Nov. 25, 2021

Five Jurisdictions to Consider When Launching a Hedge Fund

The hedge funds industry has clearly gone global – and that applies to where the funds are domiciled, where the managers are based, where the investors can be found and where the investments are located. For example, although the Cayman Islands remains the dominant offshore center for launching hedge funds, especially for U.S.‑based managers, there are other jurisdictions that have become increasingly popular – and that may be particularly attractive to fund managers based in Europe, Asia and elsewhere. Therefore, as the U.S. is celebrating Thanksgiving today, this issue of the Hedge Fund Law Report features five articles that highlight jurisdictions around the world in which non‑U.S. fund managers should consider basing their funds. These articles address some of the legal and fund structure issues in Luxembourg, Ireland, Singapore, Malta and the Channel Islands (Jersey and Guernsey). Next week (the week starting November 29, 2021), we will resume regular publication of new content focused on the regulatory, compliance and related considerations applicable to hedge fund managers in the U.S., the E.U. and beyond, including tips for non‑U.S. managers that may be facing SEC exams for the first time.

Jurisdiction #1: Luxembourg

According to PwC, Luxembourg is the second largest investment fund center in the world after the U.S. and the fastest growing alternative investment funds domicile. The legal and regulatory framework that the country has created over the years, combined with its longstanding economic and fiscal stability, have attracted hedge fund managers from all over the world. For example, as of October 2019, 16.5 percent of global alternative investment funds were domiciled in Luxembourg. A seminar organized by the Association of the Luxembourg Fund Industry, Luxembourg for Finance and the Luxembourg Private Equity & Venture Capital Association explored Luxembourg’s evolving role in financial markets and the private fund space. H.E. Pierre Gramegna, Luxembourg’s Minister of Finance, provided opening remarks, and a panel of experts from Luxembourg law firms, asset managers, banks, consultants and other firms contributed insights on a variety of issues, including Brexit, the new Reserved Alternative Investment Fund structure, private credit, Luxembourg limited partnerships, tax reforms and management companies. PwC partner Steven Libby moderated the discussion. This article highlights the principal points raised during the program. See “ALFI/KPMG Survey Details Evolution and Growth of Luxembourg Private Debt Funds” (Feb. 11, 2021); and “Distribution, Fundraising and Regulatory Environment in Luxembourg and the E.U.” (Feb. 27, 2020).

Jurisdiction #2: Ireland

According to the Irish Funds Industry Association, 1,027 fund managers from 54 countries have assets administered in Ireland, including 17 of the top 20 global asset managers. In addition, Irish funds are sold to 90 countries in the Americas; Asia and the Pacific; the Middle East; and Africa. Part of Ireland’s appeal is its clear and practical regulatory framework, as well as its support for the funds industry. As a result, fund managers are increasingly looking to Ireland’s thriving funds market as a way to access potential E.U. investors. Regulatory changes have allowed fund managers to take advantage of innovative approaches and strategies, resulting in record numbers of cross-border fund launches in the jurisdiction. A report published by Maples and Calder (Report) found, among other things, that there has been a sizable increase in Irish fund launches, along with a trend toward the use of tax transparent vehicles. This article analyzes the Report, together with insight from partners at law firms at the forefront of fund interactions with Irish and E.U. regulators concerning how non‑E.U. fund managers can circumvent obstacles – such as marketing, regulatory and remuneration issues – to take advantage of those vehicles. See “Central Bank of Ireland Requires UCITS Managers to Review Liquidity Risk Management Frameworks” (Jun. 17, 2021); and “What Does the Central Bank of Ireland’s Review of CP86 Mean for Private Fund Managers?” (Dec. 3, 2020).

Jurisdiction #3: Singapore

Singapore, a leading financial services hub, has seen many fund managers, family offices and other investment firms stepping up their expansion in the city-state since 2019, amid concerns over the future of Hong Kong, according to Reuters. For example, Singapore rolled out a new corporate structure for investment funds in 2020 to attract more funds – and the strategy seems to be working. For example, D.E. Shaw set up an office in Singapore in 2021. As hedge fund managers looking to establish a presence in Asia consider Singapore, they must be aware of licensing requirements imposed by it and the impact of external regulatory regimes on such entities. In its “Going Global” series on the formation and operation of hedge fund management companies outside the U.S., Morgan Lewis offered an overview of the relevant corporate, employment and tax laws in Singapore; its regulation of managers and fund distribution; and how other countries’ regulatory regimes affect hedge fund managers established in Singapore. Moderated by Morgan Lewis partner Timothy W. Levin, the discussion featured partners Joo Khin Ng, Wai Ming Yap, Daniel Yong and William Yonge. The first article in this two-part series summarizes the main points raised during the presentation with respect to Singapore corporate structures, employment laws, tax laws and regulation of financial services activities. The second article addresses Singapore licensing requirements, “dual-hatting” arrangements, product distribution and the impact of U.S. and U.K. regulatory regimes on Singapore-based managers. See “Morgan Lewis Attorneys Discuss the Global ESG Landscape” (Aug. 19, 2021); and “The Global Hedge Funds Landscape: Europe, Asia and the Middle East (Part Two of Two)” (Jul. 15, 2021).

Jurisdiction #4: Malta

A June 2019 report by KPMG notes that Malta continues to be an attractive choice for fund managers. Malta has a flexible legal and regulatory environment led by a single, proactive regulator that is approachable, business-minded and dynamic. It also has a competitive tax system, relies on the International Financial Reporting Standards and is financially stable. A program sponsored by FinanceMalta – a public-private venture promoting Malta as a financial center – provided an overview of private fund formation in Malta; the advantages of domiciling funds and managers there; the nation’s regulatory and tax regimes; and its emerging approach to blockchain and cryptocurrency. Thalius Hecksher, global director at TridentTrust, moderated the discussion, which featured Chris Casapinta, executive director of Alter Domus; Adam de Domenico, founder and CEO of Cordium Malta; James Farrugia, partner at GANADO Advocates; Ivan Grech, a representative of FinanceMalta; and Christopher Portelli, associate partner at EY Malta. This article highlights the key points raised by the panelists. See “What Malta Can Offer the Hedge Fund Industry: An Interview With the Chairman of FinanceMalta” (Jan. 26, 2017).

Jurisdiction #5: The Channel Islands

PwC reported that the hedge fund sector in the Channel Islands – primarily on Jersey and Guernsey – continues to grow, attracting a broader range of investors and increasingly extending its presence beyond the U.S. into Europe and Asia. Both Jersey and Guernsey regulators have been proactive in creating a regulatory environment for the hedge funds industry that offers appropriate, innovative and relevant legislation designed to keep the islands at the forefront of the industry. The Channel Islands’ competitiveness internationally endows hedge funds with credibility and a competitive edge. Offshore jurisdictions increasingly seek to lure funds by positioning themselves as reputable financial centers with robust legal and financial services infrastructures needed to foster successful fund launches and administration. To answer the myriad questions that face funds seeking to do business in Jersey and help fund managers make informed decisions about setting up and operating there, the Hedge Fund Law Report conducted an in-depth interview with Emily Haithwaite, partner at Ogier. This article recounts that interview. The Hedge Fund Law Report also interviewed Craig Cordle, partner in Ogier’s investment funds team based in Guernsey, on the current state of the funds market in Guernsey, the complexities and nuances in launching exchange-listed funds and how law firms are meeting the current needs and demands of their fund clientele. This article relates that conversation. See “U.S., U.K. and Offshore Regulators Discuss Best Ways for Hedge Fund Managers to Approach Regulation (Part One of Two)” (May 12, 2016); and “ESMA Recommends Extension of the AIFMD Passport for Hedge Fund Managers and Funds in Certain Non-E.U. Jurisdictions” (Aug. 6, 2015).