. I believe a great deal of this has to do with Guernsey's growing reputation in dealing with hedge funds and alternative asset classes. It's becoming easier to establish such vehicles simply because the levels of familiarity, both on the regulatory side, as well as the professional services side of the industry, are increasing. This obviously allows a degree of experience which compliments the formation of such products.
Everyone likes to administer assets which go up in value. The levels of work involved are always greater with more complex assets, but businesses don't like to ever get left behind and the rise of the hedge fund and the alternative asset classes is something in which most of the players want to be involved.
HFM: What are the different charges for administering the various asset classes?
WB: Administration charges vary greatly with the complexity of the work being undertaken. Charges are driven by the availability of price sources and the ever increasing obligations of accounting standards. In some cases we have seen changes, especially following the impact of the credit crises, on fixed income funds, leading to increased charges for those asset classes as the process of valuing the portfolio becomes more complex.
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