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HOW TO START A HEDGE FUND IN THE EU 2014 - HFMWeek

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HFMWEEK
S P E C I A L
R E P O R T
HOW TO START A HEDGE
FUND IN THE EU 2014
PART 2
OPERATIONS
The need for sound operational
and support networks
LOCATION
Exploring the destinations attracting
new funds
CHALLENGES
How new regulations will impact
the industry
FEATURING Backstop Solutions Group // Gibraltar Finance //
Global Prime Partners // Jersey Finance // Linear Investments
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We don’t just tick boxes.
We don’t simply provide services.
We provide a bespoke response in a template world.
Our services are what you would expect from your Prime Broker and include:
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lending and web based reporting. But how we deliver these services is what
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on the needs of start up and emerging managers.
It’s why we’ve won the HFM Week Award for
“Best Boutique Prime Broker“ for two years in a row.
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info@globalprimepartners.com
www.GlobalPrimePartners.com
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
INTRODUCTION
W
ith new regulations coming into force
and investors seeking greater levels of
transparency, it has been a testing 12
months for the hedge fund industry.
Start-ups in particular are under
unprecedented pressure as barriers to
entry continue to rise.
European fund managers – whatever
the size – are being challenged by a series of new demands, whether
because of new AIFMD regulation, which goes live next month, or
the growing requirements of investors. However, start-up managers
continue to be attracted by the European Union, whether their
fund is domiciled in the continent or not.
From the appeal of domiciles like Gibraltar and Jersey, to the
extensive brokerage and operational networks located across the
region, Europe’s position in the hedge fund industry remains
strong. And with the implementation of the AIFMD �passport’, it
is hoped the industry will experience a spike in EU-wide trading
activity over the coming months.
Despite the multiple challenges facing new fund managers
launching in Europe, there is still scope for long-term success. In
this report we explore some of the destinations that are enticing
new managers, discuss the impact of regulation and outline the
important operational considerations for new arrivals in the EU
hedge fund sector.
Chris Matthews
Report editor
Published by Pageant Media Ltd
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CEO Charlie Kerr
21
HFMWeek is published weekly by Pageant Media Ltd ISSN 1748-5894 Printed by The Manson Group
В© 2014 all rights reserved. No part of this publication may be reproduced or used without the prior
permission from the publisher
H F M W E E K . CO M 3
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
CONTENTS
CONTENTS
06
PRIME BROKERAGE
BOUTIQUE BENEFITS
13
FINANCIAL SERVICES
STARTING UP IN GIBRALTAR
Philip Canessa of Gibraltar Finance explains what Gibraltar can offer
to emerging managers and what managers should consider before
starting up
10
SOFTWARE SOLUTIONS
360В° PREPARATION
Chris DeNigris, global marketing manager at Backstop Solutions
Group, discusses the benefits of vertical cloud systems and the
importance of strong CRM when starting a hedge fund
4 H F M W E E K . CO M
JERSEY: AN ONGOING ROLE IN EUROPE
Geoff Cook of Jersey Finance tells HFMWeek why Jersey is
an attractive offshore solution for hedge funds following the
implementation of the AIFMD
Kevin LoPrimo, MD at prime brokerage and trading services provider
Global Prime Partners, discusses the challenges facing new hedge
funds and the importance of sound business practices
08
FINANCIAL SERVICES
17
INVESTMENT MANAGER
LAUNCHING A NEW FUND IN 2014: YOU CAN
DEFY GRAVITY THROUGH OUTSOURCING!
Jerry Lees outlines the benefits of outsourcing and what start-up
managers need to look for when choosing an investment adviser
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Jersey for Funds
Jersey is at the forefront of delivering fund services, with expertise in funds for institutional,
specialist and expert investors. Jersey has attracted a significant number of alternative investment
funds and built up an experienced range of fund administrators, both as part of the services
supplied by major custody banks and large specialist fund administration firms, and by boutique
groups who can provide bespoke services to meet individual investor needs.
Clients have access to legal support from Jersey law firms who work closely with counterparts in
the world’s major centres, to deliver structured products and specialist vehicles that meet diverse
financial and investment objectives.
For further information, please visit www.jerseyfinance.je
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
BOUTIQUE BENEFITS
KEVIN LOPRIMO, MD AT PRIME BROKERAGE AND TRADING SERVICES PROVIDER GLOBAL PRIME PARTNERS, DISCUSSES THE CHALLENGES FACING
NEW HEDGE FUNDS AND THE IMPORTANCE OF SOUND BUSINESS PRACTICES
T
Kevin LoPrimo,
managing director, is in
charge of hedge fund
services and equity finance
at Global Prime Partners Ltd.
With more than 28 years of
experience in the brokerage
industry, providing services to
hedge funds throughout his
career, Kevin spent over 19
years with Goldman Sachs.
he hedge fund market as a whole has experienced tough times over recent years but I
would say there is more money going into
smaller funds now then there has been in the
past. It is not an easy place to be – it never has
been – but I feel the market is improving.
Investors are looking for fresh ideas, fresh approaches
to strategies and are increasingly interested in newer managers. In general, new managers outperform more established ones because they are being more thoughtful about
their business, when you are starting something up you
need to think about anything and everything, and investors are often attracted to this and the potential of start-up
funds bringing something new to the table. They are also
more nimble due to their smaller size.
Although the investment climate for start-up funds is
improving, getting that three-year,
even five-year track record and
proving that your business is viable
and long-lasting can be a hurdle for
many funds, so it is paramount that
start-up funds have the best business and operational practices in
place, and continue to assess new
opportunities and investments
coming to the market.
INVESTORS ARE LOOKING
FOR FRESH IDEAS,
FRESH APPROACHES TO
STRATEGIES AND ARE
INCREASINGLY INTERESTED
IN NEWER MANAGERS
CHALLENGES
There are a lot of challenges to
starting up a hedge fund in the EU.
It depends on what angle you are
coming at it from. Are you somebody who has come from a big
fund and then you already know
what it is like to run a fund, to manage money, to manage
other people’s money, do you know what it is like to develop a business? However, there are those who are inexperienced at fund and business management and for these
individuals there are important considerations to take into
account.
I have had people come in here and they have managed
money somewhere else, be it a big or small firm, but they
have never run a business. The question becomes do you
know enough to realise you don’t know what it takes to run
a business and are you open to hiring somebody that does
know how to run a business, how to grow it and take all
those costs into account?
Ultimately, if you sit in front of an investor they are going
to look at your investment strategy, your risk management
and your business infrastructure, so if you do not have a
6 H F M W E E K . CO M
sound business infrastructure and you have not thought it
through then they are not going to invest.
There are undoubtedly more and more people coming
to the table having thought about such issues and new
managers seem a lot more open to receiving support and
advice from others than they were previously.
It is imperative to have that right business framework
and somebody who knows how to run a business involved
when starting a hedge fund, be it in the EU or anywhere else.
Some new managers often lack a detailed understanding of
fund administration, the relevant laws involved or compliance issues and having a good operational support team, a
strong technological infrastructure – cloud computing is
increasingly important – and a broad range of industry contacts are vital to getting a hedge fund off the ground.
As a new fund it is important to have strong technology infrastructure in place and at
Global Prime we have created an
integrated technology platform
which gives our clients the ability
to access information at any time
of the day.
Capturing all trade data, the platform provides a straight-through
processing solution and allows clients to easily track the data moving
between the fund’s various operational sections.
With full disaster recovery infrastructure and a built-in audit trail
for compliance and risk management purposes, the implementation of such technology can be
extremely beneficial to new funds,
giving them a comprehensive overview of operations.
Also, the ability to have secure access 24/7 and use in multiple locations is often very attractive to new funds, regardless of where they are based out of.
OFFSHORE VS ONSHORE
We are seeing a continued growth offshore as opposed to
onshore. With regards the AIFMD regulation, I think you
either like it and go with it or you go completely the other
direction and go offshore and do not market in the EU. I
don’t see people sitting on the fence with it – either you
feel you need the regulation or you don’t.
Exploring onshore jurisdictions, here at Global Prime
we have a number of clients in Gibraltar, Malta and we’ve
had some in Luxembourg in the past and we have even
seen interest in France recently too.
PRIME BROKER AGE
I think with offshore domiciles there is more
flexibility because there is less regulation present
and consequently managers are freer in how they
manage their fund – assuming you have the trust of
the investors. The whole debate is something of a
double-edge sword though, as while onshore domiciles are indeed more restricted, investors do generally feel more secure with an onshore structure.
BOUTIQUE BENEFITS
As mentioned previously, when you are setting up
a hedge fund it is important to have a good support
network around you and here at Global Prime we
believe the services offered by a boutique brokerage firm can significantly help a start-up operation.
Part of our selling point is that we offer a hightouch service and clients can pick up the phone
PART OF OUR SELLING
POINT IS THAT WE OFFER
A HIGH-TOUCH SERVICE
AND CLIENTS CAN PICK
UP THE PHONE AND
SPEAK TO SOMEBODY
WHO KNOWS WHO THEY
ARE, UNDERSTANDS
THEIR BUSINESS AND IS
EFFECTIVELY THEIR HELPLINE
and speak to somebody who knows who they are,
understands their business and is effectively their
helpline.
We act as an extra set of eyes and ears for hedge
fund managers and pride ourselves on delivering a
high-touch service to clients. With almost 100 clients on board and funds ranging from $5m to upwards of $30m AuM, we are experienced in dealing
with start-up funds and we know there can be challenging issues to confront.
If you are a two, three, four person shop you
might not have the expertise in place to deal with
these challenges and that is where we come in –
we consider ourselves an outsource operational
support for clients so they can focus their time on
making investment decisions and we can worry
about the operations. Q
H F M W E E K . CO M 7
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
STARTING UP IN GIBRALTAR
PHILIP CANESSA OF GIBRALTAR FINANCE EXPLAINS WHAT GIBRALTAR CAN OFFER TO EMERGING MANAGERS AND WHAT MANAGERS SHOULD
CONSIDER BEFORE STARTING UP
Philip Canessa
joined Gibraltar Finance in
September 2013 as senior
executive – funds and
asset management. He
has more than 30 years’
experience in the financial
services sector and was
for 11 years managing
director of an investment
firm managing hedge fund
portfolios. He also served
as a board director of a
number of funds in different
jurisdictions.
8 H F M W E E K . CO M
HFMWeek (HFM): What are the key considerations
for managers starting up in the EU, particularly in Gibraltar?
Philip Canessa (PC): It would be useful first to give you
some background on Gibraltar’s status within the EU.
Gibraltar is a British Overseas Territory and joined the
EU with the United Kingdom in 1973, therefore all EU
treaties are applicable to Gibraltar and all EU directives
are transposed into Gibraltar law. Gibraltar, however, is
not part of the customs territory of the EU and EU legislation in respect of the common agricultural policy, the
common fisheries policy and the common system of the
value added tax (VAT) does not apply to Gibraltar.
One of the key considerations for managers starting
up in the EU is therefore access to the single European
market. Following the transposition of the Alternative Investment Fund Managers (AIFM)
Directive into Gibraltar law in July
2013, AIFMs authorised in Gibraltar can, through a simple and
transparent process of notification
to the Financial Services Commission (FSC), Gibraltar’s financial
regulator, passport their services
into other EU states.
Of equal importance for managers is the regulatory regime and
the FSC, which is modelled on
the UK’s Financial Conduct Authority and Prudential Regulation
Authority, regulates in a sensible,
approachable and responsive
manner. Entities regulated in Gibraltar are able to work with the
regulator when the need arises. The FSC has set itself a
service level standard of 18 weeks to process applications
for authorisations, well below the statutory requirement
of six months.
Gibraltar’s size is also a key consideration. As a small
jurisdiction, we welcome start-up managers with smaller
funds wishing to set up in Gibraltar whereas larger jurisdictions may only want to look at funds with assets in
excess of $500m. Because of its geographical size everything in Gibraltar is close by; we have 15 banks, 31 investment firms, the Big Four audit and accounting firms,
ten fund administrators, international and UK qualified
lawyers, in 6.7 square kilometres.
Other considerations for managers are legal system,
tax regime infrastructure and lifestyle which will be expanded on later.
HFM: What are the biggest challenges facing emerging managers in the EU/Gibraltar and how can they
be overcome?
PC: The biggest challenges facing emerging managers in
any jurisdiction are usually based on how to set up a costeffective operation. These costs will comprise of regulatory costs and infrastructure costs including office space,
telecommunications and personnel.
Gibraltar has traditionally been, and continues to be,
a low cost jurisdiction. In addition, cost challenges are
mitigated by our favourable tax regime.
HFM: What can Gibraltar offer to emerging managers? Why should they set up there?
PC: There are several reasons why an emerging manager
should set up in Gibraltar. As mentioned previously, we
are within the EU and a manager
setting up in Gibraltar will have access to the European Union single
market.
We are the only common law
jurisdiction in continental Europe and our courts, statutes and
principles of equity are based on
English law. This makes business
transactions for legal professionals
much easier as most international
financial transactions are based on
common law.
Our Experienced Investor Fund
(EIF) regime provides for a robust and flexible product with a
number of key advantages; its prelaunch approval regime, where an
EIF can be launched in ten working days, makes it the
fastest “time to market” fund vehicle in the EU. Other
advantages are that there are no investment or borrowing
restrictions, the fund may be self-managed, the fund is
tax neutral and an EIF may be structured under a variety
of formations.
The tax laws in Gibraltar, though very favourable to
funds and investment managers, are not fundamental to
Gibraltar’s success as a jurisdiction but form part of the
overall package of making Gibraltar attractive as a jurisdiction for funds and investment management.
An investment management firm in Gibraltar would
only be subject to 10% corporation tax. Employees of the
firm who meet certain criteria can avail themselves of the
High Executive Possessing Specialist Skills (HEPSS) status and will only be taxed on the first ВЈ120,000 of earned
ONE OF THE KEY
CONSIDERATIONS FOR
MANAGERS STARTING UP
IN THE EU IS THEREFORE
ACCESS TO THE SINGLE
EUROPEAN MARKET
FINANCIAL SERVICES
income, which at the current rate of income tax
caps their annual tax at around ВЈ30,000. Gibraltar
does not tax investment income, there is no capital gains tax, no wealth tax, no inheritance tax and
does not levy VAT.
Gibraltar, however, is a separate and distinct jurisdiction to the United Kingdom within the EU.
The regulatory framework will also be familiar to
professionals who are used to dealing with the
regulator in the UK.
In addition, we offer a high quality lifestyle and
a Mediterranean climate.
THE ACTION TAKEN BY THE
US UNDER FATCA PROVIDED
A UNIQUE OPPORTUNITY
TO DEVELOP A NEW
GLOBAL STANDARD FOR
MULTILATERAL AUTOMATIC
INFORMATION EXCHANGE
HFM: Investors are concerned about tax
transparency, where does Gibraltar stand in
this respect?
PC: Gibraltar’s successful finance centre is based
on our government’s conviction that it must remain squarely within the mainstream of international consensus. In line with its commitment
to transparency and effective exchange of information,
Gibraltar has established a network of approximately
135 tax information exchange agreements to the OECD
standard, of which circa 100 have entered into force.
However, given that some of these overlap, Gibraltar effectively has tax information exchange mechanisms in
force with approximately 60 countries and territories
around the world.
The action taken by the United States under its Foreign
Account Tax Compliance Act (Fatca) provided
a unique opportunity to develop a new global
standard for multilateral automatic information
exchange. In keeping with its commitment to
transparency and exchange of information, Gibraltar therefore signed an intergovernmental
agreement (IGA) to improve international tax
compliance with the UK on 21 November 2013
and a similar IGA with the US on 8 May 2014.
HFM: How do you foresee Gibraltar’s hedge
fund space evolving in the next 12 months,
particularly in relation to start-up funds?
PC: Gibraltar’s fund regime is largely based
on its EIF regime. This regime will remain for
funds and managers that are out of scope of the
AIFMD but will allow those that wish to avail
themselves of the EU marketing passport, to
opt in to the AIFM regime. EIFs can therefore
be used as �in scope’ AIFs, and as they will have
to comply with the AIFMD will be �super EIFs’. AIFMs
wishing to set up Gibraltar funds will be able to do so
by establishing �super EIFs’ utilising the existing preauthorisation launch process available to EIFs. With
this regime in place and Gibraltar Finance’s strategy
of increasing our visibility at high profile hedge fund
events, we are optimistic that we will see a significant
increase in business coming to Gibraltar in the next 12
to 24 months. Q
H F M W E E K . CO M 9
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
360В° PREPARATION
CHRIS DENIGRIS, GLOBAL MARKETING MANAGER AT BACKSTOP SOLUTIONS GROUP, DISCUSSES THE BENEFITS OF VERTICAL CLOUD SYSTEMS
AND THE IMPORTANCE OF STRONG CRM WHEN STARTING A HEDGE FUND
M
Chris DeNigris
is responsible for developing
and executing a global
marketing strategy for
Backstop Solutions Group
within the institutional
investment industry. Prior
to joining Backstop, he
was global head of sales
and marketing for Koger,
Inc., a leading provider of
fund administration and
accounting software to the
alternative asset industry.
10 H F M W E E K . CO M
arketing is essential in preparing for
a launch, but as emerging managers are well aware, it is just one of the
many steps and regulations involved in
launching a new hedge fund. With so
many moving parts involved in a fund
launch, it is imperative that managers have the proper processes in place to effectively run their business.
“During the pre-launch stage, most funds have small
teams, limited resources and little time,” says Simon Johnson, EMEA managing director at Backstop Solutions
Group, the first software-as-a-service CRM platform for
the hedge fund industry. “While they’re marketing their
fund to prospective investors, they need a system that will
provide them with tools to work more efficiently, access
information on the go and track sales progress.”
Historically, managers have
relied on a patchwork of systems
– most often Microsoft Excel and
Outlook – to track communications, but increasing investor demands mean managers are now
asked to provide more transparency and greater clarity into their
business, which requires a firstclass operational infrastructure.
One aspect of building this is leveraging a dedicated system to help
develop and manage business processes both pre- and post-launch.
By using a single platform rather
than a disparate network of software from the onset, managers are
better positioned to increase multitasking and decrease errors during
an undoubtedly busy period.
This is where CRM software
adds value to your business practices. Standard CRM systems are
limited to offering a database for storing contacts, tracking sales pipelines and organising all communications. On
the other hand, vertical cloud software solutions, such as
Backstop, move beyond your basic CRM capabilities with
functionality developed to solve the specific, complex
needs of hedge fund managers. In addition, utilising an
industry-respected third-party system can also help the
manager gain credibility with potential investors performing their due diligence.
“Using a structured system like Backstop during the
pre-launch phase allows managers to ensure they have the
most efficient workflows in place to properly run a business,” says Johnson. “Backstop is structured to meet the
needs of all hedge fund managers, but it’s also flexible and
can be tailored to the specific needs of the fund to incorporate their own internal business processes.”
Backstop provides a 360-degree view of contacts. For
example, managers are able to see prospective limited
partnership’s related networks, including consultants, advisers and even peer managers that they may be interested
in as well. On each investor, Backstop will track and store
all activities, link correspondence to multiple contacts or
organisations, and search within notes and documents to
quickly find information. For added convenience, all of
this detail is also available on demand, via the cloud.
“New managers spend much of their time doing roadshows or travelling from meeting to meeting,” Johnson
remarks. “Having all of their contacts and activities available within
Backstop allows them to have instant access to that data. So, for example, if a manager is on the road
and forgets an address and gets lost,
they can easily pull that up in Backstop even when on the go.”
BY USING A SINGLE
PLATFORM RATHER THAN
A DISPARATE NETWORK
OF SOFTWARE FROM THE
ONSET, MANAGERS ARE
BETTER POSITIONED TO
INCREASE MULTI-TASKING
AND DECREASE ERRORS
IT’S ALL IN THE FUNCTIONALITY
Beyond managing the static contact details, Backstop can also aid
in managing the dynamic deal process through the creation of custom
fields and opportunities. From day
one, the manager can create a set,
organised process for the fund –
including noting the stage of the
outreach, assigning probability
and setting automatic follow-up reminders – to ensure no aspect of
the sales pipeline is overlooked.
This type of functionality should
be a main consideration for new managers looking to select a CRM system. As mentioned, the pre-launch phase is
often a time of limited resources – both in time and budget – which can sometimes lead funds to select more of a
commodity CRM option. While the lower costs typically
associated with these generic software products may be
appealing at the time, managers need to weigh the costs of
spending more upfront against the additional functionality, resources and experience that are advantages of vertical
clouds like Backstop.
“Software that is purpose-built for the hedge fund
SOF T WARE SOLUTIONS
industry typically has teams with years of industry
experience that can in turn give their clients access
to industry experts to assist in developing their
business processes and connect them with a network of industry affiliates,” says Johnson. “As is the
case with Backstop, years of industry best practices
are built right into the software. Plus, Backstop has
dedicated relationship managers and a professional
services team that assist new managers in building
out their specific workflows in a way that will help
maximise their time and available resources. These
offerings alone often outweigh the lower cost option of a standard CRM system and in the long run
pay dividends back to the manager.”
In addition to offering industry expertise during the launch phase, hedge-fund specific systems
often offer additional functionality for managing
investors’ capital-related information, such as communications and reporting, as well as capabilities
for tracking liquidity and fund flows, and management features for staying on top of regulations and
compliance needs.
“Although managers may not need to stay on top
of all of the numbers in order to launch their fund,
they will need these features down the line if they
want to provide their investors with the transparency and
detailed reports they have come to expect from
fund managers today,” notes Johnson. “Setting
aside the capital to invest in the right system before
launch can be much less costly and time consuming than switching to a new system in the months
or year post-launch.”
For example, Backstop is a scalable solution that
can grow with the fund as it matures. As the fund
adds investors or employees, Backstop can expand
to incorporate additional reporting options, such
as InvestorBridge. This option provides a customisable web portal that managers can use to give
their investors access to secure documents and
other on-screen content. Having Backstop already
in place creates an easy transition to this next layer
of usage.
Selecting a CRM system is non-negotiable for
new managers looking to launch a fund in today’s
environment. Without the proper controls in
place, it is inevitable that details needed for properly running the business and providing the necessary levels of service can’t be met.
“Ultimately, utilising a purpose-built CRM system like Backstop can provide managers with the
actionable intelligence they need to launch and
grow their business,” concludes Johnson. Q
IN ADDITION TO OFFERING
INDUSTRY EXPERTISE
DURING THE LAUNCH
PHASE, HEDGE-FUND
SPECIFIC SYSTEMS OFTEN
OFFER ADDITIONAL
FUNCTIONALITY FOR
MANAGING INVESTORS’
CAPITAL-RELATED
INFORMATION
H F M W E E K . C O M 11
Regulatory
Umbrella
Middle &
Back office
Capital
Introduction
DMA &
Trading Desk
Execution
Prime
Brokerage
& custody
Linear Investments
Outsourcing & Prime
Broker services
Select the services you
require or take the package
as a total solution.
sales@linearinvestment.com
Linear brings together the skills and expertise
that hedge funds need, within an integrated
platform solution. This approach will
significantly reduce your operational costs
and bring you to market faster and more
efficiently.
Linear achieves this by integrating Capital
Introduction, Prime Brokerage and custody
Services, Execution, DMA and Trading desk,
middle/back office operations and a regulatory
umbrella.
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
FINANCIAL SERVICES
JERSEY: AN ONGOING
ROLE IN EUROPE
GEOFF COOK OF JERSEY FINANCE TELLS HFMWEEK WHY JERSEY IS AN ATTRACTIVE OFFSHORE SOLUTION FOR HEDGE FUNDS FOLLOWING THE
IMPLEMENTATION OF THE AIFMD
J
Geoff Cook joined
Jersey Finance as chief
executive officer in January
2007 and is responsible
for promoting the finance
industry of Jersey around
the world. Previous to his
role at Jersey Finance,
he was head of wealth
management for HSBC Bank
Plc, based in London.
ersey 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 ВЈ200bn 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.
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 co-operation agreements
with EEA countries in 2013, including the UK, Germany
and France, Jersey’s regulator, the Jersey Financial Services
Commission (JFSC), is now granting licences 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
the 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 the
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 the 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
the 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
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
OFFSHORE SOLUTION
Where marketing into the EU is concerned, �offshore’ is very
much alive, and a combination of certainty and flexibility has
H F M W E E K . C O M 13
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
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.
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.
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
STRUCTURING
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 �offshoreonshore’ 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 the AIFMD, managers getting high-quality governance and backoffice 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
14 H F M W E E K . CO M
FINANCIAL SERVICES
FUTURE PROOF
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
the 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, futureproof solution within Europe. Q
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v email r.freckleton@pageantmedia.com
Richard Freckleton at +44 (0)207 832 6593 OR
O R V I S I T H F M W E E K . CO M FO R D E TA I L S
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
INVESTMENT M ANAGER
LAUNCHING A NEW FUND IN
2014: YOU CAN DEFY GRAVITY
THROUGH OUTSOURCING!
JERRY LEES OUTLINES THE BENEFITS OF OUTSOURCING AND WHAT START-UP MANAGERS NEED TO LOOK FOR WHEN
CHOOSING AN INVESTMENT ADVISER
T
Jerry Lees
is chairman
of Linear Investment
partners and Linear
Investments – a boutique
mini prime broker and
hedge fund incubator.
Prior to this Jerry was
global head of alternative
execution at Credit Agricole
Cheuvreux and a partner on
the executive committee.
Jerry was also a founder
of Liberty in the early
nineties, after having been
head of global operations
& marketing for Quotron
International (Citibank). In
1983 he was founder and
MD of Northgate Computer
Services.
here are many well-established and large organisations from all aspects of the hedge fund
advisory business who technically are in a
position to offer advice to the start-up hedge
fund. Advice from these sources, however, can
be very misleading and introduce you to a wall
of daunting cost. I believe our experience and track record
at Linear is fundamentally and refreshingly different in that
we have a specific focus on smaller
start-up hedge funds, and have
successfully helped many of these
early stage clients to succeed.
The problem with the approach
of the better-known firms with
large, well-established client bases
is that, by definition, their approach is geared towards the larger
fund including the larger start-up.
Some new hedge funds are able
to arrive with firm commitments
of significant investments virtually from day one. This situation is
far more rarefied than it was pre2008 for reasons I don’t need to
spell out. My feedback to you in
this article I would argue, is based
on practical experience in working almost exclusively with smaller
start-ups (more than 40 in the past
18 months) that may be kicking off
with a few million of their own money to build a track record (track records are no longer automatically transportable as many of you will have found out) or be at various
stages of early fund raising.
It is fundamentally important that the advisers you deal
with are specialists who are realistic and reasonable in the
context of your income and cost base when funds under
management are at early stages.
There are a growing number of advisers, who like us,
have decided to focus on providing solutions to emerging
funds and who will provide across the board services at
much lower cost than the big groups, but at the same time
provide quality and proper support. They do this, as we
do, by providing consolidated outsourced services across
a number of smaller funds, thereby building long term
relationships with their clients. Accordingly, both costs
and expertise are shared, and you receive value that would
normally only be achieved if you were part of a much
larger group. In addition – the regulators increasingly have
shown a preference for smaller entities to outsource to
professional grouped bodies, especially in the fields of risk,
operations, reporting and compliance.
Launching a new hedge fund in 2014, or even maintaining an emerging fund, can appear a daunting task, especially when considering the wave
of regulatory requirements and
investor’s scrutiny for operational
transparency. Funds with a team of
less than five people will find it increasingly difficult to meet requirements.
But there are new opportunities for fund managers to tick all
these boxes without getting bogged
down in procedures, thanks to the
emergence of a new breed of service providers that can provide institutional expertise, especially for
smaller funds below $100m.
The focus for regulators has
been to ensure that the numerous
and complicated processes around
running a hedge fund are carried
out by people with relevant expertise. Previously small funds with
a minimal number of employees
collectively responsible for running research, trading, operations, risk, compliance and raising capital have led to
concerns around accuracy and transparency for the end
investor.
Part of the spirit of the raft of regulatory changes, including the AIFMD, is focused on providing transparency to
investors. This is why it is more important than ever before
for hedge fund managers to ensure that they utilise the full
spectrum of service providers who can bring independent
expertise to the fund’s overall operations.
Many of the key components of running a start-up fund
can and should be more effectively outsourced to allow
focus on the core investment decisions. Take for example
raising capital - getting in front of numerous potential investors is a difficult and time consuming process. Working
with a specialist who will be marketing for multiple clients
LAUNCHING A HEDGE
FUND IN 2014, OR
MAINTAINING AN
EMERGING FUND, CAN
APPEAR A DAUNTING TASK,
ESPECIALLY CONSIDERING
THE WAVE OF REGULATORY
REQUIREMENTS
H F M W E E K . C O M 17
H O W T O S TA R T A H E D G E F U N D I N T H E E U 2 0 1 4 PA R T 2
will give a significantly greater reach and access and they
will be able focus on the right targets.
Other areas that are obvious targets for outsourcing
include the execution desk, where it is not an integrated
technical part of the strategy. Why tie up cost on the expensive task of manning an internal execution desk and
all the technology and back-up required when this can
be managed by a specialist who may have access to better
rates and more brokers?
Then of course there is the regulatory burden
faced by the whole industry, which is destined to
get more onerous and complex. It is essential that
you have a strong compliance function and capability to deal with the regulatory reporting and
management requirements, not to mention appropriate capital. This function is frequently outsourced to specialists such as Linear who can wrap
these services into a package under the prime brokerage structure, which in turn will be very costeffective for a smaller fund. The other advantage of
using a compliance/appointed rep structure under
a regulatory umbrella is that the whole process of
getting authorised will be significantly speeded up,
from nine to 12 months down to around four to
six weeks. The funds can then migrate to their own
structure in due course, whilst focusing on track
record in the meantime.
Investors who come to Linear looking for opportunities to invest in emerging managers on our platform have increasingly focused their due diligence around
�operational excellence’. They are seeking assurances that
people with the right skill sets are actively involved, on a
day-to-day basis, in the numerous post trade processes.
This also frees up the time of the manager to focus on what
they are best at, which ultimately is generating alpha for
investors.
At Linear we spend a significant proportion of the overall due diligence process on new managers going through
the intricate stages behind every trade. In this regard Linear is able to help it’s clients identify each stage and ensure
that careful consideration has been given to establish an
institutional approach to fund management from launch.
By working with experienced outsourced professionals
who have proven themselves with emerging funds
across all disciplines, you gain access to a wealth of
valuable expertise. This is what both the regulator
and investors are now looking for, in effect a safety
valve of oversight to ensure the business is being
run at the highest of standards.
This experience and oversight is particularly
important in such seemingly mundane areas such
as operational reconciliation. Without proper controls and expertise/resource this can rapidly get
out of hand. The experience of a mid/back office
support team handling the business of more than
a hundred accounts is telling and will give confidence to investors that the resources are there to
ensure that these processes do not fail.
To sum up, if you are starting a new hedge fund,
and unless you are one of the few who for one
reason or another start with a very substantial
initial investment, you need to look seriously at
outsourcing as much as you can to allow you to focus on
core competencies and keep costs down. You will benefit
from pooled expertise and at the same time alleviate cost.
The regulators and investors now increasingly prefer this
approach, it’s almost as if they had some watch-guard over
the business on a day-to-day basis. Q
BY WORKING WITH
EXPERIENCED OUTSOURCED
PROFESSIONALS WHO HAVE
PROVEN THEMSELVES WITH
EMERGING FUNDS ACROSS
ALL DISCIPLINES, YOU GAIN
ACCESS TO A WEALTH OF
VALUABLE EXPERTISE
18 H F M W E E K . CO M
INVESTMENT M ANAGER
GATEWAY TO THE
EUROPEAN UNION
SINGLE MARKET
Gibraltar Finance is the growing success story
in Europe for investment funds and investment
managers. It offers robust fund legislation, a
favourable fiscal regime, an EU framework,
efficient regulation, the flexibility of a small
jurisdiction and quality infrastructure.
Experienced Investor Funds (EIF)
An EIF is an authorised collective investment scheme exclusively
for investment by experienced investors and is designed to
invest in a wide range of traditional or alternative asset classes.
As an EU domicile, Gibraltar Finance provides investors
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thereby enabling passporting throughout the member states
of the EU. Gibraltar also presents both political and economic
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international standards and full employment rights for
EU/EEA and Swiss citizens.
Asset Management
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Management firms can establish themselves as a firm under
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2006, or the Financial Services (Alternative Investment Fund
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0DQDJHUV'LUHFWLYH$,)0'ZDVWUDQVSRVHGLQWR*LEUDOWDU
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(8bPHPEHUVWDWHV
For more information visit the Gibraltar Finance website:
www.gibraltarfinance.gi
One of the attractions of Gibraltar as a fund domicile is that no
regulatory approval is required before an EIF can begin to raise
capital and commence its investment activities. An EIF may be
launched based on a legal opinion that confirms that the EIF
has met all legal and structural requirements for its operations,
and provided that the fund’s documentation is submitted to the
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