With European legislation affecting the industry, and managers looking for talent and tax efficiencies, could hedge funds start relocating to the Channel Islands in their droves? Orlando Crowcroft investigates
Ever since Jersey and Guernsey began to actively seek diversification in their respective financial services industries, attracting a portion of the multi-billion-dollar hedge fund sector to the islands has been on the agenda.
And they have undoubtedly had some success. Guernsey"s BlueCrest is Europe"s second-largest, closely held hedge fund firm, and Jersey"s Brevan Howard Asset Management recently came in third in a world ranking of 100 hedge funds.
The Jersey Financial Services Commission said in June 2014 that around £45bn of hedge fund business is serviced in Jersey - around a fifth of the island"s total value of funds business. Guernsey too relies on hedge funds for 20 per cent of its total funds business, with five per cent funds and 15 per cent funds of hedge funds.
“Alongside the increase in the value of hedge fund business being done in Jersey, we"re also seeing a rise in the number of managers considering establishing a presence here,” says Richard Corrigan, Deputy CEO of Jersey Finance.
He explains that a number of major alternative fund houses have either moved to or expanded their presence in Jersey in recent months, including Brevan Howard and Apex Fund Services (Jersey) Limited, which join a well-established community of hedge fund managers including houses such as Altis Partners.
The numbers, however, are not huge right now, and Jersey and Guernsey are hoping the trickle of hedge funds into the islands will only increase as regulation becomes more onerous in Europe and the US. The latest piece of legislation from Brussels, the Alternative Investment Fund Managers Directive (AIFMD), has prompted a number of European-based fund managers to look not only at moving their funds offshore, but their businesses and themselves, experts say.
They look to the Channel Islands" lauded, fully AIFMD-compliant regime, which means once the AIFMD "passport" system is introduced - which Jersey and Guernsey both expect to qualify for in 2015 - fund managers based here will be able to operate in Europe. But equally, many will prefer to avoid Europe altogether, focusing on Asia, the US or the Middle East, from the islands.
In its effort to more closely regulate the actions of hedge funds and their responsibility to investors, the AIFMD has been unwelcome to many hedge funds managers, who feel that their clients - often large institutional investors, pension funds or extremely experienced individuals - want neither more regulation nor the inevitable rise in management fees that come with the cost of compliance.
“They"re saying we don"t need to have compliance with AIFMD because that isn"t necessarily what our investors want. These are sophisticated investors at the end of the day, they aren"t retail investors,” says Debbie Payne, Tax Director at PwC Channel Islands.
“I"m aware of at least two major hedge funds that have taken a very conscious decision that they didn"t want their manager to be in a country within the EU, they wanted them outside. As soon as you start to look outside the EU, Jersey and Guernsey are the first candidates that start to pop up.”
Cost efficiencies
Given the varying size and scale of hedge funds in the island, it"s difficult to put a figure on potential savings, but Wayne Atkinson, Senior Associate in the funds department at Collas Crill in Guernsey, cites an example of a Luxembourg fund compared to a Guernsey fund where the latter"s savings “were in the millions of pounds”. An added advantage of moving a manager offshore, he says, is that it substantially minimises that individual"s tax liability too.
But it"s not only geography and reduced tax liability that make the islands attractive to hedge funds looking to reduce their presence in the EU. Those looking to move managers and other staff to Jersey and Guernsey take other factors into account, such as their time zone, which is far more convenient for investors used to dealing with offices in European hubs. And there are other things to consider too.
“With the OECD initiatives, what you really have to think about now is where your people are. You have to look at it holistically: where do I see the talent located? Where do I want to recruit and where can I get a sensible level of tax efficiency?” says PwC"s Payne.
“And that"s where the Channel Islands is effective, because if you don"t want your main people or your manager in London, you can set up over here with a reasonable amount of people and you take a slice of tax out of your business. Your people are genuinely here and you have a talent pool here as well.”
That talent pool, Payne says, is a key concern for hedge funds when looking at where to relocate. She says that a current unnamed client - one of Europe"s top five hedge funds that is seriously thinking of relocating to Jersey - is considering a scheme whereby they track and recruit Channel Island graduates, employing them first in onshore hubs before moving them back to the island to take up senior roles.
Payne says she is personally aware of a further six major players in the hedge fund industry that are considering moving to the island, and that such an influx could be exactly what Jersey needs to secure a sizable chunk of hedge fund business - something that, but for a couple of high-profile aforementioned examples, has been lacking in recent years despite efforts from both islands to bring in more.
“The thing with hedge funds is once a group of them find a particular location attractive, it tends to attract more,” she says.
Atkinson doesn"t expect huge numbers to flood into the islands in the next few years, but, like Payne, he thinks the impact on the local labour force will be positive. He also expects the bulk of operations to remain elsewhere, with a small management hub in the islands.
“I don"t think we"ll see people setting up trading desks in Guernsey with hundreds of people,” he says. “We"re more likely to see a management operation that"s relatively small feeding back to other people in the world.”
However the business transpires, it seems the time is right for the Channel Islands to capitalise on the perfect storm created by European legislation.
Courting controversy
Hedge funds were, for a long time, seen as the black sheep of the investment world, known for using their financial muscle to make or break (more often the latter) companies and for their often bombastic celebrity managers.
Even if that reputation"s diminished in a more regulated and less freewheeling post-financial crisis world, hedge funds are still known for their reluctance to assent to government control, their high-risk strategies and considerable financial muscle.
In light of that reputation, some may wonder whether, reputationally, Jersey and Guernsey should want to provide some sort of Mecca for those managers looking for somewhere to ply their trade outside of the clutches of Brussels. Others, however, point out that things are a little more complicated than that.
“There are a lot of stereotypes about hedge fund managers, just like there are about lawyers like myself - or used car salesmen - and… while there"s always an example that fits the stereotype there will always be one that rebuts it,” says Wayne Atkinson, Senior Associate in the funds department at Collas Crill in Guernsey.
“Of course it"s not a great thing for the reputation of the island if you do have a "vulture fund" scenario - where you"re hearing about a fund taking predatory action - but that"s a matter for the law of the jurisdiction where it"s taking place. It"s very easy to criticise these things in the abstract, but the reality is a little bit greyer.”