As the Dust Settles
Geoff Cook, chief executive at Jersey Finance talks to HFMWeek about Jersey’s strong position to meet increased business demands in the wake of AIFMD’s installation...
With the much-hyped transitional phase for implementing the EU Alternative Investment Fund Managers Directive (AIFMD) having finally come to an end this summer, attention has now turned to how it is bedding down in different jurisdictions.
Jersey has long held significant appeal as a domicile for the management and administration of alternative funds and, in the months since the regulation was brought in, there has actually been an uptick of alternative funds business being structured through the jurisdiction.
The latest figures show that the total value of funds being administered in Jersey, as of June 2014, have stayed consistently high, most recently breaking through the £200bn ($330bn) barrier. In particular, the value of hedge fund assets under administration in the island has stayed consistently high over recent years, representing a significant proportion of Jersey’s funds business.
Far from the AIFMD prompting a re-domiciliation to other locations - something that had been suggested by some corners of the European funds community - the trend evidenced across managers in Jersey is undoubtedly one of building significant future management substance here. A number of major fund houses, such as Brevan Howard and Apex Fund Services (Jersey) Limited, have moved to or expanded their presence in Jersey recently.
Thanks to its approach to regulation and specialist alternative fund expertise, Jersey is affirming its position as a leading domicile for European hedge fund business, including structuring and servicing, both in spite of and as a result of the AIFMD.
Managers are increasingly finding that the much–hyped AIFMD ‘passport’ is not always automatically the most suitable choice and that the private placement option into Europe, offered through Jersey, can provide them with a welcome degree of certainty and flexibility, without the headache and costs of reporting under full AIFMD ‘passporting’ compliance.
Figures from the Jersey Financial Services Commission (JFSC) indicate a strong take-up in Jersey's private placement route into Europe. Just months after AIFMD came into play, 176 Jersey funds and 49 Jersey fund managers are already actively marketing into the EU with JFSC authorisation under private placement regimes.
Additional data from the JFSC also shows that the UK remains a key market for Jersey managers. As of June 2014, in indicating which EEA Member States they intended to market into, most managers licensed to carry on fund services business in Jersey said they intended to market their funds into the UK. The next most important intended markets were Sweden, Belgium, the Netherlands, Ireland, Denmark, France, Germany and Luxembourg.
This is all extremely positive for Jersey, proving that its approach to European regulation remains appealing where managers are concerned.
Costs and value
All this is not particularly surprising, given how attractive the private placement option is as a means of accessing Europe and the passport getting a mixed reception from managers.
The cost of reporting and complying with all aspects of the AIFMD, through an AIFMD passport, is a particular concern. Research by BNY Mellon and FTI Consulting (July 2014), for instance, highlights that managers expect regulatory, risk and compliance reporting to account for the majority of ongoing costs associated with AIFMD compliance, with the increased costs in some cases looking set to fall onto individual funds.
The actual value of the AIFMD is being questioned too. The BNY Mellon/FTI Consulting research also suggested that only 39% of managers believe that AIFMD will be either ‘very beneficial’ or ‘slightly beneficial’ to their organisation, and the same proportion of respondents believe end investors will benefit from AIFMD.
Further research by IFI Global (‘The Impact of AIFMD’, October 2014), meanwhile, reveals that a significant number of managers feel the AIFMD’s carrot, the passport, is of little to no interest to them.
As far as the European fund structuring landscape is concerned, the IFI Global research shows that managers hold the general view that AIFMD will not require them to change the domiciliation of their funds.
However, the same research suggests that, whilst the European alternative fund industry is going through a period of substantial structural change, how much of that is down to AIFMD is open to question.
What the AIFMD will prompt, the research says, is for the European alternative fund industry to become even more institutionalised than it is today, with fewer independent alternative managers left in the EU with AUMs below $1bn by 2020. The report also indicates that boutique managers cannot see any real advantages to AIFMD, with a number of them indicating that they might move offices to centres outside Europe. In such circumstances, Jersey can offer a cost-effective base with European market access guarantees.
As the dust settles, the value, benefits and ease of implementation of the AIFMD passport is far from clear, and the private placement option is proving an attractive and highly credible alternative. But, because of the work that has gone into future-proofing Jersey’s regime, if the untested AIFMD brand succeeds in the longer term, the availability of an AIFMD-compliant option in Jersey, when third-country manager passporting commences in the EU, will only add to Jersey’s appeal across all manager and investor types and locations.
Now reluctantly accepted as the unavoidable future regulatory model onshore, the AIFMD brand has provided commentators with an opportunity to second-guess the Channel Islands' dominance in the alternative funds business, but the statistics suggest the tried and tested offshore model will continue to support discerning and successful managers and investors for many years to come.
It’s important, as we now look forward to a new era of funds regulation in Europe, to move on from a period of intense focus on AIFMD and consider the longer-term market developments. Being a non-EU jurisdiction, of course, Jersey is ring-fenced from the business risks and distractions of unprecedented levels of EU regulatory creep and, as a result, the future for Jersey’s hedge fund management and servicing industry looks bright.
From an administration point of view, for instance, there is expected to be significant opportunity for Jersey service providers to support their onshore counterparts as regulatory pressures – including AIFMD - ramp up the volume and complexity of reporting requirements. Onshore managers are already looking to outsource their administration and governance requirements to dedicated specialists, and Jersey, with its sophisticated network of highly experienced administrators, is ready to meet that demand.
For over 25 years Jersey has provided an efficient and familiar, appropriately regulated and tax neutral operational model for the structuring of hedge funds, which has helped deliver safe and stable returns for the industry and its international investors through all economic cycles.
Against a backdrop of continuing local political stability, regulatory certainty and fiscal efficiency and with a commitment to flexibility, expertise and guaranteed market access, Jersey is extremely well placed to provide hedge fund managers with a compelling, long-term and future-proof solution in Europe.
This article was first published in HFMWeek on 11 November 2014.