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New legislationgives fresh impetusto fund sector

Focus on regulationdraws institutionalinvestors

Innovative listingsolution for funds on BSX

Bermuda HedgeFund Services2007

Jul 2007

BERMUDA Hedgeweek Special Report Jul 2007 www.hedgeweek.com | 2

CONTENTS

In this issue…03 Bermuda financial sector strives tobalance regulation and flexibilityBy Suchita Nayar

05 Bermuda’s growth attracts globaltalentBy Jessel Mendes, Chad Critchley and Chris Gauk, Ernst & Young

09 Butterfield draws on 150-year historyBy Douglas Lang, Butterfield Fund Services (Bermuda)

11 Pocket-sized financial powerhouse putsits faith in good housekeepingBy Suchita Nayar

13 An innovative listing solution for fundsBy Greg Wojciechowski, Bermuda Stock Exchange

Special Report Editor: Simon Gray, [email protected]

Sales Manager: Simon Broch, [email protected]

Publisher/Editor-in-Chief: Sunil Gopalan, [email protected]

Marketing Director: Oliver Bradley, [email protected]

Graphic Design (Special Reports): Siobhan Brownlow at RSB Design

Photographs: Courtesy of Bermuda Tourism

Published by: Hedgemedia Limited, 18 Hanover Square, London W1S 1HX

Tel: +44 (0)20 3159 4000 Website: www.hedgeweek.com

©Copyright 2007 Hedgemedia Limited. All rights reserved. No part of this

publication may be reproduced, stored in a retrieval system, or transmitted, in any

form or by any means, electronic, mechanical, photocopying, recording or

otherwise, without the prior permission of the publisher.

Publisher

In a speech delivered at an Association ofBermuda Compliance Officers’ event lastmonth, Bermuda International BusinessAssociation chief executive Cheryl Packwoodnarrated an incident which, she and otherindustry members believe, shed light on theongoing debate on standards of regulationand supervision in the offshore financialservices industry.

At a recent hedge fund conference in alocation she describes as “one that identifiesBermuda as one of its major competitors,”Packwood was seated with one of thepresenters, who worked as the complianceofficer and corporate counsel of anunidentified firm. She pressed him on whyhe chose another jurisdiction over Bermudato register his firm’s funds.

The compliance officer said that was

because this jurisdiction had no regulation, aclaim that Packwood vigorously disputed.The other location, she said, had rules thatwere in fact more onerous and cumbersomethan Bermuda’s. He replied: “Sorry, I know allabout the differences in regulations, but Ishould have said, ‘There is no enforcementof regulation where I am domiciled.’”

For a glimpse of what some offshorejurisdictions have come to represent,Bermudian officials say one does not have tolook too hard – which is why they do notwant the territory to be identified as one.Says Packwood: “We regard ourselves as analternative financial jurisdiction, whichhappens to be located on an island.”

Bermuda is a tiny speck in the northAtlantic Ocean, more than 1,000 kilometres(about 670 miles) east of the nearest

O V E R V I E W


Bermuda financialsector strives to

balance regulation andflexibilityBy Suchita Nayar

➧ p6

© 2007 ERNST & YOUNG

!@#Audit . Tax . Transaction Advisory Services

ERNST & YOUNG REFERS TO THE GLOBAL ORGANIZATION OF MEMBER FIRMS OF ERNST & YOUNG GLOBAL LIMITED, EACH OF WHICH IS A SEPARATE LEGAL ENTITY.

If it were this easy you wouldn’t need help getting through it.

The global asset management marketplace has become so complex, virtually no one cannavigate through it on their own. At Ernst & Young we have an international network of financial services advisory professionals who can provide you with world-class knowledgeand quality advice. We do all this because our clients need to compete more effectively.We're here to help clear the way.

For more information visit us at ey.com

Clients of Ernst & Young get a lot more thanmeets the eye. The eight partner rankingleaders and 170 professionals and staff thatcomprise the Hamilton office of Ernst &Young are in no way an island tothemselves, but a vital part of the firm’sworldwide network of specialists.

The firm prides itself on putting itscollective worldwide experience to work inhelping its clients achieve their businessgoals and meet existing competition andfuture challenges. Ernst & Young’s integrityand professional competence are thecornerstones of the global organisation. Thefirm is committed to ensuring that its servicelives up to the firm’s reputation as an ethical,independent and objective firm built upworldwide over the past century and more.

An important aspect of this mission isinvesting in its people through trainingprogrammes and other efforts. Driven bygrowth, it’s no secret that Bermuda suffersfrom a shortage of local skills that areheavily in demand in offshore financialservices jurisdictions. The attraction of workpermit holders and the flexibility thegovernment has shown in adjusting theduration of work permits in certain caseshas helped meet the demand. The firm isalso addressing the issue by, among otherthings, hosting an annual recruitment eventat which candidates are introduced to Ernst& Young’s well-established professionaldesignation programme and its commitmentto training the people it recruits.

In addition to recruiting locally, theBermuda practice spreads its net to NorthAmerica, Europe, and Asia. With the hedgefund services industry expected to grow atup to 30 percent annually and the insurancesector continuing to expand, Bermuda is avery appealing professional destination. Inaddition, Ernst & Young’s global network

offers employees the opportunity to move toother offices around the world, and the firmencourages its specialists to work in otherjurisdictions and industries.

The Bermuda office offers auditing,actuarial, risk and regulatory, and operationsimprovement services under the group’sAssurance & Advisory practice. The officealso offers US tax services to individuals,partnerships and corporations and, with Ernst& Young international tax services units,offers tax advice to offshore businesses thathave operations in multiple countries.

The financial services group worksactively with asset managers, banks,brokerages, insurers and private investors toprovide audit and tax services. As befits aleading insurance jurisdiction with more than2,000 companies and USD230bn in assets,Ernst & Young has a particularly strong localteam in this sector, with insurance andreinsurance specialists serving more than300 insurance clients.

The Bermuda asset management groupcomprises more than 60 professionalsservicing clients offering both mutual andhedge funds through vehicles such ascorporations, unit trusts and partnerships.The practice services hundreds of onshoreand offshore funds, helps clients to set upfunds in Bermuda and assists managersseeking to expand into other jurisdictions.

Bermuda’s buoyant financial sectorcontinues to attract international investors –for example UK-based private equity firm 3i,which has just acquired a stake in fundadministrator Fulcrum – and the island’sfuture as an offshore centre remains bright.A key factor is the authorities insistence onattracting top-quality managers, not just alarge number of funds, to safeguard theisland’s reputation as a pre-eminent financialservices hub. ■

E R N S T & Y O U N G


Bermuda’s growthattracts global talent

By Jessel Mendes, Chad Critchley and Chris Gauk

Jessel Mendes, Chad Critchleyand Chris Gauk are leaders inthe Bermuda Ernst & Younghedge fund practice

continental landmass, Cape Hatteras inNorth Carolina, and home to an estimated66,100 people. Once best known as a rathergenteel tourist destination for moneyedvisitors from Europe and North America, thearchipelago of 138 small islands has seen itseconomy transformed by internationalfinancial services over the past two or threedecades.

Bermuda is now the world’s insuranceand reinsurance capital with a total of 1,312companies at the end of 2005, with grosspremiums of USD100.7bn and total assets ofUSD329.8bn, as well as being a thriving hubfor funds with more than 2,200 traditional andalternative vehicles domiciled in thejurisdiction and total net assets of someUSD1210bn. Additionally, the Bermuda StockExchange has more than 420 listedsecurities with a total market capitalisation ofUSD350bn, and there are four home-grownbanks, of which the best known is Bank ofBermuda, now part of HSBC, and ButterfieldBank.

While these numbers are impressive for agroup of islands barely a third of the size ofWashington DC, they are modest incomparison with those of rival domicilessuch as the Cayman Islands, Dublin andLuxembourg. That, say industry insiders, isdeliberate; Bermuda views itself as asomewhat exclusive club. The financialregulator, the Bermuda Monetary Authority, isextremely vigilant about whom it lets in andhow business gets done from the island’spristine shores. Quality, not quantity, is itsguiding philosophy.

At the same time officials such as deputypremier and finance minister Paula Coxincreasingly have to defend Bermuda’sreputation from charges of being costly andslow, and industry participants are embarkingon an aggressive marketing approach todebunk such myths and instill a differentimage of a jurisdiction that is serious aboutregulation but welcomes innovation.

They hope institutional investors, such asendowments and pension funds, will bereassured by Bermuda’s commitment topolicing its financial services companies, andare taking the message to leading onshorefinancial centres including New York,London, Paris and Geneva.

A company can have its registration

application turned around in as little as 24hours at a cost in fees of around USD3,900,comparable with if not less than what itwould take in any competing jurisdiction. ButTim Calveley, chief financial officer of hedgefund administrator Fulcrum, hastens to add:“Bermuda is trying to tell everyone it’s not abrass-plate jurisdiction. The BMA is quitestringent about anti-money-laundering. It haspositioned itself as a premier jurisdiction withhigh standards, and that’s how it wants toknown.”

Adds Pat Phillip-Bassett, the BMA’sassistant director for corporate governanceand communications: “Maintaining thatdelicate balance supports Bermuda’ssuccess as a leading, quality financialservices jurisdiction. A vast network ofattorneys, auditors and administrators hashelped solidify its place in the internationalfinancial services industry.”

Among measures to strengthen oversightof the insurance sector, the regulator hasdeveloped an audit programme fornewcomers to complement its on-sitereviews. It is also preparing a code ofconduct for companies and has expandedthe scope of audits it conducts on location.The BMA has carried out initialimplementation of a programme governing itsinsurance captive market over the past threemonths, and it is close to completing workon a new risk-based capital adequacy model.

Meanwhile, insurers and re-insurerscontinue to flock to Bermuda. During 2006,

O V E R V I E W


p3 ➧

82 new firms were established here, thelargest number for three years and up nearly10 per cent from 2005. The new wave ofbusiness coming to Bermuda beganfollowing the September 11, 2001 terroristattacks in the US and gained furthermomentum after Hurricane Katrina in 2005 –events that cost the industry an estimatedUSD40bn but prompted the creation of newinsurance companies to take advantage ofsoaring premium rates.

The Investment Funds Act 2006, whichreplaces the 1998 Collective InvestmentScheme regulation, has created a three-tierclassification. Administered funds must havea Bermuda administrator and be either listedon a recognised stock exchange or carry aminimum investment requirement ofUSD50,000. Institutional funds are targeted atqualified investors and must maintain aUSD100,000 investment threshold.

Funds that do not fall in either of theseclasses belong to the standard fundscategory. Given the sophisticated nature ofits market, the regulator does not encourageretail participation in Bermudian alternativefunds, although the sector also includesretail funds offered to local investors by theisland’s domestic financial services providers.

Responsibility for creating or changingrules now rests with the BMA rather than thefinance ministry. The new legislationintroduces the licensing of new fundadministrators, of which Citadel SolutionsBermuda became the first last month, andthe regulator is drawing up guidelinesgoverning their duties, requirements andstandards. However, the BMA says that thatits approach to regulation of the fund sectorwill remain unchanged as long as theindustry follows market discipline and carriesout proper disclosure.

The island is also tweaking a number ofother measures including its regulationsdesigned to prevent money laundering, andthe BMA will have statutory authority tomonitor fund administrators’ anti-moneylaundering compliance. It also has authorityto check legal and accounting professionalsconducting financial transactions for clientsand can order searches of businesspremises if required.

The measures to assure a regulatedenvironment for fund services are encouragingcontinuing growth in the sector. CitadelSolutions, the fund administration offshoot ofone of the largest US hedge fund managers,is joining a sector that already includes HSBC(through its acquisition of Bank of Bermuda),Bank of New York and Citigroup (which hasjust acquired Bisys, another administrator witha Bermuda presence).

The presence of these major players givesBermuda a significant boost in terms of theisland’s hedge fund servicing capability. SaysJessel Mendes, who heads Ernst & YoungBermuda’s asset management practice: “Inmy opinion, Bermuda has done a good jobregulating the local asset managementindustry. Our reputation for quality, flexibilityand appropriate oversight has helped attractblue-chip names.”

While Bermuda’s regulatory box is neatlychecked off, it is contending with a host ofother challenges. While it boasts animpressive telecommunications network,other parts of its infrastructure leavesomething to be desired. Skilled manpoweris always at a premium, and the decline ofthe dollar against the euro and sterling ismaking it harder to attract offshore talent toits shores.

Several administrators including Citi,Dundee Leeds and HSBC are reportedlyscaling back their Bermudian operations forreasons that are not completely clear butmay reflect higher costs and skills shortages.Rents and purchase prices for higher-endresidential properties are already among thehighest in the world, which filters down tothe salaries that firms must pay.

The government is working with firms inthe accounting, fund administration andinsurance sectors, which are most likely tobe affected by the manpower crunch. It hasbeen flexible in granting extensions of visas

O V E R V I E W


➧ p10

The firm now known as Butterfield Bank isBermuda’s oldest banking company. It tracesits origins back to a firm founded by NathanielButterfield in 1758. Originally established totrade cedar, wine and other dry goods, thecompany gradually started providing financialservices to its suppliers and customers. Acentury later, financial transactions dominatedthe business of the company, and in 1858,under the direction of the founder’s grandson,Nathaniel T. Butterfield, the firm became theBank of N.T. Butterfield and Company. In 1865,“& Son” was added to the bank’s name, andin 1904 it was incorporated as the Bank of N.T.Butterfield & Son Limited under a Special Actof Parliament.

Today, Butterfield Bank is well known for awide array of businesses including retail andcorporate banking, fiduciary services, fundadministration, private banking and assetmanagement. The group’s 1,500 employeesstretch from Bermuda to offices in theBahamas, the Cayman Islands, Barbados,Guernsey, Switzerland, Canada and the UKas the bank prepares to celebrate its 150thanniversary next year.

The Butterfield Fund Services business,which was launched in 1969 and is now ledby senior vice-president Frank Sebestyen, hasshown remarkable growth over the past fewyears. In addition, recent regulatory changesintroduced by the Bermuda Monetary Authoritythrough the Investment Funds Act have madebusiness conditions more amenable. TheBermuda operation administers 400 funds withUSD35.5 billion of assets, numbers thatindicate the island’s strength as an offshorehedge fund jurisdiction.

The rapid growth in hedge funds andother alternative investments is a uniqueopportunity for Butterfield Fund Services toexpand its fund administration businesssignificantly over the next few years, with afurther 30 per cent increase in business

targeted over the next 18 months throughgeographic growth and increased marketingefforts. Being part of a bank, the fundservices business can offer a one-stop shopto clients including compliance, currencyhedging, line of credit, leverage, cashmanagement and custody services.

Butterfield Fund Services is anticipatingadditional inflows of new business asinstitutional investors increasingly demandenhanced corporate governance and third-party administration. Unlike some of itscompetitors, the group is still very muchinterested in the USD50m to USD200m fundsas well as multi-billion-dollar vehicles. Whileother administrators take on only the biggestfunds, Butterfield Fund Services believes itcan offer excellent customer service tosmaller funds and still maintain a strongbusiness plan.

Butterfield Fund Services has a number ofstrengths that make it an attractive choice.First, it has a highly educated andexperienced staff, maintains a low staffturnover rate and motivates its top talent tosucceed within the organisation. Secondly,comprehensive internal control policies andprocedures ensure that proper checks andbalances protect the company and its clients.Thirdly, sophisticated IT systems in bothaccounting (Advent Geneva) and shareholderservices (NTAS) are vital to compete intoday’s expanding hedge fund industry.

The company is also continuing itsoverseas expansion. It is looking at openinga marketing office in New York to directmore business to all its servicing locations,and in March this year opened its firstonshore North American service centre inHalifax, Nova Scotia. Butterfield FundServices (Canada) has already taken on adozen employees whose mandate is to helpalleviate the workload of their colleagues inBermuda and Cayman. ■

B U T T E R F I E L D F U N D S E R V I C E S


Butterfield draws on150-year history

By Douglas Lang

Douglas Lang is managingdirector of Butterfield FundServices (Bermuda)

to certain foreign employees that have beenadmitted on work permits, and hasintroduced various practical measures toease living and working conditions, includingcar-sharing schemes and a faster ferryservice for commuters.

To get around infrastructure issues, someadministrators have been establishing officesin other countries including Canada andIndia. Both Butterfield Fund Services andOlympia Capital have opened facilities inHalifax, Nova Scotia, over the past year,while Fulcrum has an office in Waterloo,Ontario. Butterfield, which already hasoperations in Barbados, the Cayman Islands,Guernsey, Switzerland and the UK, is lookingto add New York to its international network.

Critics say that businesses movingoperations overseas spell long-term troublefor Bermuda and say the government shouldoffer incentives to staunch the outflow,although the more relaxed approach torecruitment abroad helps. Ernst & Young, forinstance, now brings in people from countriessuch as India and the Philippines. “We havegone much further afield to find qualifiedaccountants,” says executive Chris Gauk.

The recruits are also on the regulatoryside, with the BMA having just luredMatthew Elderfield from the UK’s FinancialServices Authority, where he had been headof department for the major retail groupsdivision since December 2004, to succeedCheryl-Ann Lister as its chief executive.Elderfield was previously director of policyfor the International Swaps and DerivativesAssociation and established its Europeanoperations.

It’s a time of change, too, in the structureof the island’s financial services industry,with increasing signs of convergencebetween its two largest sectors, insuranceand hedge funds, according to Julie McLean,a partner in the corporate department at lawfirm Conyers, Dill & Pearman.

Hedge funds have become significantinvestors in the area of property catastropheinsurance through vehicles known assidecars, fixed-term bespoke reinsurancedeals between reinsurance companies andinvestors such as hedge funds and privateequity partnerships. “Lines between privateequity and hedge funds are slowly blurringas well,” says Ernst & Young executive Chad

Critchley. “They are both looking at similarinvestment opportunities.”

Meanwhile, the Bermuda Stock Exchangeis targeting potential listings of debtderivatives and warrants as well as of hedgefunds. It has teamed up with the BMA andBIBA to create ‘Launch ‘n’ List,’ an initiativethat allows fund paperwork to be submittedsimultaneously to the regulator and theexchange. In most instances, a listing on theexchange can take place within a two-weekturnaround.

Bermuda’s well-established fundadministration sector is one of thebeneficiaries of the growing trend for UShedge fund managers to engage third-partyadministrators, gradually falling into line withtheir counterparts in Europe and otherregions where this is the norm.

According to Douglas Lang, managingdirector of Butterfield Fund Services, ashedge funds accept increasing volumes ofinstitutional money, they are being compelledto hire independent administrators to servicetheir assets and calculate valuations, whichshould help steer business to Bermudianadministrators, especially those that alreadyservice offshore fund structures for USmanagers.

Other sectors of the financial industry alsoseem to be benefiting from Bermuda’sreputation for sound regulation and solidservice providers, including private wealthmanagement and fiduciary services. Officialsand industry players hope that thejurisdiction can take advantage of a globalshift toward greater scrutiny of the offshoreworld and demand on the part of investorsfor protection through the use ofindependent service providers and effectivecorporate governance structures, and thatthis will feed through to the bottom line forthe island’s businesses.

For now, Bermuda is on the upswing as itdeploys its reputation as a well-policedfinancial centre to its advantage, McLeanargues, saying the island can point to amuch longer history of effective regulationand compliance requirements than some ofits international rivals. Members of theindustry are confident that the authorities willcombine this with adjustments to the regimewhere necessary to make procedures asefficient and streamlined as possible. ■

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p7 ➧

At a time when offshore financial centres areagain under fire from politicians inWashington concerned about the use of tax-free jurisdictions by US individuals andcompanies, as well as the difficulty ofmonitoring alternative funds located interritories where the writ of federal regulatorsdoes not run, Bermuda is keen to get themessage across that it is anything but abrass nameplate jurisdiction for offshorebusiness companies and hedge funds.

While most attention in recent weeks hasbeen on the debate over the taxation of theshare of fund profits received by partners in

private equity firms and hedge fundmanagers, a fresh initiative is underway inthe US Congress to clamp down on the useof offshore centres, backed by influentialsenators including Democratic Partypresidential hopeful Barack Obama.

Last month Senate Finance Committeechairman Max Baucus and seniorRepublican member Chuck Grassley madeheadlines by asking the US GovernmentAccountability Office to examine UglandHouse in George Town, Grand Cayman, thehome of leading offshore law firm Maples &Calder, for possible avoidance of US taxes

A D M I N I S T R AT I O N


Pocket-sized financialpowerhouse puts its

faith in goodhousekeeping

By Suchita Nayar

➧ p14

AdvantageBermuda

Established in 1971 the Bermuda Stock Exchange (BSX) is today the world’s fastest growing offshore securities market.

The BSX is internationally recognised as an attractive venue for the listing of:

�Hedge Funds�Investment Fund Structures �Equities �Fixed Income Structures�Derivative Warrants

The BSX is a full member of the WorldFederation of Exchanges.

Bermuda is a British Overseas DependentTerritory and is part of the UK for the

purpose of OECD membership.

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22 Church Street, Hamilton HM 11, Bermuda Tel: 1-441-292-7212 • Fax: 1-441-296-1875

www.bsx.com e-mail: [email protected]

With nearly 2,000 registered funds and acombined net asset value of aroundUSD179bn, Bermuda is home to a thrivingand dynamic offshore funds industry. Formany years, the island has been the leaderin creating and implementing the businessand regulatory models that have become thestandard for other jurisdictions to follow.

Bermuda is located within two hours’flying time of most US east coast hubs anda short journey from Canada. Daily airservices to the UK and European centres putthe island at a crossroad between Europeand North America and in a complimentarytime zone to Asia. This proximity to theworld’s largest capital markets has beencritical to the continued success of thesophisticated industries that Bermuda hasdeveloped, nurtured and grown.

The arrival of leading financial servicesgroups such as Citi, its recent acquisitionBisys and Bank of New York, and theacquisition of Bank of Bermuda by HSBC,have thrust the jurisdiction into the spotlightfor financial services. These leading globalplayers have given the island’s hedge fundservicing capabilities in particular asignificant boost.

Bermuda’s pragmatic approach in creatingan operational, technical and regulatoryinfrastructure focused on clients’ needs,while maintaining integrity throughout thesystem, stems from concerted collaborationbetween the private and public sectors. Thismodel ensures that policies remain in linewith or ahead of market developments.

A recent example is ‘Launch ’n’ List’, acollaborative initiative involving the BermudaInternational Business Association and theregulator, the Bermuda Monetary Authority, tospeed the listing of funds on the BermudaStock Exchange (BSX), the world’s leadingfully electronic offshore securities market with

a current market capitalisation (excludingmutual funds) of more than USD330bn.‘Launch ’n’ List’ offers a solution to managersthat are facing long delays to bring theirfunds to market on other exchanges becauseof increasing regulatory requirements.

Bermuda’s strength as an offshore financialservices leader owes much to its longevity inthe business. As a pioneer of the offshorefund business, the island has established acommercially sensible level of regulation andcreated products that meet the needs of asophisticated client base. The jurisdiction’sexperience has produced a deep andknowledgeable infrastructure of serviceproviders such as fund administrators,lawyers, banks, auditors and the BSX.

Launched in 1971, the BSX specialises inlisting and trading of capital marketinstruments such as equities, debt issues,funds and depository receipt programmes.The exchange has carved a niche in theglobal funds industry; of more than 420listings, nearly 350 are funds and more than100 are hedge funds or have similar attributes.

The exchange’s regulatory approach isbased upon accepted international standardsand seeks a balance between facilitatingissuers’ access to the market and thesafeguarding of investors and provision ofinformation that enables informed decisionson the value, risk and merit of listed securities.

The BSX has become the offshorelocation of choice for entities seeking asuperior level of support and distinction fromtheir listing, with more than half the fundslisted on the exchange originating from otherjurisdictions. Issuers also benefit from theaward of Approved Stock Exchange statusunder Australia’s Foreign Investment Fundtaxation rules and of Designated InvestmentExchange status by the UK’s FinancialServices Authority. ■

B E R M U D A S T O C K E X C H A N G E


An innovative listingsolution for funds

By Greg Wojciechowski

Greg Wojciechowski ispresident and chief executiveof the Bermuda StockExchange

by the thousands of companies that use thebuilding as a legal address.

Bermudian officials are quick to insist thatthe island is a financial jurisdiction ofsubstance. “We’re not just a post boxaddress,” says Cheryl Packwood, chiefexecutive of the Bermuda InternationalBusiness Association. “We have theintelligence, intellectual property andinfrastructure to make business decisionshere. Actual business gets done here.”

Acting as an official mouthpiece for theinternational financial industry, the group’smembers plan to carry this message toindustry events around the world. InSeptember, BIBA plans to host a hedgefund panel in Greenwich, Connecticut,where its mission will be to debunk themyth that Bermuda is over-regulated andexpensive among offshore jurisdictions.Similar events in Paris and Geneva are alsoplanned.

Says Packwood: “We don’t haveregulations in place just for the sake ofhaving them. They come with a goodhousekeeping seal.” The island’s financialregulator, the Bermuda Monetary Authority,also prides itself on its long-standing “qualityover quantity” mantra. It thoroughlyscrutinises fund prospectuses andsubsequent financial reporting to ensureadequate disclosure to investors.

Following an extensive review of its nearlydecade-old regulatory framework for fundsthat took up most of last year, the authoritieshave updated the legislation with theInvestment Funds Act 2006, which receivedthe assent of the territory’s governor-generalat the end of December.

The legislation introduced for the first timelicensing rules for fund administrators, amove the regulator hopes will strengthen itsreputation as a jurisdiction that adheres tointernational standards, according to PatPhillip-Bassett, the BMA’s assistant directorfor corporate governance andcommunications. The recent legislation givesthe BMA greater investigative powers to rootout problematic funds.

However, the regulator and industryrepresentatives are also trying to quellconcerns about the jurisdiction becomingover-policed, maintaining that the island isthriving as a result of its balance between

effective regulation and the freedom to letbusiness innovation flourish.

While many other offshore jurisdictionsembraced ‘know your customer’ rules andother measures to counter money-launderingonly in the past decade, following theestablishment of the Financial Action TaskForce to make it harder for members of thedrugs industry and other criminals to recycletheir revenues into legitimate deposits andinvestments, Bermuda has insisted onknowing the identity of those who dobusiness there for more than half a century,according to Julie McLean, a partner in thecorporate department of law firm Conyers,Dill & Pearman.

Over the past six years, since theSeptember 11, 2001 attacks on New York putthe financing of terrorism into the spotlight,the government has further fine-tuned thecode, which was originally put in placebefore World War II to keep out Nazi money.The BMA has been asking the hedge fundindustry tough questions before it becamefashionable to do so, says McLean, althoughthis is not at the cost of speed to market.She notes that a fund can be registered in



p11 ➧

between two and 10 days and involves justUSD3,000 in fees.

Bermuda seems an unlikely location forone of the world’s top hedge fundjurisdictions. Until a couple of decades ago,the oldest British colony in the North AtlanticOcean was principally sought after bywealthy European and North Americanindividuals as a travel destination, but todayfinancial services are its leading industry,thanks in large part to the boomingreinsurance industry, and its gross domesticproduct per capita, estimated at USD75,441in 2005, is among the highest of any countryor territory in the world.

There’s no question, however, that theterritory has its own unique problems. Theaverage cost of a house is nearly USD1m,making it one of the world’s most expensiveplaces to live, and rents on executiveproperties are rising. That’s partly due to theterritory’s high population density, with anestimated 66,100 people living in an area of53.3 square kilometres (21 square miles).

To bring in employees from overseas,companies must secure work permits forthem, a process that can involve a lengthywait for the authorities to complete thepaperwork and carry out background checks.That can create difficulties in maintainingstaff continuity. Then there’s the issue ofeducation; executives coming from abroadcan face great difficulties in finding places

for their children in the island’s limitednumber of schools. Families have to makedo with one car per household, but even so,roads are limited and commuter numbersand congestion are rising.

Businesses have to deal with problemsfrom an infrastructure point of view, saysTim Calveley, chief financial officer of hedgefund administrator Fulcrum, which movedsome of its activities to Waterloo, in theCanadian province of Ontario, to capitaliseon the greater availability and ease ofrecruitment of staff.

Fulcrum, which was established inBermuda 12 years ago and in which UKprivate equity firm 3i recently took a minoritystake, still maintains a small number ofmanagement staff on the island. However,Calveley expects Bermuda to maintain itsrole as a financial services hub, thanks to arobust regulatory framework, stablegovernment, geographic proximity to bothNew York and London, a low taxenvironment and access to a wide networkof local service providers.

The massive dominance of the CaymanIslands as a hedge fund domicile does notdiscourage members of the fundadministration industry, who believeBermuda can continue to win a significantshare of the business. “Cayman is like amassive snowball rolling down a hill,” saysmanaging director Douglas Lang ofButterfield Fund Services. “We are hoping toget pieces off that.”

The firm, which is wholly owned byBermuda’s oldest financial services company,Butterfield Bank, is also expanding inCanada, having opened a fundadministration facility in Halifax, Nova Scotiaearlier this year to help relieve some of theworkload of its Bermuda and Caymanoperations.

Butterfield Fund Services also plans toopen a marketing office in New York toattract both onshore and offshore businessfrom the US to add to its existing USD71.3bnin assets under administration. According toa recent survey by HedgeFund.Net, the firmwas ranked 17th worldwide amongadministrators of single-manager hedgefunds with USD31.4bn in assets and 11thamong fund of hedge funds administratorswith USD31.2bn at the end of March. ■



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