Our Head of Funds, Elliot Refson recently spoke at the AYU Emerging Manager Conference. A boutique event designed to connect young and growing hedge funds with early-stage seed investors and experts in hedge fund launches.
In its third year, this all-day event focused on hedge fund launch and growth success, operating as an education and networking-rich occasion.
At the event, Elliot discussed the challenges and the opportunities facing new and emerging managers having established, built, and managed two macro strategy hedge funds.
The first in 1993 under the Cresvale banner in Hong Kong and the second under the Ermitage banner in Jersey in 2006.
When Elliot first set up his fund there were only three hedge funds in Jersey, there are now more than 40, as well as an array of crypto funds and an ecosystem that supports them.
Elliot emphasised that: “For any emerging manager, the choice of jurisdiction for their fund is critical. The evolution of those jurisdictions matters because the way they were established and the markets they set out to attract set the scene for where they are now, and more importantly, where they will go and the impact that this will have on their managers and their investors.
“To frame Jersey in this context – if you were to go back twenty years, Jersey was seen as over-regulated, inflexible and expensive as an alternative investment funds jurisdiction. The reason for this is that our government and regulator strove to adopt the highest standards; to be early adopters of new regulation and legislation.
“Fast forward to today, Jersey is seen as proportionately regulated, innovative and competitive.”
So, what changed? Elliot believes that in short, the answer to that is everything and nothing.
He goes on to add: “On the everything side of the equation, the fact is the internationalism of standards and regulation that we have seen over recent years has set the scene for the future of international finance centres. There have been two key driving forces to this change.
“The first is that as other jurisdictions who took a softer view of regulation and international standards at the outset have moved – or been forced – to catch up with Jersey’s position around international standards, for example BEPS or substance this has led to regulatory uncertainty in some jurisdictions and uncovered flaws, for example, a lack of suitable infrastructure or personnel in some jurisdictions.
“At the same time geopolitical events have uncovered instability in other jurisdictions. This has spooked many investors and managers who demand stability and certainty in their jurisdictions.”
“On the nothing side of the equation Jersey has not changed its outlook but maintained its course of the highest standards. Indeed, this is highlighted by our substance legislation in 2019 which was in fact simply the codification of the prevailing best practices.”
Elliot notes that Jersey’s forward-thinking approach to maintaining high regulatory standards has been acknowledged by some of the world’s leading bodies such as the OECD, the IMF, and the World Bank.
He highlights a range of factors which support Jersey’s approach including the Island’s stability, both political stability and fiscal stability, as well as a minimal change outlook from a regulatory, legal or economic perspective, underpinned by world class infrastructure, for example by the fastest broadband speeds in Europe, and by the broad and deep expertise of the almost 14,000 people who work in our industry.
“Either by good luck or good management, the decisions made by our predecessors more than twenty years ago have landed us in the sweet spot today. And this is borne out in the statistics. Not only are we seeing record inflows of AUM to the tune of 142% over 10 years and 72% over the past five years, but our growth rate has outpaced our closest competing jurisdictions in recent years. The divergence of the rate of that outperformance continues in our favor.
“We are seeing this success because alternative investment fund managers are seeing the benefits Jersey has to offer and sending their peers and their funds to Jersey.”
Elliot refers to past examples of “herd instinct” which has seen alterative investment fund managers move their funds from one jurisdiction to the other. “The classic example is hedge funds in Bermuda. Back in the day, Cayman turned up with a better product and a better service and stole their lunch. The reality is that jurisdictions that do not evolve, that do not support the managers who trust them, they simply die out.”
Another example Elliot gives is the securitization market, which in 2022 saw more than 130 either moved to Jersey from Cayman or created in Jersey. A trend he believes is driven exclusively by investors and is starting to bleed across other asset classes.
On why Jersey’s position matters to emerging managers, Elliot explored this from their viewpoint.
“The key market trends effectively fall into two clear camps: those that are within the remit of the manager and those which are not. Those which are within the remit of the manager are areas such as market trends, macroeconomics and competition. And those that are not within the remit of the manager are areas such as, increased regulatory pressure, the removal of reverse solicitation, regulatory uncertainty and geopolitical uncertainty.”
He concluded that areas outside of an emerging manger’s remit can be mitigated by their choice of jurisdiction and that managers should focus on what they can control. In Elliot’s view, it is up to the jurisdiction – or international finance centre – to focus on political and fiscal stability, maintaining robust but proportional regulation with a minimal change outlook. In practice this, means no red flags and no surprises for emerging managers.
He ended his speech by summarising the necessity of a “symbiotic” relationship between a jurisdiction and the managers they serve, asserting that “the jurisdiction must evolve to support the evolution of the managers and their industry.”