Looking back to look forward
By Elliot Refson, head of funds at Jersey Finance
We live in increasingly complex times; from the rapidly shifting landscape of international regulation to the increasing focus on emerging trends such as ESG and digitisation, there are now considerably more factors influencing decision making when it comes to choosing a fund domicile.
Those able to accurately predict future twists and turns will obviously do well. But in the absence of a crystal ball, considering the history of the sector and identifying patterns of change can also reveal insights as to where the sector is heading.
While a number of offshore locations began to develop a connection with international finance as far back as the 1960s, it wasn’t until the late 80s that the international fund industry truly gathered momentum.
The first investment products offered were mainly for UK nationals working overseas and other expatriates and they differed greatly from the products available today. In particular, money market funds and investment products with a life assurance wrapper were popular while equity and bond mutual funds were also being offered to retail investors.
Jersey, having established a reputation for international finance dating back to 1961, played a part in supporting growth and developing expertise in these endeavours. Meanwhile jurisdictions in the Caribbean were increasingly being sought to domicile hedge funds.
It wasn’t until the late 90s, however, that international fund domiciliation for the private equity and real estate sectors began to take off - which up until that point had almost exclusively housed their investment products onshore, mainly in the UK or US.
It was this decade that saw the dawn of meaningful regulations for fund industry entities based in offshore jurisdictions. This evolution gave rise to fund administration and infrastructure services setting up in locations like Jersey as well as in continental Europe.
This helped drive the growth of alternative investment products in offshore domiciles - so when institutional investors began to allocate to alternatives in the new millennium, such locations became the obvious ports of call.
Of course, this in turn led to greater requirements in operational capabilities and professionalism, which were met by jurisdictions with varying degrees of success.
It was the financial crash of 2008, however, that prompted a rapid increase in the pace of change in fund domiciliation with calls for greater responsibility and regulation - much of the regulatory environment to be navigated today stems from the events of 2008.
The EU’s Alternative Investment Fund Management Directive (AIFMD) in particular made greater demands on demonstrating substance in EU jurisdictions.
Meanwhile Base Erosion and Profit Shifting (BEPS), introduced by the Organisation for Economic Cooperation and Development (OECD), also imposed substance requirements on offshore jurisdictions.
Both of these initiatives prompted varying degrees of challenges for IFCs. For Jersey, complying with substance requirements was a relatively smooth process, particularly given that the requirements fit with the Island’s strategy of developing skills to support its alternative fund industry. Other jurisdictions, however, encountered greater difficulties and found themselves on various blacklists.
This has proved to be a boon for jurisdictions like Jersey. Once seen as a more expensive option with greater regulatory demands, today, Jersey’s regulatory regime looks proportionate and pragmatic, while the cost gap between it and other international fund centres has narrowed considerably.
Fast forward to the future
What does all this tell us about the state of the international fund domicile landscape today?
Looking in the rear-view mirror is not just a nostalgic exercise – doing so gives us some pointers about how international fund centres might continue to evolve. What is clear is that throughout their respective journeys, being able to adapt, having foresight, and listening carefully to the mood music is absolutely critical.
There’s no doubt that centres will have to continue to adapt in the future and there are a number of specific areas where we can expect significant change and where those centres will need to show strong leadership.
Sustainable finance, for instance, is clearly going to continue to be hugely influential. Just as some domiciles have become synonymous with specific asset classes, it is likely that certain IFCs will rise to the fore in specific ESG categories too. Jersey is in a good place here, having launched its sustainable finance strategy some two years ago, and with the regulator having created a robust, flexible and proportionate regime for ESG investments.
The digital assets space is also likely to maintain a rapid pace of change. But, while the number of crypto funds is increasing at speed, the structuring of these entities is not always of a standard investors would expect. That will create opportunities for IFCs with specific expertise in, for instance, blockchain, tokenisation and governance.
There will also likely be further investment categories in the future. These will create significant opportunities for those jurisdictions that can be nimble, especially when attracting any first-movers, who can provide a domino effect whereby investors are attracted to IFCs that house a substantial number of funds in the same category.
Making the right choice
Today Jersey is an alternative funds centre of significant note. Across its regulated and lighter touch regimes, including its industry-leading Jersey Private Fund structure, Jersey services in excess of US$0.5trn of fund assets through fund vehicles, with many more fund pools held through corporate structures – more than 90% of that funds business is in alternatives.
Its positioning outside of the UK and the EU, but with excellent relationships with both, places it in an ideal position to attract capital from anywhere in the world, with global distribution capabilities.
While the next decade will see many more changes – both foreseen and unforeseen – domiciliation will continue to be an integral part of global fund structuring and play an increasingly significant role in manager and, crucially, investor decisions.
Jurisdictions that can provide stability, expertise and infrastructure, combined with flexibility and an innovative approach, will stand in good stead. This is an approach Jersey has long adopted and is how the jurisdiction has kept up with the pace of change within the investment funds arena over the past 30 years.
For its part, Jersey’s focus will remain on staying true to its values and on retaining its position as an integral part of the global fund landscape.
A white paper commissioned by Jersey Finance in 2022 exploring the origins of key international fund jurisdictions around the world can be found here.