Regulators, tax authorities and investors are increasingly focused on the substance of offshore management companies and hedge fund governance.
Managers of hedge funds are facing four highly topical developments: (1) increased prudential supervision under the AIFM Directive, (2) the amendment of the Swiss Federal Act on Collective Investment Schemes (CISA) to bring it into line with the AIFM Directive, (3) increasing scrutiny by regulators and tax authorities of the "substance" of offshore structures, and (4) a heightened interest by investors in the corporate governance of hedge funds.
The European Securities and Markets Authority (ESMA) is consulting on a framework to govern the delegation of portfolio and risk management by managers in the EU to management companies domiciled outside the EU. Separately, the CISA in its amended form will require all Swiss domiciled managers of non-Swiss investment funds being managed or sold in Switzerland to apply for authorization by the Swiss Financial Markets Supervisory Authority (FINMA).
These developments pose a challenge to managers in Switzerland, many of whom manage or sell offshore funds in Switzerland and delegate key functionality (like portfolio and risk management) to an offshore management company. Some offshore management companies are "substance lite", which entails a risk that FINMA will require the manager's Swiss domiciled firm to be authorized under CISA. The Swiss tax authorities are also showing an increased interest in the substance of offshore management companies.
Meanwhile, institutional investors are increasingly concerned about corporate governance of hedge funds, and have expressed a clear desire that the majority of the fund's directors be independent of the manager. From a tax perspective, many Swiss domiciled managers take the view that the boards of their offshore funds be composed at all times of a majority of non-Swiss residents.
Appleby Zurich can help managers implement offshore substance and good corporate governance of their hedge funds by:
- Reviewing delegation arrangements between the Swiss domiciled firm, offshore Fund and offshore Management Company
- Providing fully insured and independent, non-executive directors to Fund and Management Company in the offshore domicile
- Hardwiring substance provisions into the constitutional documents and service agreements of Fund and Management Company
- Reviewing arrangements for location and frequency of board meetings, and provision of advice on how offshore substance can be reflected in board papers
- Conducting a health check on a Fund's board in light of the recent Weavering Macro Fixed Income case in the Cayman Islands
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