Jersey: an ongoing role in Europe
Jersey has long held significant appeal as a domicile for the management and administration of alternative funds and, despite some talk about the Alternative Investment Fund Managers Directive (AIFMD) having a ‘concentration effect’ in Europe involving just a handful of EU countries hosting and servicing European-focused funds, Jersey’s experience and expectation is very different.
Fund values are performing well, with the net asset value of funds being administered or managed in Jersey standing at around £200bn as at the end of the first quarter of 2014, and the number of funds registered in Jersey rising to well over 1,500.
With the global asset management industry expected to grow from $65trn to in excess of $100trn by 2020 (PwC, ‘Asset Management 2020: a Brave New World’, February 2014) and alternative investments to grow from $6.5trn to over $13trn, there is positive news for the alternative asset servicing industry. As cross border finance grows, so too will the demand for tax neutral capital raising and pooling centres, and Jersey is well placed to meet that demand.
With the end of the transitional period for implementing the AIFMD now imminent (22 July 2014), there are incredibly encouraging signs that the enormous amount of hard work that has gone into establishing Jersey’s ‘future proof’ model in relation to the AIFMD is being very well received, including where hedge funds being marketed into Europe are concerned.
In fact, research suggests that around 70% of EU fund managers are considering setting up an offshore solution in response to the AIFMD (KNEIP, June 2013), with Jersey’s private placement option into Europe providing managers with a welcome degree of certainty and flexibility without the headache of reporting under full AIFMD ‘passporting’ compliance. It’s why 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.
Where marketing into the EU is concerned, ‘offshore’ is very much alive, and a combination of certainty and flexibility has been borne in mind in Jersey’s response to the AIFMD that allows funds to be marketed into the EU through national private placement regimes, with the option of an EU-wide passport as anticipated from July 2015, or to the rest of the world through existing regimes outside the scope of the AIFMD.
Having signed 27 bilateral cooperation agreements with EEA countries in 2013, including the UK, Germany and France, Jersey’s regulator, the Jersey Financial Services Commission (JFSC), is now granting licenses for fund managers actively targeting European markets through private placement arrangements, with limited AIFMD reporting and disclosure requirements.
In addition, Jersey was also the first third country to offer managers a fully compliant AIFMD option, meaning that Jersey has an anticipated ‘opt-in regime’ for managers wishing to comply fully with AIFMD requirements when marketing to European investors, with the use of an EU-wide passport as expected from July 2015.
In comparison with onshore, Jersey’s AIFMD regime is incredibly competitive, with regulatory approval for accessing Europe through private placement under AIFMD including options which can take from between just three and ten days, depending on the structure. This can be juxtaposed with the waiting time for funds being granted full AIFMD authorisation reportedly stretching to months in some EU countries.
Moreover, with recent reports suggesting that AIFMD has not yet been fully transposed into law by a third of all EU countries, and that around half of all managers have not yet applied for authorisation under AIFMD, Jersey’s private placement route is expected to prove incredibly effective and popular as a means of guaranteeing hedge fund managers with a seamless route into Europe.
This expectation is being translated into reality too – approaching 50% of all funds registered in Jersey in the past six months have been authorised for private placement under AIFMD and, with a BNY Mellon survey earlier this year suggesting that 20% of fund managers would apply for their AIFMD passport during the final three month period prior to the 22 July deadline, there is real potential for the private placement option to give managers marketing into Europe another option and some welcome breathing space. In so doing, they can take time to assess the full impact of the AIFMD in a safe, secure, familiar environment before committing to the onshore requirements under the AIFMD.
In particular, and importantly, with the UK Treasury confirming its national private placement regime will be in place until 2018, Jersey will continue to benefit from certainty of access to the hugely important UK investor market.
In setting up a hedge fund within the EU, there are real opportunities for Jersey. As far as structuring is concerned, as we near the end of the transitional period, Jersey’s expectation is to see ‘offshore-onshore’ structures become more commonplace, with some hedge fund managers choosing to run an onshore EU fund actively marketed in the EU, alongside a more cost-effective and flexible offshore option for other investors.
Meanwhile, in the face of increasingly complex reporting requirements under AIFMD, managers getting high quality governance and back-office experience and expertise will be key. With that in mind, there is likely to be a growing demand from hedge fund managers to outsource their administration and governance requirements to a centre like Jersey that has a sophisticated network of highly experienced administrators.
Managers can draw on Jersey's deep experience in fund administration, asset servicing, tax advice, and accounting, and have fast access to real governance expertise. The long-standing ability for Jersey to field local directors and officers of management entities with risk and portfolio management skills, and Jersey's ever-growing pool of skilled non-executive directors means there is little risk of Jersey management entities being discounted as mere ‘letterbox entities’.
This sort of long-standing expertise has created a genuine offering of substance in Jersey and a model that is attractive for EU-focused hedge funds. It will be of considerable comfort to managers that the familiar onshore EU adviser/offshore manager model still works in Jersey too, without risk of an EU onshore adviser being regulated as a manager onshore.
As we look beyond the end of the AIFMD transitional phase next month, the future for Jersey’s hedge fund management and servicing industry looks bright, both within Europe and outside of it.
Despite the onslaught of complex regulation and managers still being cautious about the full impact of AIFMD, there are real solutions. Flexibility, expertise and clarity are absolutely key for hedge fund managers and Jersey is extremely well placed to offer these qualities and provide managers with a compelling, long-term, future-proof solution within Europe.
This article was first published in HFMWeek's 'How to Start A Hedge Fund in the EU 2014' Guide, published June 2014