jul 2007 isle of man hedge fund services 2007 - … · abacus financial services limited is...

Administratorsbenefit from fundsof funds revival

Light-touchspecialist vehicletargets domicile

Island focuses onattracting hedgefund managers

Isle of Man Hedge Fund

Services2007

Jul 2007

ISLE OF MAN Hedgeweek Special Report Jul 2007 www.hedgeweek.com | 2

CONTENTS

In this issue…03 Financial services message wins aninternational audienceBy Phil Davis

05 Private funds offer new options to highnet worth investorsInterview with Andrew Ashworth, Abacus Financial Services

09 Local service provides anentrepreneurial success storyInterview with Anthony Long, Capital International

11 Development effort looks to broadenrange of hedge fund activityBy Phil Davis

13 Fortis builds scale with sophisticatedadministration skillsInterview with Charlie Woolnough, Fortis Fund Services

17 Partnership paves way for fund sectorgrowthInterview with Mike Simpson, PriceWaterhouseCoopers

Special Report Editor: Simon Gray, [email protected]

Sales Manager: Simon Broch, [email protected]

Publisher/Editor-in-Chief: Sunil Gopalan, [email protected]

Marketing Director: Oliver Bradley, [email protected]

Graphic Design (Special Reports): Siobhan Brownlow at RSB Design

Photographs: Courtesy of Isle of Man Finance Image Library

Published by: Hedgemedia Limited, 18 Hanover Square, London W1S 1HX

Tel: +44 (0)20 3159 4000 Website: www.hedgeweek.com

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After a 30-year career in the City, Peter Longcould have been forgiven if he had moved toa relaxing and beautiful tax haven with oneeye on a golden retirement. But Longactually went to the Isle of Man for far moredynamic reasons.

He viewed the island as a potent force inthe making and decided to launch a firm ofstockbrokers there with sons Anthony andDavid, themselves financial industryprofessionals.

Although they knew little about the Isle of

Man before they conducted their research in1996, the Longs soon identified thejurisdiction as the ideal environment in whichto set up Capital International, a broking,administration and fund management firm.

“We realised that the environment on theIsle of Man was conducive to entrepreneurialbusiness,” says Anthony Long. “Theregulator here is incredibly realistic in itscommercial outlook and willing to workclosely with industry. This contrasts withLondon, which has thousands of regulated

O V E R V I E W


Financial servicesmessage wins an

international audienceBy Phil Davis

➧ p6

Abacus Financial Services Limited is licensed by the Isle of Man Financial SupervisionCommission as a Category 3 Investment Business licence holder.

Contact us for more information:

Telephone: +44 (0) 1624 689600

Email: [email protected]

Abacus, Sixty Circular Road, Douglas,

Isle of Man, IM1 1SA, British Isles.

www.abacusiom.com

A truly bespoke solution• Fund design• Launch co-ordination• Shareholder services• Net Asset Valuation• Fund accounting• Compliance• Corporate governance

Our service sets usapart from the rest

With strong growth in the ranks of the wealthyin recent years, high net worth individuals andgroups are increasingly willing to investportions of their liquid assets themselves.They are emboldened by the availability ofinformation and data on the internet andelsewhere, and ally it to their own knowledgeand skills to enhance their wealth.

“Although many also use assetmanagers, they find that traditional fundsmay not reflect their views and thatalternative asset management can becostly,” says Andrew Ashworth, managingdirector of Abacus Financial Services.“Equally, unstructured asset pools such asinvestment clubs often create unforeseenproblems and risks.”

Abacus, which has USD3.5bn in fundassets under administration, believes that theIsle of Man’s fund regulation offers aninvestor-friendly structure to fill the gap.

Under the Exempt Funds regime, a groupof investors can create a vehicle that poolstheir assets in a tax-efficient structure aslong as it is not offered to third parties.Investments can range from shareholdings ina global equity portfolio to prime property toa buy-to-let portfolio in eastern Europe.

This structure is likely to appeal to afamily in which several members wishcollectively to put several million pounds towork, or to like-minded investors who cometogether under the guidance of anindependent financial advisor. As an Isle ofMan entity, the vehicle is not subject tocorporation tax and, in the case of aproperty portfolio, rental income rolls uptax-free.

“It’s like a teenage version of private

equity,” says Ashworth. “It could eventuallyturn into a full private equity vehicle, takingfees and providing carried interest for thepartners.”

Abacus believes that having a formalstructure and professional administrationaround the investments is key. “An informalinvestment club is not ideal,” he says. “Eachinvestor has to be registered with thestockbroker, then someone has to run aspreadsheet and try to produce valuations.Without systems, procedures and cover inplace, this places a lot of strain on atreasurer to get the numbers right.

“A proper fund structure means there areshares and subscription and redemptionrules. These are important if the friends orfamily members disagree or are forced tocash out due to personal circumstances. Aclosed company is not designed for that.”

Abacus says it can smooth the processfrom beginning to end. It designs thevehicle, incorporates the company, issuesthe shares, manages cash, executestransactions and reconciles cash andassets.

At the end of every period, it sends outan NAV and produces a set of annualaccounts. As the portfolio matures andpeople require the cash for planned orunforeseen events, the firm handles theredemption requests and distributes theproceeds.

“You are getting professionaladministration by a licensed operator of astructured legal entity in a good jurisdictionat low cost, which allows the investmentgroup to focus purely on the wealth creationprocess,” says Ashworth. ■

A B A C U S F I N A N C I A L S E R V I C E S


Private funds offernew options to highnet worth investors

By Phil Davis

Andrew Ashworth, managingdirector of Abacus FinancialServices

entities that cannot possibly all have arelationship with their regulator.”

The Longs’ story could be seen as aproxy for many firms in the Manx financialservices sector which, after a tentative start,has blossomed in a way that few could haveexpected when the Experienced InvestorFunds legislation was enacted in 1999.

EIFs were designed to involve a minimumof red tape, could be launched without pre-approval and were not subject to productregulation provided they used an authorisedadministrator in the Isle of Man. To this day,EIFs are the fastest-growing category offunds on the island, making up 135 of the422 funds and representing assets ofUSD9.8bn.

But laws and regulations, althoughsignificant in the island’s recent growth, donot tell the whole story. Some of its greateststrengths are rooted in its distant past. Forexample, Tynwald, the Manx Parliament, ismore than a thousand years old and is thelongest continuous parliamentary assemblyin the world.

The island makes its own laws andoversees all its internal administration, fiscaland social policies, with the Britishgovernment responsible only for externalissues such as defence and foreign policy. Aself-governing UK crown dependency, theisland is part of the Commonwealth and ofthe Organisation for Economic Co-operationand Development. In short, it is independentenough to act in its own interest, but has thepatronage of a relatively powerful and well-connected country.

The island has also earned a reputationfor high regulatory standards and financialstability, enjoying an AAA risk rating fromStandard and Poor’s. An InternationalMonetary Fund report in 2003 said the Isle ofMan had a high level of compliance withinternational standards in areas such asbanking, insurance, securities, prevention ofmoney laundering and combating thefinancing of terrorism.

With many of the essential building blocksin place, the stage was set for a further stepforward in 2003, the year that Brian Doneganbegan working with Isle of Man Finance, thegovernment agency dedicated to promotingthe growth of the sector.

The offering for funds at that time, in his

words “could have been more competitive”.There was no obvious way to challenge thesupremacy of Dublin, which had a seeminglyimpregnable position as the administrationcentre of choice for Cayman funds.

“Back in 2003 we could see there wouldbe no funds growth unless a new strategywas put in place,” says Donegan, who is Isleof Man Finance’s business developmentmanager for the funds sector. The mainplanks of this strategy were the removal ofVAT on all companies except banks, and theending of the dual regulation of funds notdomiciled in the Isle of Man.

In addition, the island created a zero rateof corporate tax for fund managers andadministrators, a regime that was extendedto every business last year. “We decided toposition ourselves clearly as a place wherealternative funds could incorporate,administer and manage all in the samelocation,” he says.

The main targets were hedge funds,private equity and closed-ended funds, andgrowth soon followed. Between 2003 and2006, the level of funds under administrationin the island more than tripled, with asignificant proportion of that growth comingin the past year.

Funds under administration reachedUSD50bn by the end of 2006 and, buoyed bythis success, the island is now targetingUSD100bn by 2010, while funds under

O V E R V I E W


p3 ➧

management have reached USD15bn. Theassets of closed-ended schemes have grownto USD5.9bn, not counting thoseadministered by corporate service providers.

Says Long: “The Isle of Man punchesabove its weight because of its offshorecredentials. It has a really strong regulatoryframework.”

Today financial services are one of themain drivers of the island’s economic growth.In the past decade, annual GDP growth hasaveraged 6 per cent, compared with aEuropean Union average of 2.4 per cent.

Gross domestic product of GBP1.1bntranslates to GBP17,309 per capita. Not onlydoes this outstrip the UK figure in relativeterms, but because the standard rate of Isleof Man income tax is only 10 per cent (thehigher band is 18 per cent) and there is aGBP20,000 personal allowance, people aretaking home more than their counterparts onthe mainland.

Other factors contributing to growthinclude notably the longstanding relationshipbetween government and industry. There is apervasive feeling of togetherness on theisland, in the classic “united we stand”tradition. This resonates with the Isle ofMan’s famous three-legged symbol,accompanied by a Latin inscription thattranslates as: “Whichever way you throw meI shall stand”. All parties realise that it is intheir own interest to work in partnership.

Long says: “Having a healthy dialoguewith the regulator allowed us to explore at

an early stage areas of new businessopportunities. We collectively coined thephrase Isle of Man PLC to show the closeand dynamic relationship betweengovernment and business.”

The result has been regulation that isfairly robust without being so burdensomethat financial services companies headstraight for competing jurisdictions. SaysDonegan: “We believe the Isle of Man hasthe balance right between a high calibreregulatory framework and one that isbusiness-centric. It offers speed, ease andvalue for money.”

The profile of the island has also beenhelped by a reduction in the cost of travellingto and from it. It is now far easier to get toDublin, London and Edinburgh thanks to thelaunch of new air services and growingcompetition that has brought prices down.

The profile of the Isle of Man is one of theissues taxing its best minds at the moment.Marketing and business development wasone of the main topics addressed in a report,published in February, by the Isle of ManFunds Review Group, which was establishedin 2006 under the sponsorship of Isle of ManFinance and is made up of public andprivate sector representatives.

Despite the heady growth of recent years,local industry leaders felt a review of thesector was necessary to make the Isle ofMan a more attractive offshore jurisdictionfor fund activity. The report was brokendown into four parts: strategy, marketing,regulation and legislation, and training andeducation. The group was chaired by PaulSmith, the former global head of HSBC’salternative fund services division and aleading light of the international fundindustry.

Gordon Wilson, managing director ofCaledonian Fund Services (Europe), the Isleof Man arm of a Cayman-based hedge fundadministration business, says: “We were verylucky to get Paul Smith to chair it. He is verysenior in the industry and has a lot of insightand understanding.”

The report, unveiled by Treasury ministerAllan Bell in his 2007 budget speech,recommended several ways for the island totry to establish itself as a force in the globalfund services industry. Its recommendationsincluded the introduction of a new specialist

O V E R V I E W


➧ p10

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Capital International is typical of manyentrepreneurial firms that have beenlaunched in the Isle of Man in recent years.“We had no prior relationship with the island,but we could see the opportunity thatexisted,” says Anthony Long, who set up thecompany in 1996 with his father Peter andbrother David.

The family of stockbrokers saw that manymainstream financial institutions had arepresentative office in the Isle of Man toservice expatriate accounts, but that most ofthe dealing was routed through London.“Starting with the life sector, we offered alocal presence to the wholesale institutionaland intermediary market,” Long says.

The life companies offered – as they stilldo – various wraps for tax planning, intowhich prescribed assets may be placed. Inthe long term this provides many taxefficiencies, not least because the end-clients can withdraw 5 per cent of theirassets a year for 20 years without paying taxon it.

But the services offered to clients were farfrom efficient. Says Long: “They were beingcharged hefty rates, mainly because thevalue of the business was small for the bigLondon brokers. We could provide a localservice at a better rate.”

Today, in addition to internationalbroking, Capital provides investmentadministration and asset managementservices as well as fund administration,although the firm avoids going head tohead with the bigger global administratorssuch as HSBC and Fortis.

“We don’t provide shareholder registrationservices, unitisation and fund accountingstructuring,” says Long. “We focus on

providing complementary services, includinginvestment administration, custody, valuation,pricing and developing holistic solutionsonline. We call it the Offshore InvestmentPlatform.”

This platform is offered as an outsourcingsolution to independent financial advisers,providers of corporate and trust services andfund management companies. “It is a white-label wholesale investment solution,” Longsays. “For example, we take an instructionfrom an IFA, execute it, settle it, arrange thecustody, price the assets and then do all therelevant paperwork.”

In asset management, Capital offers adiscretionary service for individuals withliquid assets starting at GBP75,000, openingup the market to those who do notpossess the GBP250,000-plus required bymany investment managers. Capital alsomanages institutional money for the Isle ofMan government and other institutions onthe island.

Its main collective product, Fusion, is anabsolute return-focused portfolio of fundssold through professional intermediaries. Thetraditional fund management portion is runby five in-house managers and the hedgefund allocation is run by external firms. Amoney market account product, with fixedrate returns and a two-day notice period, hasrecently been added to the range.

Capital says it is careful to manage thefee process on its products to ensure that allthe allocated funds are fully invested. “If theintermediary wishes to take an upfront fee,we manage the risk through a redemptionperiod so the net performance of theunderlying portfolio is not impacted,” Longsays. ■

C A P I TA L I N T E R N AT I O N A L


Local service providesan entrepreneurial

success storyBy Phil Davis

Anthony Long, managingdirector of CapitalInternational

fund with a USD100,000 minimum initialsubscription, the flexibility to basemanagement and administration of funds inother jurisdictions, the abolition of restrictionson investment strategies, and a light-touchregulatory approach.

Says Wilson: “It is important these reviewsget done or else you are relying on thegovernment and regulators to come up withthe way forward. They are not thinking aboutthe opportunities; their job is to deal with theissues and problems as they come up.Industry must always take the opportunity toanalyse its own markets.”

The main recommendation was the needto increase marketing activity in order toraise the profile and awareness of the Isle ofMan as a funds centre. The island has manyof the structures and advantages necessaryto attract business, but has a substantiallylower profile than Ireland and even than itsChannel Island rivals.

“External exposure is very important in thenext 12 months as the island promotes itsnew fund status,” Long says. “Theopportunity is huge. This is the first timethere has been a fully joined-up approach toposition the island for new markets andopportunities.”

Donegan is confident that, with the hedgefund sector still growing very strongly, this isthe right time for a big marketing push. “Wewant to scale up resources,” he says. “Wewill soon have a full-time research officer inthe City and a dedicated senior hedge fundperson. We can put together a wholepackage for hedge funds in Mayfair that canboth provide quality and potentially mitigatethe tax burden.”

Communication with the lawyers thatcreate the structures for new funds is crucial.“The business is within their gift,” Donegansays. “Twenty per cent of the lawyers have80 per cent of the business. It is down to usto talk to them and engage them andpersuade them that regulation and keyinfrastructure has changed. In short, theyshould be thinking of incorporating funds inthe Isle of Man as an alternative to theCaymans and Dublin.”

The vision is of a cluster of verysuccessful hedge fund managers creatinghuge wealth. This makes sense because theisland could not support a large

commoditised industry. “We don’t want theinfrastructure creaking at the seams,” saysDonegan. “Intellectual property is the way togo – look at the new IT centres in India andHong Kong. We think hedge fundmanagement is the way forward and wewould want to see more hedge fundincorporations rather than rely too heavily onadministration.”

Donegan and his team travel far and wideto spread the word. An Isle of Mandelegation recently exhibited at Gaim inMonaco, and the island was represented atFund Forum, Europe’s largest funds event inthe same location, in July. “Companies oftencome along with us on a ‘Team Isle of Man’basis,” says Donegan.

The marketing budget at GBP580,000 isnot insignificant, but it may rise considerably.Donegan says: “That is just a starter. TheTreasury has given us a mandate, so theclear implication is that when performancecomes through, at the end of next year therewill be another review. If we want to scaleup business we need to extend funding. Webelieve there is no shortage of potentialresources.”

The Treasury may well be happy to stumpup. Even though it has lost revenue from thereduction of corporation tax to zero, this hasbeen more than offset by the VAT take,which accounts for 75 per cent of theTreasury’s income.

The VAT revenues primarily come from theservices used by the – often well-paid –employees and executives based on theisland. In fund management alone there aremore than 500 professionals, includingauditors, accountants, lawyers, brokers,transfer agents, investment managers andadministrators.

And yet funds are not the only game infinancial services. For example, the island isalso developing a strong proposition forcompanies listing on London’s AlternativeInvestment Market.

“Of all the companies listed on AIM, morethan 5 per cent are Isle of Man-incorporated,”says Donegan, citing zero corporation tax, anEnglish-speaking domicile and one closeenough to get to and from for boardmeetings in the same day as the keybenefits. “We think this makes us moreattractive than, say, Bermuda,” he says. ■

O V E R V I E W


Caledonian managing directorGordon Wilson: “Industry mustalways take the opportunity toanalyse its own markets”

p7 ➧

Within the hedge fund sector, the Isle of Manis best known for administration, havingswelled dramatically the volume of assets itservices over the past three years, but thegovernment and industry are not entirelysatisfied with being reliant on this singleproduct line.

They have watched as Ireland hasbecome swamped by huge administrators,with all the attendant problems of soaringcosts and skill shortages, and questionedwhether that is what they really want forthemselves. The Isle of Man is a good dealsmaller than Ireland, and the likelihood isthat it would not be able to cope with asimilar deluge.

The alternative is to create a hub that isattractive for fund management firms and

investment professionals. Attracting greaterhedge fund incorporation would havemultiple benefits: it might attract morewealthy individuals to the island, who wouldthen pay VAT on the goods and servicesthey consumed; it would raise the profile ofthe island, encouraging further investment;and it would keep headcount relatively low,so that pressure on the island’s infrastructurewould be manageable.

This push is happening now. The Isle ofMan Funds Review Group report, publishedin February, made the luring of moremanagers an absolute priority. The islandalready has a regulatory framework designedto encourage the establishment of alternativefunds, which can be launched within fourweeks with no application or licence fees

J U R I S D I C T I O N


Development effortlooks to broaden rangeof hedge fund activity

By Phil Davis

➧ p14

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Fortis, one of the largest hedge fundadministrators on the Isle of Man as it isworldwide, has been a significant beneficiaryof the boom in the industry over the past fewyears. From USD2bn in hedge fund assetsunder administration at the beginning of2005, Fortis is now servicing assets totallingUSD15bn, split equally between hedge fundsand funds of hedge funds.

Charlie Woolnough, senior businessdevelopment manager at Fortis FundServices (Isle of Man), says: “Historicallyhedge fund clients serviced from our Isle ofMan office were relatively small. We nowservice five clients from the office with morethan USD1bn in assets. This is clearly noservicing backwater, and there’s no reasonwhy we could not be servicing a USD10bnmanager in the future.”

For hedge funds, Fortis providesadministration and investor servicing as wellas bridge financing. It has greater input intothe activities of funds of hedge funds since, ascustodian, it has the collateral to be able toprovide forex and leverage financing, typicallyup to three times the assets in the fund.

The business has benefited from theresurgence of funds of hedge funds, whosenew business appeared to be declining atthe end of 2005. “Many people predicted theend of funds of hedge funds, but in fact theopposite occurred,” Woolnough says.

“The pension fund money that looked likeit might never substantially materialise hasgradually come through. This has givenfunds of hedge funds a second wind.”However, he says, only well-establishedplayers and new entrants with nichestrategies are attracting significant assets.

The embedded and stable skills in the Isle

of Man lend themselves to the servicing ofniche and complex strategies, such asdistressed debt, emerging market and fixedincome funds, that may deal in difficult tovalue assets such as CDS baskets, syntheticCDO tranches and variance swaps.

Woolnough says that producing a NAV forcomplex instruments such as OTC derivativesrequires judgment that only experiencedprofessionals with knowledge andunderstanding of the underlying fund possess.

He points to three possible methods: “Youcan build a system internally to modelprices, but that is not scaleable. Or you canrely on third-party pricing vendors, whichhave their relative strengths. We prefer tocreate a basket of providers and use thebest provider in each asset class.”

Only in the case of extremely illiquidinstruments, such as multi-party creditinstruments, would the NAV calculation bepartly reliant on counterparty quotes. “Brokervaluations were common a few years ago,”says Woolnough. “This is no longeracceptable, as institutional investors requireindependent valuations.

“But where it takes place, there are bestpractice rules that offset the potential conflictof interest. For instance, where available, itmight be appropriate to take an average ofseveral counterparty quotes. And it would bebest practice to have a pricing policydocument that clearly states how theinstruments are valued and, where possible,how that valuation is sourced.”

The ability of firms such as Fortis to offersophisticated services to hedge funds andfunds of funds is a key factor in the growinginternational profile of the Isle of Man as acentre for hedge fund administration. ■

F O R T I S F U N D S E R V I C E S


Fortis builds scale withsophisticated

administration skillsBy Phil Davis

Charlie Woolnough, seniorbusiness developmentmanager at Fortis FundServices (Isle of Man)

and no regulatory pre-approvals.A clutch of well-known and smaller hedge

fund managers have already set up in theIsle of Man. Among the best known areCharlemagne Capital, which listed on theLondon Stock Exchange last year and iscurrently valued at GBP200m, and LaxeyPartners, the activist hedge fund firm thatspecialises in investment trust arbitrage.

Others include Tufton Oceanic FinanceGroup, London and Capital, Barings, ThomasMiller and Nedbank Investments, and morefund firms could be on their way. BrianDonegan, the business development managerfor the funds sector at governmentpromotional agency Isle of Man Finance, says:“We have a pipeline of business that maycome here, but the gestation period is long.”

The review recommended the islandshould position itself as the premier locationfor the domiciling of specialist institutionalfunds, focused mainly on the alternative andclosed-ended sectors. The need for such amission statement became evident amid aslowdown in the pace of growth in fund-related business on the island.

The review noted that while fund assetsunder administration grew by 35 per cent in2006, this was largely as a result of risingmarkets and growth in the number of closed-ended funds as well as of foreign-domiciledfunds administered on the island. In addition,the total number of funds serviced in the Isleof Man, excluding exempt funds, rose only to330 from 265 in 2005.

Of the 65 funds added last year, 40 weredomiciled overseas, predominantly in theCaribbean, compared with just 25 domiciledin the Isle of Man, including sevenExperienced Investor Funds. By comparison,in 2006 some 1,232 funds were established inthe Cayman Islands, 175 in Guernsey and142 in Jersey. The result, the reviewconcluded, is that the Isle of Man remainsheavily reliant on back office work in whichthe trend is toward lower-cost jurisdictions,posing an obvious risk to future prosperity.

To counter this risk and attempt to attractmore management companies, the reportrecommended the creation of a newspecialist fund which will eventually replacethe EIF. The fund, likely to be brought intoservice later this year, will have a USD100,000minimum initial subscription, the flexibility to

base management and administration inother acceptable jurisdictions, no restrictionson investment strategies and a light-touchregulatory approach.

Donegan says there is a real opportunityto attract more hedge funds as managers inLondon become concerned about the fate ofthe investment manager exemption, theguidelines that investment managers mustsatisfy, notably to demonstrate an arm’slengthy relationship with the offshore fundsthey advise, to ensure that the funds’ profit isnot taxable in the UK. The rules are one ofthe factors that have made London anattractive location for hedge fund managers.

However, Donegan says: “The hedge fundcommunity has been rattled by what theBrown administration may do with theexemption. They are also becoming unhappywith the quality and level of outsourcing inthe UK. We want to catch them at the gatebefore they ship out to Switzerland orwherever and tell them we’d love them tocome lock, stock and barrel to the Isle ofMan. After all, it’s only 50 minutes fromLondon by air.”



p11 ➧

Further encouragement to managerscomes in the form of grant aid from theManx government for firms looking to movethere. Fifty per cent of their capitalexpenditure in the first year in areas such asproperty, recruitment and hardware can bewritten off against tax.

While Laxey, Charlemagne and othershave already based some of their managersin the Isle of Man, it is only a smallproportion of their overall staff numbers. Justas few investment professionals ever movedto Luxembourg, Ireland or Grand Cayman, itis hard to see many moving to the Isle ofMan despite income tax rates of only 18 percent at the top end and a cap of GBP100,000income tax in any one year.

“It’s a hard sell,” admits CharlieWoolnough, senior business developmentmanager at Fortis Fund Services (Isle ofMan), which has a large administration hubon the island. “Fund managers tend to be inLondon where they enjoy all the facilities ofa big city. It’s not a move for everyone, butfor those who like island life and naturalbeauty it’s a great place.”

Adds Anthony Long, a director of CapitalInternational, which offers administration andfund management services: “The island doesnot score as highly as, say, the ChannelIslands or the Caribbean, which enjoy theweather and a glamorous profile. The islanddoes fall down for young single dynamicindividuals.

“It is best suited to a young family orsomeone in the later stages of their career.At the same time, many people come hereby default through their jobs for a notionaltwo or three years but then stay. Therestaurants and entertainment generally have

improved hugely. The island can really holdits head up in that respect.”

If attracting managers in great numbersseems a distant dream, persuadingmanagers based elsewhere to set up fundsin the Isle of Man may be a realistic aim.This was one of the drivers behind theSpecialist Fund structure, which will allowgreater institutionalisation of the Manx fundsector, which was difficult with the existingEIF regime.

The review in February noted that the Isleof Man was the “only quality location globallywith an EIF regime that has no minimuminvestment restriction. This has resulted inthese funds, which are effectively non-regulated, being marketed on a retail basisand thus demands increased regulation toprotect retail investors, which is unnecessarilyburdensome on institutional business.”

Gordon Wilson, managing director of theEuropean fund services business of Cayman-based administrator Caledonian and amember of the review body, says: “Weidentified that the Isle of Man needed to havean institutional-focused fund product giventhe opportunities in the institutional market.”

He believes a key component of the newfund structure is allowing funds to beincorporated in the Isle of Man butadministered elsewhere. “This will be a bigstep for the island, but in order for the newfund offering to be truly competitive, it wasseen as an essential component.”

Although Manx administrators may haveto fight harder for business initially, Wilsonbelieves they will benefit in the long run.“The Isle of Man’s global share of hedgefunds is very small, therefore it’s vital that theisland raises its profile,” he says. “There area lot of funds, particularly in the Caribbean,whose managers and advisors may neverthink of the Isle of Man for domicile andadministration. However, if there are morefunds established here, more people will getto know what the Isle of Man has to offerand that it is able to compete globally.”

Of course, fund administration is animportant part of the Manx hedge fundjigsaw in its own right and will continue tobe. With the exceptions of Fortis and HSBC,the administration firms are modest in size,but this can be an advantage when trying toattract smaller hedge funds whose assets



➧ p18

© 2006 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the Isle of Man firm of PricewaterhouseCoopers LLP (a limited liability partnership) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

As well as getting the figures right, our Assurance Services practice in the Isle of Man has experts in everything from statutory audit to process assurance, and accounting advice to corporate governance. It’s all about adding value to our clients’ business. To find out more about what we could do for your company call Mike Simpson on +44 1624 689689, contact him at Sixty Circular Road, Douglas, Isle of Man or visit www.pwc.com/im

As youmight expect,excellence inassurance isnot just aboutnumbers.*

As auditor to more than a quarter of thefunds domiciled in the Isle of Man,PricewaterhouseCoopers is in a strongposition to both view and influence thedevelopment of the funds sector on theisland. Apart from the zero rate of corporateincome tax, says partner Mike Simpson, therapport between industry and governmenthas been a significant factor in the island’ssuccess.

“Regulation is light touch, focusing on theservice provider rather than the fund,”Simpson says. It has improved a step furtherwith the introduction of overseas schemerules, which have removed the burden ofdouble regulation on foreign funds.

PwC believes the geography of the islandis also helping to maintain its competitiveposition among the various fund servicesjurisdictions dotted around the British Islesand further afield. “The Isle of Man coversmore than 200 square miles,” Simpson says.“You can fit Guernsey, Jersey, the Caymansand several other islands inside it, so wedon’t see the same pressures produced bygrowth. Whereas rents in Guernsey areGBP30 per square foot, here they averageGBP18. This has a whole knock-on effect onpricing. After all, the two biggest costs in thisbusiness are offices and staff.”

In addition, there are no residencyrestrictions as there are elsewhere. “Youneed a work permit, but we’ve never had aproblem,” Simpson says.

And while the island does not have theclimate and attractions of some otherislands, qualified staff are surprisinglyaccessible. “We are able to recruit localgraduates and people from all over theworld,” he says. “If we couldn’t, it would have

been hard to grow the business as wehave.”

Important growth areas for PwC includeproperty, as new segments – such asemerging markets and EU accessioncountries – open up across the world. Someof these vehicles are choosing to list on theLondon Stock Exchange’s AlternativeInvestment Market, using the services ofPwC as an advisor. “We are able to draw onthe experience within the wider firm,” saysSimpson.

The advisory side is also busy with taxand corporate governance work. Tax is aparticular specialty, Simpson says: “It ispointless having an umbrella companypaying zero corporation tax if thesubsidiaries pay 30 per cent.”

But the funds sector cannot afford tostand still, and PwC is part of efforts to makesure it stays up to date. “We need to remaincompetitive and keep developing productsthat are attractive to international business,which can basically go wherever it wants,”Simpson says. “The experienced investorfund structure, for instance, has served itspurpose well for seven or eight years, but forinstitutions there needs to be a vehicle thatdoes not require an Isle of Man director onthe board.”

The best way for a relatively newjurisdiction to succeed is by the main playersacting in concert, PwC believes, occasionallyignoring the fact they are competitors. “Thegovernment is very helpful, but as anindustry we still have to put our differencesaside and go to it with a united voice,”Simpson says. “If you can do that – and sofar we have been pretty good at it – you getgood results.” ■

P R I C E WAT E R H O U S E C O O P E R S


Partnership paves way for funds sector growth

By Phil Davis

Mike Simpson, partner andhead of investmentmanagement, PricewaterhouseCoopers Isle of Man

would be a drop in the ocean for the biggestDublin administrators.

“There are huge opportunities in thehedge fund industry, particularly for thosewith the technology necessary to service themore complex fund structures,” Wilson says.“Our technology is benchmarked against thebiggest players in our industry, and we arefocused on bringing that technology to someof the smaller fund managers of today whowill hopefully be the larger fund managers oftomorrow.”

Wilson saw the opportunities in the Isle ofMan after working in Grand Cayman for fiveand a half years. As a director in Deloitte’saccounting and insolvency practice inCayman, working on the Long Term CapitalManagement liquidation and various otherfund collapses, he knew from his experiencein suing fund administration companies whatthe pitfalls were and how to create a fundadministrator that was aware of the risks inthe industry and offered more than a box-ticking service.

“There are many challenges and potentialrisk areas, for example in illiquid or thinly-traded securities, or in overly complex fundstructures,” Wilson says. “Late filing offinancial statements can also be indicative ofproblems, and this was true in many of thecases we were involved in Cayman. Usingthis experience, we’ve tried to developenhanced controls and make sure ourpeople are alive to the risks. Our remit is torun a tight ship.”

He believes the hedge fund industry hascome such a long way in such a short timethat it is inevitable there will be those whoseek more than their fair share of the pie.“You need parameters and controls andpeople who are alive to the risks,” he says.

Smaller shops, with experiencedpersonnel, are perhaps better at the detailthan the larger ones, he argues. But canthey compete with the technology offeringsof the bigger service providers? Wilson saysthey can, but need to be smart about it: “Infund administration you need cutting edgetechnology. We did not try to develop this in-house, opting to buy a best in class system,Advent. And last year we were one of thefirst fund administration companies toimplement Paladyne, a front and middleoffice system designed to work with Advent.”

The two systems running side by side canhelp achieve higher levels of straight-throughprocessing, automated from the order toexecution to the back office. “At the momentmany managers have separate systems fromtheir brokers and administrators,” Wilsonsays. “At the worst everything is done threetimes and reconciled.”

If the island can demonstrate it has boththe expertise and technology to rival (orbetter) its larger competitor in Ireland, andcan do it more cheaply, surely it can start totake market share? Woolnough believesDublin is under pressure, noting that staffturnover in Ireland is very high comparedwith the Isle of Man and that it does nothave such a high ratio of experienced fundadministrators. “The biggest complaint frompeople who are looking to leave otheradministrators is that the people servicingtheir account have left,” he says.

The fast growth of Dublin may be apossible reason for the decline insatisfaction among its clients, he believes.Whereas there were only about 10administrators in Dublin a decade ago, thereare more than 50 now. “Three or four yearsago, everyone thought there would be a bigconsolidation of administrators and therewould just be a handful left,” Woolnoughsays. “In fact, it’s been the reverse.” Theoutcome is large movements of staff and agrowing dissatisfaction among Ireland’s clientbase that may just benefit the Isle of Man. ■



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