A Hedge Haven Makes Its Rules Even Lighter


By Alistair MacDonald

Wall Street Journal
September 29, 2007

Island of Jersey Offers Funds a New Regime; Will It Start a Trend? This summer's credit crunch showed just how little investors and regulators know about the assets owned by financial companies. But even as regulators and politicians around the world push for greater oversight of hedge funds, the small English Channel island of Jersey - a haven for funds thanks to its light regulatory touch and low taxes - is relaxing its rules even further. It is a shift that could trigger a race to the bottom among offshore financial centers: The demands that the Financial Services Commission, Jersey's regulator, places on some funds where investors have put in a minimum of at least $1 million will effectively fall to zero as of January.

Funds that choose to set up shop in Jersey - already home to hedge funds with a total of more than £40 billion, or $81 billion, under management, including the $2.8 billion Ermitage Group and the $640 million Altis Partners Ltd. - will be able to opt for a regime that requires no regulatory authorization to register, no outside audit and no public filings of prospectus changes, Jersey officials say. Jersey's decision to introduce a new regime "was based on demand from the hedge-fund and other alternative-investment management community, which wanted an unregulated product," said Robert Kirkby, a technical director at Jersey Finance, a quasi-governmental body that helps shape and promote financial services on the island. Funds can still choose a more rigorous oversight regime, he said.

The move could intensify the rivalry among islands such as Jersey, Guernsey, the Cayman Islands and the British Virgin Islands to become the offshore haven of choice for hedge funds and other alternative-asset managers - a business that provides the islands with much-needed jobs in financial and legal services. The amount of money in offshore-registered hedge funds reached $1.17 trillion in July, up from about $431 billion five years earlier and representing about two thirds of all hedge-fund assets, according to Chicago-based firm Hedge Fund Research Inc. "There is a lot of competition in terms of looking at what they can do to pull more assets in," said Stephen Burke, an executive director at London based IMS Consulting, which advises funds on regulatory compliance. Peter Niven, chief executive of GuernseyFinance, a promotional body, said the island has considered offering a zero-regulation regime and will "monitor both changes and trends in the industry," but so far feels it goes against investors' desire for strong corporate governance. Ted Bravakis, a spokesman for the Portfolio of Finance & Economics, the Cayman Islands' Finance Ministry, said that "if the market asked for it, we'd consider it."

Any trend toward lighter rules among offshore havens presents a challenge for regulators in Europe and the U.S., which are moving in different ways to push for more disclosure among hedge funds and reduce the risk that their combined investment strategies could precipitate a financial crisis. "The problem is that in order for these offshore centers to make themselves more attractive, they may look to offer ever more simplicity and flexibility in regulation," said Ieke van den Burg, a Dutch Socialist Member of the European Parliament who focuses on economic and monetary affairs. "The European Union member states are going more for stronger regulation of hedge funds, not weaker."

Regulators and politicians in many European countries are pushing for a stricter disclosure regime, which could require hedge funds to obtain ratings like those used for bond issues. In the U.S., the Treasury Department has created two groups to develop "best practices," which will include voluntary guidelines to mitigate systemic risk and improve disclosure. Britain's market regulator, the Financial Services Authority, already requires detailed checks on fund managers and filings about their trading and risk management. Still, responsibility for valuing the assets of hedge funds, protecting them from fraud and appointing staff is in the hands of the funds and their directors. In the case of offshore funds, they fall within the purview of offshore regulators. "Regulators in places like London have quite a limited role" in the regulation of a hedge fund, said Mr. Burke.

In an industry paper in 2005, the FSA expressed concern that investors might have a "false set of expectations" about the extent of its influence over hedge funds. A spokesman declined to comment further. The U.S. Securities and Exchange Commission tried to regulate hedge funds by requiring most fund advisers to register with the agency and be subject to routine inspections and examinations. A federal appeals court threw out the rule last year and the SEC has since focused on proposing to raise the monetary threshold investors must meet in order to buy into a fund. While many funds are registered offshore, the managers are typically based in the U.S. or U.K. and are subject to the antifraud laws of the country where they are based. Still, by incorporating a fund offshore, managers feel they can strip out one layer of regulation and administration, as well as lower their tax burden.

For their part, many offshore havens are trying to make that as easy as possible to do. Guernsey, an island neighbor to Jersey, switched in 2004 to a system that cut the time required to incorporate a new fund to around 72 hours from five to six weeks - largely by streamlining regulatory checks. Under Jersey's Expert Fund regime, which applies to most hedge funds on the island, a fund must have outside auditors and a board that includes at least one Jersey resident. It must also inform the local regulator of any significant changes to its business, such as updates to the fund's prospectus. Mr. Kirkby said that because funds already face regulatory requirements in places like London, they'd rather not suffer an extra layer of time-consuming and duplicating regulation where their funds are incorporated. The new lighter regime, he said, is for funds that work with high-net-worth individuals or institutional investors who know what they are doing, and all funds will be required to inform investors of the risk they are taking.

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