Fund Domiciles Remain A Significant Consideration For Alternative Investment Managers
Alternative investment fund managers looking to launch in the current environment face challenges with capital raising due to the lack of face time with potential investors and ever-increasing regulatory challenges to negotiate. The choice of domicile for their fund feeds directly into both of these challenges, whether that means increasing or decreasing them. AlphaWeek's Greg Winterton spoke to Justin Partington, Group Head of Funds at investor services provider IQ-EQ, to understand the current landscape for fund domiciliation and what managers looking to launch new funds should consider.
GW: Justin, the current economic environment naturally dominates the headlines, but the U.K. is only 6 months away from the ‘full Brexit’ with the British government showing no signs of being willing to agree to extend the December 31st deadline. What do fund managers – both U.K.-based and non-U.K. based - need to be aware of with regards to how Brexit will affect their fund domiciliation decisions?
JP: Fund managers and their advisers have been carefully monitoring the third country delegation rules to ensure that commitments made last year by the EU would enable UK based fund managers – or ex-UK fund managers with UK teams or fund structures – to effectively advise their funds. If the UK should fail to reach a comprehensive trade agreement, then those promises might be in jeopardy and may need to be bilaterally reviewed.
GW: Let’s move onto BEPS. In May, the OECD held a virtual public consultation meeting on the 2020 Review of Country-by-Country reporting. What’s the current state of the BEPS initiative and how do you see this affecting fund managers’ domicile decisions as it currently stands?
JP: One of the main challenges is the way in which BEPS is implemented and the focus on hybrid mismatches. Domiciles with extensive tax treaties have been regularly used to efficiently avoid double taxation of fund investments, though there are indications that those structures could be less effective in the future. While fund managers likely do not have enough clarity yet on the future landscape, and we see managers continuing to structure funds in the same way as was the case before BEPS, retaining flexibility to migrate funds in the future (should it be required) is a key feature in today’s fund documents.
GW: From the institutional investor perspective, what are you seeing with regards to how investors are looking at a fund jurisdiction? Is there a still a bias towards more well-known domiciles, or is that not the case anymore, and why?
JP: Investors continue to require well-regulated, politically stable and tax efficient structures. Many institutional investors, including pensions and insurance companies, need certainty over the domiciles’ current and future regulations in order to plan ahead for fund investments that can be tied in for five or 10 years, or longer. There remains a strong element of inertia where investors are keen to follow their peers on domiciliation. All jurisdictions that have a good base of institutional capital and sensible regulation in a stable environment have good prospects for growth.
GW: Offshore domiciles like the Cayman Islands have recently updated their funds laws so that funds are subject to additional scrutiny. This helps the investors, but likely increases costs for the managers. From a cost/benefit analysis, what do you think are the primary considerations for a manager here?
JP: I think we are starting to see the blurring of “offshore” and “onshore” and those are trending towards being outdated labels. All major financial centres globally have introduced comprehensive regulations in recent years, including AML/KYC enhancements and substance requirements, and have complied with tax registration initiatives such as FATCA and CRS. The regulations in domiciles that could once have been labelled as “offshore” and “secretive” are universally more comprehensive than in major “onshore” jurisdictions such the U.S., and most of Europe.
With regard to Cayman, the updates are less about subjecting funds to scrutiny and more about ensuring good corporate governance, appropriate disclosure and proportionate regulatory oversight. Through the application of efficient technology, the additional cost can be minimised, though it is worth noting that as this is a level playing field across all major domiciles, it will simply be a cost of doing business.
GW: Do you see any trends emerging in the next 12-18 months in the fund domicile arena – whether that be on a regional basis, a strategy basis, or something else?
JP: As outlined in our recent fund domiciliation report, the main trends are additional new factors to consider, including BEPS and substance. These factors could lead to more funds being domiciled in the U.S. and U.K., though choice of fund domicile is based on a number of factors and established and reputable investment hubs will continue to thrive.
GW: Finally, Justin, if you had to pick one, what would be your main piece of advice for a hedge fund manager with regards to the domicile decision?
JP: The domicile should be for the life of the fund; it’s like a marriage. Choose carefully based on shared values and with the long term in mind, and make sure that you build strong relationships with all involved in order to withstand the test of time.
Justin Partington is Group Head of Funds at IQ-EQ
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