The GFSC has never discouraged the use of Guernsey as a domicile for hedge funds. Indeed, many that are domiciled in other jurisdictions are administered in the island. However, there were four main areas where hedge fund operations did not fit comfortably within the established legal and regulatory framework and this discouraged promoters from using Guernsey as a hedge fund domicile. In order to address this problem, the GFSC issued a consultation paper in November 2003 seeking input from interested parties on possible solutions that fell within the existing investment fund framework with the aim of improving the attractiveness of Guernsey as a hedge fund domicile.
The four main areas on which the GFSC consulted were:
Following the close of the consultation period, the GFSC published a general policy framework for the authorisation of hedge funds in Guernsey which is summarised below.
For institutional and expert investor hedge funds, the GFSC will be prepared to designate as custodian a prime broker, regulated in an acceptable jurisdiction and having substantial net worth. In addition, the GFSC will not require a prime broker to offer physical segregation of fund assets from its own assets, even where fund assets held by the broker exceed credit extended by the broker.
For hedge funds targeted at retail and less sophisticated investors, the GFSC will generally continue to require a traditional custodian to exercise essential oversight of the fund manager. It will, however, be prepared to waive the requirement that the custodian take control of the fund’s property, provided that the property is held by a prime broker regulated in an acceptable jurisdiction and having substantial net worth. The GFSC will normally expect such a custodian to be a licensed Guernsey institution but will be 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.
For funds of this type, the prime broker will be expected to provide clear segregation from its own assets all fund assets exceeding the amount required for collateral against credit extended by the prime broker. The segregation arrangements would have to ensure that surplus fund assets would be fully protected in the event of failure of the prime broker.
Because of the nature of its assets and the way in which those assets are managed, it may often take many days, sometimes weeks, for a hedge fund manager to establish the fund’s net asset value and the subscription and redemption prices. This can be a particular problem for funds of hedge funds as the speed with which the manager can calculate net asset value and prices will be dictated by the speed of the slowest hedge fund in the portfolio. To alleviate this problem, the GFSC is prepared to permit arrangements which allow preliminary estimations of net asset value. On this basis, subscription monies could be taken into a fund before the final number of shares to be allocated has been determined, and interim redemption monies could be paid out of a fund, subject to a later final adjustment once the price calculations have been completed.
The applicable Guernsey rules require that client money, including fund subscriptions and redemptions, be held in a client money account until it may properly be paid to the fund or, following a redemption, to the client. The GFSC will, if so requested, make available appropriate waivers from the operation of the client money rules, (provided that it is satisfied as to the robustness of estimation procedures to be used), to enable subscription money to be paid into a fund on a subscription day notwithstanding that the fund may not be in a position to meet completely its obligation to the investor since the number of shares to be allocated will not at that stage be finally determined.