Gavin Farrel of law firm Ozannes discusses Guernsey as an alternative offshore hedge fund jurisdiction

At a time of increasing corporate governance requirements, greater regulatory oversight of hedge funds and the Madoff “experience”, it’s becoming increasingly important to show real control over fund assets. This could take the form of directors attending board meetings in person to query, among other things, custody arrangements.

Guernsey is a “European” offshore jurisdiction from where hedge funds can
be established outside the traditional Caribbean structure. This means that Guernsey is an ideal place to domicile an offshore fund as it allows the investment manager and board to attend meetings more frequently, and visit the administrator and custodian at the same time. In addition, Guernsey has always been recognised as a well but not
over-regulated jurisdiction with an excellent infrastructure.

In terms of Guernsey products, hedge funds can either be open or closed ended. The vast majority, however, are authorised open-ended schemes, providing investors with a right to redeem their shares during the lifetime of the scheme. However, that right is frequently restricted through long redemption notice periods, redemption gates, redemption fees and other limitations.

Recent reforms in Guernsey have reduced the burden of regulatory approval in the case of hedge funds by enabling them to be set up as registered funds and benefit from the self-certificated and expedited process. In such cases, the Guernsey Financial Services Commission (GFSC) undertakes to issue appropriate authorisation, if the application is successful, within three working days of receipt of the relevant application documents.

The principal effect of the changes is that the onus will fall upon the licensed Guernsey fund administrator to conduct due diligence on the fund promoter and the fund structure and to certify to the GFSC that the proposed fund satisfies the criteria for authorisation. The standard three-stage process (see below) will therefore not be applicable. Provided the fund administrator confirms to the GFSC that the criteria are met, the GFSC will grant the required approval within three working days. These changes should significantly accelerate the regulatory approval process.

In circumstances where the fund does not wish to benefit from the self-certificated regime, and prefers to go through an authorisation process and review of documentation by the regulator, the procedure continues to follow a three-stage process, involving outline, interim and final stages.

Outline stage:
This requires the completion of a form setting out the details of the fund’s
structure and objectives with details of all parties involved. Hedge funds must
be administered by a Guernsey fund administrator and therefore the principals will need to have already chosen their local administrator. The Guernsey administrator can however delegate to administrators based outside of Guernsey if required by
the commercial terms of the structure.

Interim stage:
This involves the filing of the near final draft prospectus with a form containing a checklist of the disclosure requirements in the prospectus. The GFSC has maintained a policy of “fast tracking” an application by combining the interim and outline stages, provided that both forms and relevant documents are filed together.

Final stage:
Once the GFSC has reviewed the draft prospectus and related forms, and has obtained satisfactory responses to its queries, the filing of the final prospectus and certified copies of constitutive documents and material contracts disclosed in the prospectus is required.
The granting of full approval will then be considered by the GFSC.

If the entity responsible for the fund’s establishment is not already known to the GFSC, additional documentation and time to conduct due diligence on that promoter will be required at the time of, or before, the outline stage.