Guernsey: Offshore Business Sectors
Investment Funds Management
Open ended funds may be established as Class A, B or Q funds and are constituted as companies, protected cell companies or unit trusts. Closed ended investment funds are constituted as companies, unit trusts, limited partnerships or protected cell companies.
Open ended schemes are authorised and entities involved in controlled investment business are licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended. The Commission has made a number of rules under the Law which set out the detailed requirements to be followed by all authorised schemes and licensees. These include:
- The Collective Investment Schemes Rules 2002 (which cover Class A schemes); The Collective Investment Schemes (Class B) Rules 1990 (which cover Class B schemes);
- The Collective Investment Schemes Qualifying Professional Investors (Class Q) Rules 1998 (which cover schemes designed for qualifying professional investors);
- The Collective Investment Schemes (Designated Persons) Rules 1988;
- The Licensees (Conduct of Business and Notification)(Non-Guernsey Schemes) Rules 1994.
- The Authorised Collective Investment Schemes (Class A) Rules 2008
- The Authorised Closed-Ended Investment Schemes Rules 2008
- The Registered Collective Investment Scheme Rules 2008
- The Prospectus Rules 2008
Class A schemes are those which meet the Commission's Collective Investment Schemes Rules 2002 and are therefore eligible for recognition by the UK Financial Services Authority for sale to the public in the United Kingdom under section 270 of the Financial Services and Markets Act 2000.
The rules for Class B schemes incorporate a measure of flexibility. This policy recognises that Class B schemes range from the retail fund aimed at the "general public" via institutional funds to the strictly private fund established solely as a vehicle for investment by a single institution. Their investment objectives and risk profiles are similarly wide-ranging.
The Class Q Rules seek to provide a clear and concise set of requirements for the operation of professional investor funds and have been designed to encourage innovation.
A Qualifying Investor Fund (QIF) regime was Introduced following consultation with the financial services industry in the latter half of 2004, and was welcomed by the island's fund industry. Under a streamlined application process, the Commission undertakes to grant fund approval within 3 working days provided that an appropriately licensed Guernsey applicant has certified that: the fund will be restricted to professional, experienced and knowledgeable investors; the applicant has conducted due diligence on the promoter and associated parties and has found them to be fit and proper; and the applicant is satisfied as to the fund's economic rationale and the disclosure of any risks associated with the investment vehicle.
New criteria for Qualifying Investor Funds released by the Guernsey Financial Services Commission in 2006 met with support from the island's finance industry.
Chief executive of GuernseyFinance, Peter Niven, suggested that the move "will serve to bring more business to the island", whilst Chairman of the Guernsey Investment Fund Association, Mike de Haaff, announced that:
"GIFA welcomes the change in criteria as it brings Guernsey in line with other offshore jurisdictions. The change in definition of a professional investor will encourage more take up of QIFs and can only be seen a positive move for the island's fund industry."
Under the new rules, the definition of Professional Investor has been widened to include an individual investor who invests a minimum of USD100,000 in such a fund.
The revised guidance note issued by the FSC also re-emphasised the due diligence obligations which Guernsey Licensees undertake when submitting applications for Guernsey Qualifying Investor Funds.
The growing use of Guernsey structures as vehicles for hedge funds has highlighted a number of areas where the investment fund framework can create problems, leading the GFSC to issue a consultation document: 'The regulatory framework for Hedge Funds in Guernsey' in November 2003. This culminated in a report issued in the latter half of 2004 which advocated more flexibility in certain aspects of the legal regime governing funds, including: dispensing with the need for a Guernsey-domiciled and licensed custodian to fill the role of a suitably qualified prime broker; waiving complex segregation requirements for prime brokers holding fund assets; waivers for funds which can demonstrate a need to use estimates of net asset value in advance of final NAV determination; and where estimation is permitted, a possible waiver of client money rules requiring segregation of subscription and redemption monies.
The GFSC has also recently issued guidance on the disclosure regime for closed-end investment funds. That guidance re-emphasised the flexible nature of the Commission's approach. Guernsey domiciled closed-end funds are subject to Guernsey company law and the Control of Borrowing regime, and it is clear, from the closed-end hedge funds already established under those arrangements, that few structural problems arise. In the open-ended sector, the position is more complex. Open-ended funds are subject to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended, ('POI') and to rules and regulations made under that law. POI provides, inter alia, that all Guernsey open-ended funds must be authorised by the Commission - there is no provision for 'unauthorised' funds - and that each fund must have a designated manager and a designated trustee or custodian.
Plans were announced in mid-2006 to dramatically change the legislation and regulation relating to investment and fund business in Guernsey.
The proposed changes include:
- The introduction of a new Prospectus Law covering the disclosure requirements for Guernsey investment funds and other local entities that are raising capital through the offering of securities;
- The placing of greater emphasis on the regulation of licensed service providers rather than individual investment funds;
- A new Funds Law to cover both open- and closed-ended investment funds; and
- Categorisation of funds into 'regulated' and 'registered' and streamlining the regulatory process by removing registered funds from that process
Peter Niven, the chief executive of GuernseyFinance, observed at the time that:
"Guernsey's fund business is at an all time high, with year-on-year growth in funds under management and administration of 47.4% to the end of March 2006. The timing of these recommendations could not be better to capitalise on this result and pave the way for further success."
He continued: "Guernsey's growth in investment business had been partly down to an increasing appetite for alternatives, in particular fund of hedge funds, property funds and private equity funds. Guernsey had also attracted a number of alternative fund managers to relocate to the island in recent years. In addition, traditional sources of new business are continuing to come through very positively."
In 2008 the island made several legislative amendments related to funds business and introduced a new set of fund rules. The main result is that now both Guernsey open and closed-ended funds can be established as authorised or registered funds. Authorised funds are regulated by the Guernsey Financial Services Commission and subject to closer supervision than registered schemes, which are not authorised by the GFSC.
Guernsey’s position as a jurisdiction of choice for new and innovative funds was strengthened in November 2009 with the launch of a new scheme that invests in the collectables market, according to Guernsey Finance, the jurisdiction's investment promotion body.
Launched by investment advisory boutique Emotional Assets Management & Research LLP (EAMR), the Guernsey-domiciled ‘Emotional Assets Fund 1 Limited’, invests in a diversified set of ‘Emotional Assets’ across some 15 sectors of the collectables market, from fine art and rare stamps to vintage jewellery and rare manuscripts.
It is the first time that exposure to a broad and diversified range of 'emotional assets' has been achievable via a single fund vehicle.
Kleinwort Benson has been appointed as the administrator and financial custodian of the Guernsey Closed-Ended Authorised Fund, with Bedell Cristin as the Guernsey legal advisor.
The Emotional Assets Fund 1 seeks to provide qualified investors with long-term capital appreciation. Its objective is to deliver a stable target growth rate of 15% per annum, with predictable volatility – at the same time preserving capital.
Bernard Duffy, Managing Director of EAMR, commented at the time that: “We chose to domicile the fund in Guernsey as it is such a user-friendly jurisdiction; it has robust legal system, a favourable tax neutral regime and excellent on-island administrators. Kleinwort Benson has a good reputation within the alternatives market, with specific experience in alternative asset classes, and has a hands-on approach to bringing on clients which helps the whole process."
He added: “At a time when conventional investment wisdom is being challenged and investors are questioning the investment merits of a range of assets, Emotional Assets are emerging as a viable and mainstream asset class.”
In the following month, Guernsey Finance announced the launch by HSBC Securities Services in Guernsey (HSSG) of a major, high profile fund worth USD1.5bn on the island.
HSSG has been chosen to provide administration services for the award-winning Tufton Oceanic Hedge Fund, managed by Oceanic Investment Management Limited.
Oceanic Investment Management is a subsidiary of Tufton Oceanic, a shipping investment house which focuses investment in shipping and oil services industries.
Paul Keltie, Head of Fund Administration for HSSG, said at the time that:
“This is great news, not only for HSSG, but for Guernsey as a whole. This deal brings new investment to the island, which can only be of benefit to our economy and community."
"It clearly demonstrates that we have the capability and talent in Guernsey to provide leading and innovative service solutions to support such truly alternative funds.”
A spokesman from Tufton Oceanic added: “We transferred the administration of the Fund to HSSG because of their ability to provide leading offshore administration services. We are confident that the Group will deliver us the best administrative support, to compliment our continuing growth strategy.”
End of year figures for 2009 show that the value of investment funds in Guernsey increased by GBP2.7bn (1.5%) during the final three months of the year.
The second successive quarter of growth took the total value of funds business in the island to GBP184.2bn as of the end of December 2009. Despite late growth, over the full calendar year, total funds business declined by GBP16.2bn (8.1%) from end-2008.
Guernsey domiciled closed-ended funds reached a net asset value of GBP85.4bn at the end of December, which was a rise of GBP4.3bn (5.3%) during the quarter but a decline of GBP6.1bn (6.7%) year on year.
The Guernsey open-ended sector was valued at GBP50.7bn by the end of the year – down GBP800mn (1.4%) during the final three months of 2009 and falling GBP12.9bn (20.3%) compared to twelve months previously.
Non-Guernsey schemes, where some aspect of management, administration or custody is carried out in the island, decreased by GBP800mn (1.6%) during quarter three to GBP48.1bn although this is GBP2.8bn (6.2%) higher than the value at the end of December 2008.
The figures issued also show that the gross asset value of all Guernsey funds reached GBP220.7bn at the end of December. This is a rise of GBP3.5bn (1.5%) from the end of September, which was the second quarter for reporting those gross figures.
“We can continue to be cautiously optimistic about our funds sector,” said Peter Niven of Guernsey Finance. “Although we have seen overall business decline by some 8% during the last calendar year, it must be remembered that this comes in the wake of a severe global financial crisis.”
“Our performance has outstripped some of our closest competitors and the fact that we have had two consecutive quarters of growth to the end of the year points again to a slow climb out of the general trough of 2008/9.”
“Our funds industry is proving robust throughout changing economic conditions and this final quarter of growth represents a positive move forward. It is another step down a long road to recovery but with increasing confidence in the markets, we hope that this will continue through 2010.”
Guernsey Finance announced in its annual report for 2010 that the overall value of funds managed in the bailiwick of Guernsey increased by 1.6% year on year to GBP261bn.
Following a drop of just over GBP10bn, first quarter growth in 2012 took the total net asset value of funds under management and administration in Guernsey to GBP270.1bn at the end of March 2012, representing a growth of GBP6.4bn year on year.
Fiona Le Poidevin, Deputy Chief Executive of Guernsey Finance, said: “It is very pleasing to see that the depreciation in the value of our funds business during the final quarter of last year was almost completely recovered during the first three months of 2012. Looking at the figures, we can see that there was an increase in fund values across the board but the vast majority of the growth can be attributed to a number of closed-ended and non-Guernsey schemes launching during the quarter.”
“What I am hearing from the funds sector is that much of this business is coming from managers who have used Guernsey in the past and are providing repeat business. This demonstrates confidence in Guernsey as a jurisdiction and in particular, the experience and expertise of our service providers. The fact that it also comes in the face of generally gloomy economic conditions is very positive but we must also be conscious that external events, such as developments in the eurozone, will continue to have an impact on our business.”
By the end of the first quarter in 2013, the net value of funds under management increased by 9.8% year on year, with the toal net value recorded at GBP296.5bn.
Guernsey domiciled open-ended funds reached a net asset value of GBP54.1bn at the end of March 2013, an increase of GBP3.8bn (7.6%) during the quarter but down GBP1.7bn (3%) year on year.
The Guernsey closed-ended sector was valued at GBP137bn at the end of March – up GBP6bn (4.6%) during the first three months of 2013 and up GBP13.1bn (10.6%) compared to 2012.
Non-Guernsey schemes increased by GBP9.9bn (10.4%) to reach GBP105.4bn at the end of March 2013 (and increase of GBP15bn compared to March 2013).