The flexible and pragmatic approach adopted by the GFSC in relation to investment funds aimed at the institutional or high net worth investor market has helped the significant growth of this sector in Guernsey.
Nowadays, most funds formed in Guernsey tend to be for the institutional or high net worth individual markets, with hedge funds, funds of hedge funds, private equity and property funds being especially popular.
Guernsey is particularly keen to attract high quality hedge fund business. Following consultation with the industry, the GFSC released a guidance note in November 2003 setting out a more relaxed framework for the operation of hedge funds, which included waivers of the various fund rules in four key areas.
For funds targeted at institutional and expert investors, the GFSC is prepared to waive the requirement for a Guernsey licensed custodian to hold the assets and will be prepared to designate the fund’s prime broker as custodian (if the custodian is regulated in an acceptable jurisdiction and has substantial net worth). In addition, the GFSC will not require such a prime broker to take on formal duties of oversight over the fund manager (which is normally required of a custodian).
The GFSC is willing to take the same approach as regards the custody of the assets for funds targeted at retail and less sophisticated investors, but will still expect the Guernsey licensed custodian to oversee the fund manager (although it is prepared to consider requests to designate custodians from other jurisdictions provided it can be satisfied that the custodian’s role in overseeing the fund manager will be subject to monitoring by the custodian’s regulatory authority).
Segregation of assets
For funds targeted at institutional and expert investors, the GFSC will not require the prime broker to offer physical segregation of fund assets from its own, so long as the fund prospectus makes clear the risks of such arrangement.
For funds targeted at retail and less sophisticated investors, the GFSC will require the prime broker to offer physical segregation of surplus fund assets from its own (surplus being the excess of fund assets above the collateral required to be set against any credit extended by the prime broker).
Net Asset Value
The GFSC recognises that some hedge funds, and funds of hedge funds in particular, may have difficulty in establishing their net asset value with a frequency that corresponds with the valuation and liquidity points of units in such hedge fund or fund of hedge funds.
The GFSC is therefore willing to permit subscriptions and redemptions on the basis of preliminary NAVs, with the final number of shares (for subscriptions) determined at a later date, and interim redemption moneys being paid out pending a later final adjustment, in each case once the NAV is finalised. Full disclosure of the risks of this approach is required.
The GFSC is willing to permit the same approach for funds targeted at retail and less sophisticated investors, provided that any interim redemption payments are set at such a percentage of the estimated NAV that the chance of an overpayment (if the final NAV is significantly lower) is extremely remote (in which case the manager must reimburse the fund any overpayment).
Client money rules
The GFSC is willing to provide waivers from the client money rules to permit the subscriptions on the basis of estimated NAVs, provided that it is satisfied as to the robustness of estimation procedures to be used. This is required because client money rules would normally prevent the release of subscription moneys for use by the fund where the final number of shares subscribed for is not yet determined
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.
Christopher Anderson has significant experience in investment funds, insurance and reinsurance and protected and incorporated cell companies. He has built a strong reputation in private equity, having advised some of the world's largest private equity houses as well as new fund promoters in connection with fund establishment, investment structuring, exits and regulatory issues. He has also advised the insurance and reinsurance sector for almost 25 years and has been recognised in the Guide to the World's Leading Insurance and Reinsurance Lawyers from 2004 - 2016. He was listed in the International Who's Who Legal of Private Funds Lawyers in 2018.
Annette Alexander advises on a broad range of corporate matters with a particular emphasis on the establishment, regulation and operation of investment funds, regulatory compliance, capital markets and banking and finance. Her practice also covers the formation of alternative investment funds, including private equity funds, listed funds, hedge funds and property funds as well as banking and finance transactions. She advises many of the largest fund promoters and financial institutions, locally and internationally. Annette arranges listings of investment funds, trading companies and bonds on The International Stock Exchange, including acting as sponsor and advising on compliance in relation to continuous obligations.
Andrew Boyce has significant experience in investment and finance transactions across all entity types. He has specialist experience in the structuring and establishment of open and closed-ended investment funds and related credit and structured finance products. His core expertise is in private equity fund formation where he advises global investment houses and new managers on fund establishment, investment structuring, asset acquisitions and disposals, and regulatory issues. Andrew's banking and finance expertise compliments his investment funds practice and covers a range of credit types, including capital call facilities, leveraged financing and asset finance. He acts for global banking institutions, alternative credit providers and institutional borrowers.
For more information, please visit www.careyolsen.com.