‘May your choices reflect your hopes, not your fears.’ – Nelson Mandela
Without question, the most detailed discussions that I have with our European based clients is where to domicile their new hedge fund.
Historically, the jurisdiction of a hedge fund was fairly routine. If the requirement was offshore, then the Cayman Islands took the lions share and if this included US investors, a Delaware feeder would be added. For European structures it would mainly be called upon for a UCITS, and we would see either Ireland of Luxembourg favoured. Then, in 2009, following the Great Recession, and the Bernie Madoff scandal, the simple choices became seemingly more complex.
Location, Location, Location.
This growth in jurisdictional choice for European hedge fund managers over the past 10 years has been driven by to two basic elements, reputation and adaptability.
The reputation of a hedge fund’s domicile has attracted significant attention from one key player: investors. In the post-crash new order, it is essential that ethical and governance considerations be demonstrated by those allocating to investment funds. The leading edge of this new-found social conscience is taxation. As low, or no, tax island states were seen to be harbouring illicit assets this put the spotlight on the Caribbean and specifically the home of hedge funds, the Cayman Islands.
Simultaneously, opportunity was being seized by the traditional onshore investment sector. Many jurisdictions across Europe sought to adapt to capture the profitable hedge fund business, including Luxembourg, Ireland, Malta, Holland, the Channel Islands, just to name a few. New regimes were established delivering equivalent terms to those found offshore.
The decision process today for domiciling a hedge fund is driven by three primary factors, 1) Regulation, 2) Corporate Governance and 3) Taxation. (note: I have deliberately excluded cost from this equation!). Each one of these factors will deliver a level of comfort to the socially conscious investor but must equally be balanced with the hedge fund managers ability to execute their investment strategy. In addition, it’s important not to forget practical elements, such as language, location and flexibility, that will be drawn into the decision-making process.
I recently completed a broad jurisdictional review, taking the above factors in to consideration. The outcome was somewhat frustrating, as relying solely on rationality it proved difficult to place one jurisdiction above another. What I did discover though was a strong correlation between those jurisdictions with a seemingly reputational advantage and their marketing budgets.
The choices for domiciling a hedge fund may be plentiful, but the differences are slim. Wherever you choose to establish your fund, I am certain you will have little to fear.
To learn how Quay Partners can guide your business to success, contact us for more information.
Quay Partners Group delivers bespoke investment management solutions to independent hedge fund managers and family offices.
Thomas Underwood, the Founder, has over 20 years’ experience in managing and operating hedge funds.