Jersey – A Home for Hedge Fund Managers
One of the current trends we are witnessing in Jersey is the inflow of hedge fund managers establishing a physical presence on the island. A number of household name hedge fund managers now call Jersey home, with rumours that others are in advance stages of planning to follow them into Jersey. What are the principal drivers of this trend?
The drivers are both economic and regulatory. Jersey’s established and sophisticated funds services offering enables the island to offer operational advantages for hedge fund managers relocating their domicile to Jersey. Underscoring this has been a political desire within Jersey to diversify Jersey’s economy, which has resulted in the introduction of tax regimes and policies which have had the effect of encouraging high value industries, such as the fund management industry into the island.
As the UK represents the largest European base for the hedge fund sector, possible UK tax changes are undoubtedly contributing to the growing interest amongst hedge fund managers to domicile outside the UK. Jersey residents are subject to personal income tax at a maximum rate of 20% on worldwide income. Certain high net worth investment managers who become resident in Jersey may (subject to a number of conditions) have a significant proportion of their non-Jersey income taxed at a rate as low as 1%. Additionally, since the introduction of the “zero-ten” tax regime, the profits of a Jersey based and regulated investment manager may be taxed at a rate of 0%. These tax advantages clearly make Jersey an attractive proposition for hedge funds managers.
For hedge fund managers wanting to access European investor capital, the fact that Jersey does not form part of the EU and that Jersey based hedge fund managers are permitted to continue to access EU national private placement regimes is an attractive proposition. This enables a Jersey based hedge fund manager to benefit from a reduced AIFMD disclosure and transparency burden, in particular enabling it to avoid being bound by the remuneration disclosure rules applicable to EU fund managers. Additionally, at the point at which the AIFMD passport becomes available to non-EU funds, the existing availability of fully AIFMD-compliant regulations for those funds “opting-in” to the AIFMD, means that Jersey will be ideally placed to be able to benefit from this marketing passport, as and when it becomes available.
Qualifying segregated managed accounts (QSMAs)
Jersey took steps to adopt its regulatory and legal framework to enhance its attractiveness to hedge funds managers by introducing an exemption which enables hedge fund managers that are already regulated under the Financial Services (Jersey) Law 1998 (FSJ Law) in Jersey to carry out fund services business (FSB) to also service QSMAs without the need to seek additional regulation for the conduct of investment business under the FSJ Law.
As well as simplifying the regulatory position this will also allow managers of QSMAs to continue to be able to benefit from a 0% corporate tax rate.
Under the QSMA regime, an exemption from the requirement to be regulated for investment business has been introduced for QSMAs. The exemption recognises that those who utilise managed accounts in the hedge-fund space are typically very sophisticated investors. The QSMA regime is open to managed accounts meeting the following criteria:
minimum initial subscription of US$1million
the manager must be licensed for the conduct of Fund Services Business (FSB) as a manager, investment manager, trustee or general partner and must be appointed as manager to hedge funds
the QSMA must only pursue hedge-fund strategies that replicate, or be comprised of elements from, the hedge-fund strategies currently employed by one or more funds to which the manager is appointed to provide FSB services and the manager must ensure fair treatment of investors as between each other
the manager must file a notice with the Jersey Financial Services Commission (the JFSC) confirming reliance on the exemption together with an annual fee, and must report on an ongoing basis the number of QSMAs and the aggregate value of investments managed in such QSMAs
there must be a single investor (although this may include employees of the manager jointly or members of the same family jointly) who has received and signed a prescribed investment warning
the Jersey manager must be the only manager of the QSMA and cannot hold or otherwise have custody of the assets under management
Jersey economic substance requirements for fund managers
A Jersey fund manager which will be conducting ‘fund management business’ will fall within the scope of the Taxation (Companies – Economic Substance) (Jersey) Law 2019 (the Economic Substance Law), which came into force on 1 January 2019, and such manager will be required to ensure that it is governed and operated in a way that complies with that law, namely that:
all of its “core income-generating activities” (CIGAs) are carried out in Jersey (fund managers must conduct all of their CIGAs in Jersey and must be able to monitor and control any CIGA outsourced to another entity in Jersey);
it is “directed and managed” in Jersey in relation to the relevant CIGA (it is expected that the majority of board meetings will be held in Jersey with a quorum of directors being physically present, the board must be the decision-making body, and all company records and board minutes must be retained in Jersey); and
it has adequate employees, expenditure and physical premises in Jersey (these can be provided by an outsourced service provider in Jersey).
Fund vehicles themselves are outside the scope of the Economic Substance Law, other than self-managed funds (i.e. corporate funds which do not appoint an external manager but which are managed internally by their board of directors), which will be in scope as fund managers after a change to the Economic Substance Law, which is expected to be effective in 2020.