Cheryl Lister, Chairman and CEO of the Bermuda Monetary Authority - the body responsible for regulating the financial services sector, announced plans to introduce "far-reaching" changes to Bermuda's alternative investment regulations in a speech given at a BIBA (Bermuda International Business Association) sponsored event held recently.
Mrs. Lister provided a brief overview of Bermuda's hedge fund sector, citing its fairly recent origins and the incredible growth and success that has followed. Mrs. Lister however was careful to point out the market volatility that exists as a result of the large scale of hedge funds under management and the ability to react quickly to changing market conditions.
This degree of instability has raised the concern of some regulators who fear the sheer size of market "bets" could disrupt growth in the real economy. Mrs. Lister pointed out that following the Long Term Capital Management affair in the US, this concern has only grown, leading to calls for greater transparency and the possibility of having all funds regulated. With more and more investors looking to get a piece of the sizeable returns realized by many of the successful funds, questions are being raised as to how to best regulate the industry in order to protect the growing public.
While Bermuda's own hedge fund sector has flourished over the years, Mrs. Lister suggested that the Island's regulatory requirements have been appropriate and effective. She added that Bermuda had already sought to apply even tougher standards that call for full transparency and to protect investors. However, Mrs. Lister admitted that the present 1998 Regulations have not totally realized these objectives and as such, Government is in the process of introducing "far-reaching" changes and amendments to the present provisions, including a new primary statute to regulate pooled funds. Mrs. Lister suggested that these changes would address shortcomings in the existing regulatory framework of the BMA Act under which funds are governed.
The new provisions will also for the first time, provide licensing requirements for fund administrators in Bermuda while concurrently retaining the existing graduated approach to regulation with "more intensive supervision." However, from an institutional standpoint, regulation will remain "much lighter."
General Counsel of Hemisphere Management, Mr. Marty Brandt, welcomed the new provisions set forth by the BMA and suggested that the increased scrutiny placed on hedge funds by the USA Patriot Act represented a potential "business opportunity" for Bermuda.
He suggested that the presence of expert service providers on-Island, has put Bermuda in a strong position to compete with its onshore counterparts.
"The USA Patriot Act will…separate the hedge fund playing field into those funds which are willing to comply with the new rules and those funds which choose to set themselves apart and seek to evade detection and compliance. Those funds choosing to avoid compliance will be faced with a shrinking list of counterparties and service providers who are willing to do business with them."
He added, "Funds with institutional investors, or seeking to attract institutional investors, will seek out service providers with hedge fund expertise located in jurisdictions with excellent reputations who can leverage off that expertise and offer compliance solutions."
"Jurisdictions with questionable reputations will simply not pass the due diligence reviews of these types of investors. Bermuda, due to its excellent reputation and wealth of hedge fund expertise, is poised to take advantage of this flight to quality."
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