Ben Morgan and Tom Carey of Carey Olsen Guernsey look at changing rules around the island’s hedge funds.
As interest in hedge funds has grown in the UK and Europe during recent years, a large number of promoters have chosen to locate their funds in Guernsey away from traditional hedge fund domiciles. This is due in no small measure to the encouragement provided by the Guernsey Financial Services Commission for the use of the island as a domicile through two policy changes.
The first of these comes in the form of changes to the legal and regulatory framework to permit the usual form of operation of hedge funds. The second is the introduction of a streamlined authorisation process allowing promoters to establish hedge funds as qualifying investor funds (QIFs) within three working days.
The commission published a framework policy document on February 23, 2004, entitled "Hedge Funds: Flexible Approach to Authorisation Policy".
The framework gives the commission the flexibility to waive rules that had previously been problematic for hedge funds, in particular:
- The commission is prepared to waive the requirement for a fund to have a locally licensed custodian and will permit the appointment of a prime broker so long as it is regulated in an acceptable jurisdiction and has substantial net worth;
- The commission does not require a prime broker to offer physical segregation of fund assets from its own assets, even where fund assets held by the broker exceed credit extended by the broker;
- The commission will be prepared, provided that the process is robust, to permit arrangements that allow a preliminary estimation of net asset value for the purpose of allowing subscription monies to be taken into the fund before the final share allocation has been determined;
- The commission will also make available appropriate waivers from the operation of the client money rules provided that it is satisfied as to the robustness of estimation procedures to be used.
In recognising that many hedge funds are established for professional and experienced investors, the commission published a Guidance Document in February 2005 creating a streamlined authorisation process for QIFs. The process reduces the authorisation time scales that used to apply from four to six weeks to less than three working days once all the fund documentation is finalised. Approval will be given by the commission on the basis of the Guernsey administrator’s self-certification of the promoter.
QIFs can be established as open-ended funds or closed-ended funds and as single or multi-class unit trusts, investment companies, protected cell companies or limited partnerships. They are open to qualified investors defined as professional investors, experienced investors and knowledgeable employees.
The Guernsey administrator has an ongoing responsibility to monitor compliance with the matters it has self-certified and to ensure its rationale for the self-certification is clearly documented. The commission will consider derogations in relation to the rules relating to the relevant classification of investment funds subject to it having sufficient notice before the QIF application.
The commission’s change in policy has gone a long way towards promoting the advantages of Guernsey as a domicile for hedge funds and builds on the foundation of Guernsey as a burgeoning destination for fund of hedge funds.
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