practical uses of bermuda structures/alternative investment

Practical Uses of Bermuda Structures/Alternative Investment

Vehicles

Bermuda:The Future of Offshore, Today

London, January 22, 2001

London, January 22, 2001

Practical Uses of Bermuda Structures /Alternative Investment Vehicles

Moderator: The Hon. C. Eugene Cox, JP, MPDeputy Premier and Minister of Finance

Greg Haycock

Martin Lane

Fergus Healy

Johann Wong

Greg HaycockPartner

KPMG Bermuda

THE SEGREGATED ACCOUNTS COMPANIES ACT 2000

andANTI-MONEY LAUNDERING

AND THE PROCEEDS OF CRIME ACT

Overview

The new public registration system for creating protected client “cells” in any industry: quickly inexpensively

Advantages

Less Expensive More Manageable Establishes substantive law

Substance of Relationships

Nature of a trust Created by way of mandated agreement

Benefits

International recognition and enforceability Enhances Bermuda’s reputation Establishes a system of registration Sets prescribed standards Improves Bermuda’s competitiveness

Business Opportunities

Applies to non-insurance as well as insurance uses Promotes tailor-made solutions

Non-Insurance Uses

Mutual fund structures Property development companies E-commerce companies Ship and aircraft companies Securitisation and derivative transactions Trust company arrangements

Summary of the Act

Establishes system of public voluntary registration Creates statutory regime governing record keeping Incorporates principles of U.S. business trust

legislation

Requirements

Available to companies governed by the Companies Act No restrictions on insurance company applications Other companies must seek approval of Minister Company name must include “(SAC)”

Crucial Aspects

Attributes portions of an asset/liability Allows for amalgamation or consolidation Any type of securities Sets conditions for dividends or distributions

Competitive Fees

Annual fee of $250 per segregated account Maximum annual fee of $1,000

Determining Solvency of SAC

Cells or Segregated Accounts

General Account

Cells or Segregated Accounts

Separate accounts for each cell Each with assets and liabilities Subject to any abatement provisions

General Account

One set of accounts Assets and Liabilities

Illustration of SAC, General Account and Segregated Account Cells

Conclusion

Bermuda at the forefront International recognition Responsible legislation Suited to a wide range of business uses Assists development of offshore sector

Anti-Money Laundering and the Proceeds of Crime Act

Historical Perspective

1940 Defense Finance Regulations 1972 Exchange Control Act 1997 Proceeds of Crime Act 1999 Proceeds of Crime Amendment Act

“Know your Customer” Initiative

1988 Vienna Convention

1991 BMA issues Anti-Money Laundering Code

1995 UK officially declares to UN Vienna Convention applies to

Bermuda Code of Conduct updated and reissued formerly adopted by all financial institutions, other than CIS

Proceeds of Crime Act, 1997

Crimilized the laundering of proceeds of criminal conduct including; concealing or transferring proceeds assisting another to retain proceeds acquisition, possession or use of proceeds failure to disclose knowledge or suspicion tipping off third parties under investigation

Criminal Conduct

Schedule of “relevant offences” includes offences which; result in significant monetary gain

corruption, fraud, counter-fitting, stealing and/or forgery

“dual criminality” an act or omission which would constitute drug trafficking or a

relevant offence had it occurred in Bermuda.

Proceeds of Crime Money Laundering Regulations, 1998 Provides that banks, trusts, deposit companies and other

categories are regulated institutions and must observe the rules

Regulated institutions required to establish & maintain procedures concerning; client identification record keeping internal reporting training appointment of compliance officer

Proceeds of Crime Amendment Act, 1998

Changes definition of relevant offences under ‘criminal conduct’ to mean all indictable offences.

Criminal Tax Evasion - only indictable tax offence in Bermuda

“any willful act by a person with intent to defraud and where (a) the person knows a substantial amount of tax would otherwise be due (b) the conduct involved constitutes a systematic effort or pattern of activity designed to falsify material records

Martin LaneManaging Director

Conyers Dill & PearmanLondon

The Legislative Framework forCollective Investment Schemes

in Bermuda

Current Legislative Framework

The Companies Act 1981 The Bermuda Monetary Authority

Collective Investment Scheme Classification Regulations 1998

The Companies Act 1981

Allows Redemption Prospectus Requirements

BMA (CIS) Regs

Bermuda Standard Scheme Bermuda Institutional Scheme Bermuda Recognised Scheme

Bermuda Standard Scheme

Local (Bermuda) bank custodian - usually Local (Bermuda) registrar BMA approval of other functionaries

Bermuda Institutional Scheme

No requirement for Bermuda custodian minimum subscription $100,000 initial offering size $50m

Bermuda Institutional Scheme

Administrator must have a physical presence in Bermuda be independent of the scheme and other functionaries

Warning language - regulated to a lesser degree

Establishing a Mutual Fund

Incorporation by registration application to BMA

BMA to approve offering materials Prospectus filed if public offering

Officers or Representatives

Two Resident Directors One Resident Director and a Resident Secretary Resident Representative and a Resident Secretary

Declaration filed annually with fees

Monthly statistical report

Prospectus - refiling on material changes

On-going ReportingRequirements

Minimum capital lowered

No annual prospectus refiling

Recent Changes

Future Proposals?

Fergus HealyVice President

Bank of Bermuda

Substance to Investment FundBusiness In Bermuda

Bermuda is in an almost unique position in the offshore world as many facets of the investment management industry have a substantial presence on the island.

Leading jurisdiction for the incorporation, management and administration of investment funds of all types and the provision of custody services.

1,339 open ended funds constituted in Bermuda with nearly $40 billion in assets as at 30th June 2000.

Very Good Infrastructure

Excellent telecommunication network E-commerce hub Regular flights to the US, London and Canada Safe, stable economic and political environment Excellent accounting, legal and technical professional

support services

Strong but Flexible Regulation

Bermuda Monetary Authority (“BMA”) has a sound track record for prudent regulation

Excellent working relationship/partnership between government and industry

Bermuda is not on the FATF or OECD “blacklists” due to strong “Know your Customer “requirements.

KPMG recognized Bermuda’s strong regulatory environment in its Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda for the UK Government.

Pending Licensing of Fund Administrators

Experience with DifferentFund Structures Hedge Funds

Equalization Series Accounting Hot Issues Electronic links to Brokers Huge growth in European based sponsors

Fund of Funds Very popular in 2000 Allow investors to be exposed to a number of hedge funds Seeing a trend for lower minimums Many large custodian do not want the custody side of the buisness

Experience with DifferentFund Structures Private Equity Funds

A large number of Private Equity Funds have been set up in the last three years in Bermuda by European Managers

Very unique accounting requirements Bermuda has built up an expertise in the administration and auditing of

Private

Equity Funds Emerging Market Funds Seeing a revival after September ‘98

Structured Trusts Can be very effectively used for some commercial transactions

Expertise in Administration

Many well respected administrators in Bermuda Ability to service funds from many jurisdictions State of the art systems Exposure to developments in many jurisdictions And most importantly . . . . .

. . . . for the fund sponsor

A Great Place forBoard Meetings!

“QI” Status

Bermuda recognized as an approved jurisdiction Benefit the custody business but also the unit trust

business QI’s who are non-US Custodians and Trustees - No

disclosure of client details to IRS

Removal of “Ten Commandments” Has not had the drastic impact some thought Expertise, cost effectiveness and flexibility Many investors still look to a 3rd party administrator for

comfort Provided opportunity for many of Bermuda’s

administrators to move some of their operations on-shore Opens up new market - domestic U.S. Hedge fund

market

Summary Bermuda has a substantial multi-faceted investment

management industry. Fund administration is major component of the investment

management industry. Bermuda’s Administrators are among the leading off-shore

fund administrators in the world. The BMA enforces a strong but flexible regulatory regime. Bermuda’s continues to take steps to protect its good

reputation.

Bank of Bermuda Contacts

Fergus HealyVice President & Legal CounselBusiness DevelopmentThe Bank of Bermuda Limited6 Front StreetHamilton HM 11Bermuda

Phone (441) 299-6174Fax (441) 299-6565Email healyfa@bankofbermuda.com

Anthony RikerVice President BusinessDevelopment ManagerThe Bank of Bermuda Limited6 Front StreetHamilton HM 11Bermuda

Phone (441) 299-5117Fax (441) 299-6565Email rikerat@bankofbermuda.com

Drew A. DouglasVice PresidentBusiness Development ManagerBank of Bermuda (New York) Limited100 Wall StreetNew York, NY 10005

Phone (212) 715-6454Fax (212) 715-9300Email douglada@bankofbermuda.com

Johann WongPresident & Founder

HedgeWorld Ltd.

Alternative InvestmentsAlternative Investments

E-CommerceE-Commerce

Risk TransferRisk Transfer

“All Good Things Converge In Bermuda”Bermuda is the premium offshore jurisdiction where alternative investments, risk transfer and electronic commerce converge to offer a seamless solution for

businesses

Bermuda:The Convergence Island

Bermuda: The New New Thing Innovative building blocks, include:

Seamless Solution - accounting, administration, banking, capital markets, custody, insurance, Internet infrastructure, legal...

Rule of Law - Electronic Transaction Act, 2000 and Investment Business Act, 1998 and respective Code of Conducts...

Estimated $10 billion + in reporting hedge funds domiciled and/or custodied in Bermuda (TASS+)…

PlusMarkets joint-venture with the BSX and Plusfunds.com HedgeWorld.com, HedgeTrust Exchange and the BSX... Annual MAR/Hedge industry conference… Estimated $84 billion in total assets and $23.4 billion in capital in insurance

companies (Deloitte & Touche 12/31/99), 1,500 insurance companies XL Capital, MaxRe, Imagine, Tremont Insurance...

www.bermudaconvergence.com

Regulatory Overview & Links

Bermuda International Business Association Bermuda Monetary Authority Bermuda Stock Exchange - FIBV, IOSCO Member Insurance Advisory committee IRS Qualified Intermediary - Bermuda is Qualified KPMG Report - Recognized jurisdiction OECD - FATF - Not on any black lists U.S. Treasury Advisory - Not on black lists

Fact Sheets

The Convergence Island Why Bermuda Mean Business Financial Services Hedge Funds Mutual Funds Insurance Industry E-Commerce Legislation E-Business Solution

Case Studies DotRisk.com - insurance site HedgeWorld.com - hedge fund B2B infrastructure solution Imagine Re - reinsurance wrapped around hedge funds Invesdex - online alternative investments index Max Re - reinsurance wrapped around hedge funds PlusMarkets - online trading of hedge funds with BSX Principal Guaranteed: ACE, XL, Zurich - insurance-based principal

guarantee of hedge funds products Tremont International Insurance Ltd. - insurance and annuities

wrapped around hedge funds

Widely Held Moore Capital

Fixed Income

AlternativeAssetsPortfolio, Managed by Moore Capital

Life and P&CReinsurance

(Low Volatility)

$500 million

MAX RE

* First class insurance management team* Class 4 licence

$350 million $150 million

60% 40%

TOTAL ASSETS

NOTES:

Not a PFIC or CFC

Tax Free Income Roll-Up

Leverage Using Premium Flow

IPO Likely-Multiple

“Hedge Fund” Insurance Companies

INVESTORSTRUSTEE

ASSETSCUSTODIAN/

TRUSTEE

COLLECTIVEINVESTMENT

SCHEME

NOTES:

- Wider Investor Pool

- Effective use of Capital

- Insurer looks for:

• liquidity

• track record

• transparency

• ability to understand risks

• control

- Costs

INSURER

MANAGER

GUARANTEE

PRINCIPAL RETURN AT MATURITY

CAPITAL

REPORTS TO

MANAGEMENT

CONTRACT

HELD BY

CUSTODY

AGREEMENT

Principal ReturnGuarantee

Global Hedge Fund Industry

Where is the opportunity?

Estimated 3,000 to 5,000 hedge funds, U.S./non-U.S. Estimate US$300-500 billion in assets, U.S./non-U.S. Estimated 25%+ growth rate, new assets received Estimated to grow to trillion U.S. dollars in 5 years Institutions and their consultants High net worth investors and financial service providers Growth in hedge funds under US$100M Transparency and risk management

Hedge Fund Industry Trends Traditional to alternative manager brain drain Inherent supply side constraints increasing Emergence of a “elite” class of hedge funds Fee discounts on unproven managers Demand for hedge fund transparency increasing Demand for hedge fund increasing with knowledge Financial institutions outsourcing to hedge funds Hedge funds are moving down market to affluent investors

Hedge Fund Industry Trends (cont.)

Capacity will increase with institutionalization Liquidity is decreasing Structured products are increasing Lenders consolidating credit and trading risk Managers want stickier funds Regulatory reform focusing on creditors Managers becoming more marketing-orientated

Great Performance...

Year

S&P500 w/div.

Median, of all equity

mutual funds

Top 25%, of all equity

mutual fundsMedian, all

hedge fundsTop 25%, all

hedge funds

1989 31.63 25.39 31.22 20.95 32.04

1990 (3.15) (5.09) (1.18) 6.86 19.11

1991 30.41 33.90 45.26 25.95 42.09

1992 7.61 8.87 13.73 15.82 24.42

1993 10.03 12.79 18.18 23.75 35.36

1994 1.12 (0.99) 1.22 4.38 11.06

1995 37.58 31.98 36.21 20.94 34.15

1996 22.97 19.89 23.01 19.13 28.77

1997 33.36 25.85 30.54 18.22 28.22

1998 28.58 14.31 24.81 7.53 18.25

CAGR 19.17 15.73 17.81 16.48 21.32

Source: Tremont Advisers, Inc.

Superior Rewards vs. Risk (1986-1995)

Cottier, Philip, Hedge Funds and Managed Futures, University of St. Gallen, Verlag Paul Haupt, Bern, 1997

50

190

450525

645760

900

1060

1220

1380

1540

1700

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1990 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Assets

(b

illio

ns $

)

E E E E E E E E E

Creates StrongHedge Fund Growth

Tremont Advisers, HedgeWorld.com, Dr. Rama Rao and Jerry J. Szilagyi,

The Coming Evolution of the Hedge Fund Industry, RR Capital Management, 1998

U.S. Offshore Fund 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Total Funds Listed 78 108 142 176 265 313 400 459 550 593

Hedge Funds Listed 123 197 248 308 375 445 375Fund of Funds Listed 53 68 65 92 86 105 218

New Listings 30 51 56 106 93 145 135 147 146Net New Funds 19 23 45 35 68 116 115 118

U.S. Offshore Fund 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 CAGRTotal Funds Listed 0 38.46% 31.48% 23.94% 50.57% 18.11% 27.80% 14.75% 19.83% 7.82% 25.28%

Hedge Funds Listed 60.16% 25.89% 24.19% 21.75% 18.67% -15.73% 20.42%Fund of Funds Listed 28.30% -4.41% 41.54% -6.52% 22.09% 107.62% 26.58%

New Listings 70.00% 9.80% 89.29% -12.26% 55.91% -6.90% 8.89% -0.68% 21.87%Net New Funds 21.05% 95.65% -22.22% 94.29% 70.59% -0.86% 2.61% 29.81%

Source: U.S. Offshore Funds Directory

Stronger Growth Offshore...

17002400 2800 3200

3800

57286254

66847314

7791

0

2000

4000

6000

8000

10000

12000

14000

1995 1996 1997 1998 1999

Mutual Funds

Hedge Funds

Investment Company Institute & TASS Investment Research

E EE

# of Mutual Fundsvs. Hedge Funds

$ billions. Investment Company Institute & TASS Investment Research

$2,812$3,526

$4,468

$5,525

$6,843

190 210 280 450 525$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

1995 1996 1997 1998 1999

Mutual Fund

Hedge Fund

E E E

Assets of Mutual vs.Hedge Funds

60% -75%

40% - 25%

TASS Research Investment Research

Hedge Fund Investor Profile

High-net-worth families Swiss private banks U.S. endowments/foundations Institutional Structured notes Insurance companies

Allocations to Hedge FundsEstimated Hedge EstimatedFund Investment Allocation Rates

(billions)High Net Worth $140.0 1.60%Pension Funds $8.5 0.08%

Insurance Companies $1.7 0.03%Non-Profit Organizations $13.6 1.17%

Others $6.8 0.14%RRCM & KPMG, 1998

N = 267, emerging wealth investors ($100,000 or more)High-Net-Worth Psychology: Finding, Winning and Keeping Affluent Investors, Prince & Associates

Hedge Fund Opportunities for Investors 68.9% - Will be more available to less wealthy

investors 68.2% - Only the rich get to invest 64.8% - Best investment managers run hedge funds 63.7% - Everyone should be able to invest 62.2% - Would invest if opportunity arose 57.3% - Good way to create a diversified portfolio

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Public Private Endowment Total

Assets

(%

) D

oll

ar

Weig

hte

d A

vera

ge

1996

1999 E

Greenwich Associates

Pension Plans Alternative Investments

U.S. Institutional Investors DemandHedge FundsNow Would TotalUse Consider Demand

1997 1998 1997 1998 1997 1998Corporate Funds 5% 4% 5% 7% 9% 11%Over $5 billion 17% 15% 8% 23% 25% 38%$1,001-5,000 million 7% 5% 9% 11% 16% 16%$501-1,000 million 5% 5% 4% 9% 8% 14%$251-500 million 2% 2% 4% 3% 6% 5%$100-250 million 2% 2% 2% 3% 4% 6%Public Funds 3% 2% 4% 5% 7% 8%State 3% 2% 5% 6% 8% 7%Municipal 3% 3% 4% 5% 7% 8%Over $5 billion 5% 2% 9% 7% 14% 8%$1,001-5,000 million 7% 3% 1% 6% 8% 9%$251-1,000 million 0% 3% 2% 5% 2% 8%$100-250 million 1% 1% 6% 4% 8% 5%Endow ments 33% 32% 15% 39% 47% 71%Over $1 billion 38% 42% 19% 48% 57% 90%$251-1,000 million 39% 31% 14% 38% 53% 68%$100-250 million 23% 29% 13% 36% 36% 64%Total Funds 9% 9% 6% 13% 16% 22%

Greenwich Associates

All Good Things Converge In Bermuda

Bermuda:The Convergence Island

Seamless Solution - Alternative Investments, Risk Transfer and E-Commerce Business friendly environment and stable economy Accounting, Administration, Banking, Custody, Financial Services,

Insurance, Internet, Legal Rule of Law - Electronic Transaction Act US$10 billion from over 120 hedge funds US$30 billion from over 1,000 mutual funds US$100 billion assets from over 1,500 + insurance companies Proven case studies - ACE, DotRisk.com, Hedgeworld.com, Imagine,

Invesdex, MaxRe, PlusMarkets, Tremont International Insurance Ltd., XL, Zurich

The Convergence Island

All Good Things Converge In Bermuda