The hedge-able patch
27 July 2009
Guernsey’s transparent and sensibly regulated regime, geographical location and wealth of on-the-ground expertise make it a safe bet for the domiciliation of hedge funds. By Gavin Farrell
Guernsey is a European offshore jurisdiction from where hedge funds can be established outside the traditional Caribbean structure. Indeed, at a time of demanding corporate governance requirements, especially in light of the recent requests for greater regulatory oversight of hedge funds and the consequences of the Madoff experience, it is becoming increasingly important for some form of control over fund assets to be exercised and for directors to attend board meetings in person in order to query, among other things, those custody arrangements.
This has led to a review of safekeeping procedures of assets and to the domiciliation of offshore funds in more accessible jurisdictions, allowing the investment manager and board to attend meetings more frequently and visit the administrator and custodian in that jurisdiction at the same time.
Guernsey has always been recognised as a well-regulated, but not overregulated, offshore jurisdiction with an infrastructure that lends itself to servicing clients on a full-service basis. In terms of Guernsey products, hedge funds can either be open-ended or closed-ended. The vast majority of hedge funds tend, however, to be open-ended schemes, thus providing investors with a right to redeem their shares during the lifetime of schemes, albeit restricted in practice through long redemption notice periods, redemption gates, redemption fees and/or other limited rights of redemptions.
Recent reforms in Guernsey have reduced the burden of regulatory approval in the case of hedge funds by setting these up as registered funds. Such funds will benefit from a self-certificated and expedited process.
In such cases the Guernsey Financial Services Commission (GFSC) undertakes to issue appropriate fund authorisation, if the application is successful, within three working days of receipt of the relevant application documents (see below).
In addition, any required incorporation and licensing of a management company to the fund may also benefit from a fast-track approval regime. In circumstances where the fund does not wish to benefit from the self-certificated regime, and prefers to go through an authorisation process and review of documentation by the regulator, the procedure continues to follow the three-stage process - the outline, interim and final stages:
- Outline stage: this requires the completion of a form setting out the basic details of the fund’s structure and objectives together with details of all parties involved.
- Interim stage: this will see the filing of the near final draft prospectus with a form containing a checklist of the disclosure requirements in the prospectus.
- Final stage: once the GFSC has reviewed the draft prospectus and related forms, and has obtained satisfactory responses to its queries (if any), the filing of the final prospectus and certified copies of constitutive documents and material contracts disclosed in the prospectus are required. The granting of full approval will then be considered by the GFSC.
If the entity responsible for a fund’s establishment is not already known to the GFSC, additional documentation and time to conduct due diligence on that promoter will be required at the time of, or before, the outline stage.
Hedge funds will need to be administered by a Guernsey fund administrator and to appoint a custodian.
However, in February 2004 the GFSC relaxed its rules for hedge funds, the need for such relaxation being deemed to be particularly appropriate in the case of funds targeting institutional and/or expert individuals. It waived the obligation to appoint a Guernsey custodian where
a reputable prime broker has been appointed.
As with many of the leading hedge fund jurisdictions, Guernsey plays host to a range of third-party service providers, including approximately 40 different entities providing fund management, administration and custodial services to the industry. Many of Guernsey’s administration firms are part of global operations that can outsource to other centres of particular expertise where necessary.
In addition, Guernsey is situated approximately 40 minutes flying time south of London and, as a result, is an accessible jurisdiction for the holding of meetings, as well as satisfying prudent corporate governance and fiscal arbitrage.
Gavin Farrell is a partner at Ozannes in Guernsey