28/07/2010 Author: Tony Griffiths

Unchartered territories

Despite hedge funds' global focus, the industry is dominated by relatively few tried-and-tested locations. But as the world's emerging markets come to prominence, there are a raft of nascent domiciles, offering fund management and administration services, looking to make their mark on the global stage. HFMWeek examines the potential hedge fund hubs of tomorrow

Domiciliation in Cayman, administration out of Luxembourg and access to Asia from Singapore; the world’s leading hedge fund centres offer managers a range business solutions in a variety of international flavours. If the geographical spread is broad, the jurisdictional pecking order is relatively well-established. Along with the aforementioned trio, the US, UK, Ireland, Malta, Australia, Hong Kong and a smattering of Caribbean jurisdictions all enjoy a sizeable slice of the pie, via both service provision and management.

Mention any of the above in the context of hedge fund services and no-one will bat an eye. Name-drop the likes of Norway, New Zealand or Mauritius and you’re likely to receive some bemused looks. That, however, may be about to change.

In recent years, the global hedge fund industry has been expanding to a scale increasingly deserving of the name. As the developed world struggles to regain its economic foothold, emerging markets have become a staple part of the hedge fund sector’s diet. Meanwhile, a budding appreciation for the role of financial services has created a new group of domiciles eager to join the lucrative ranks of the big league and cash in on the growing global focus.

In the name of global competition, changes – both established and proposed – to fund regulation in a number of less fancied countries have hit the headlines in recent weeks. Newcomers Norway and New Zealand have made overtures with regards to fund management and administration respectively, while Dubai has continued its well-documented rise by recently softening its own regulatory framework.    

Not everyone will be able to make the step up, of course, and those that do will have to rely on more than the traditional route of tax incentives. “The successful fund centres are not the ones that have proactive incentives in place, but those that best remove the obstacles,” says Peter Douglas, founder of Singapore-based hedge fund consultancy firm GFIA Pte, and Asia’s representative for Aima. “Having an educated, English-speaking workforce, streamlined visa/immigration processes and a clear judicial process are more important than tax breaks.”  

With the help of a number of global commentators, HFMWeek takes a look those jurisdictions seeking to join the likes of Cayman, Luxembourg and Singapore at the fund industry’s top table, the means and focus of their
endeavours, and the chances of their success.

BRAZIL fund management, South America
Brazil’s recent strong showing in the financial markets has prompted a series of new hedge fund ventures, most notably the opening of Morgan Stanley’s Sao Paulo prime brokerage office and JP Morgan’s interest in regional hedge fund business Gavea Investimentos. Manager spin-outs from the banking sector are also increasing.

Chances of joining the big league
Mixed. “The growth is strong but local,” says David Butler of Kinetic Partners. “It’s largely Brazilian nationals coming out of the private banks or going back to the country to operate out of Brazil.”

NORWAY Fund management, Scandinavia
Since the lifting ofthe country’s ban on sales to institutional investors on 1 July, the Norwegian regulator has already received a number of applications – both foreign and domestic – to establish hedge funds in the country. Expectations are for a few dozen funds in a year’s time.

Chances of joining the big league
Strong. With the Norway Oil Fund a renowned hedge fund investor, as well as a wealth of Scandinavian pension funds, Norway-based managers would be well positioned for allocations. Outside the EU, Norway is also immune to the AIFM Directive. 

CYPRUS Operations, EMEA
Cyprus has a network of tax treaties with Russia, the top performing emerging market of 2010 to date, and other CIS states. Though the relationship is historic, Russia’s recent strong performance has seen a proliferation in operations and research centres.

Chances of joining the big league
Poor. Its geographical proximity to Malta – a centre with rising prominence and an attractive regulatory regime relative to Cyprus – puts it at a significant disadvantage, meaning it is likely to stay a domicile for managers with an EMEA focus. 

DUBAI Fund management, MENA
Earlier this month, the Dubai International Financial Centre (DIFC) announced a series of changes, increasing the ease for both domestic and foreign managers to market and domicile funds in Dubai, and lightening the regulatory load. 
 
Chances of joining the big league
Good. Already the premier fund centre in the Middle East, the new changes mark an important next step in Dubai’s development. “The regulatory changes bring the DIFC in line with other leading financial hubs around the world,” said Abdulla Al Awar, the regulator’s CEO.

MAINLAND CHINA fund management & operations, Asia
China introduced new legislation earlier in the year that permitted some shorting and futures trading in its mainland markets for the first time. “Short-selling will encourage more domestic Chinese hedge funds,” says David Walter, an Asia analyst with FoHF Paamco.

Chances of joining the big league
A slow burner. “Hong Kong and Singapore are still miles ahead of China which has all this baggage,” says Mark Smith, a China-focused analyst with Nimco. “Eventually it will become a decent centre for funds, but it’s going to take a long time.”
 
MAURITIUS Offshore hub, Africa
Mauritius has spent the last five years improving its financial infrastructure and fund regulation and is now reaping the rewards. “In the last 18 months there’s been a definite increase in South African hedge fund businesses coming to Mauritius,” says Simone Lowe, manager of Thames River’s Africa-focused FoHF. The locale will also benefit from India’s potential as a centre of hedge fund management.

Chances of joining the big league
Promising. Close to South Africa, tax-efficient and English-speaking, Mauritius has experienced some of the biggest growth in Africa in terms of financial services in recent years. “Their aim is to be the jurisdiction of choice,” Lowe says.

NEW ZEALAND, fund administration, Asia-Pacific
Keen to become the administration hub for Asia-Pacific, New Zealand plans to introduce fresh regulation by 2011. “The idea is to have legislation to allow for Ucits-compliant foreign funds to be non-taxable in New Zealand should they be administered from there,” explains Stephen Abletshauser of Palladium Trust Services.

Chances of joining the big league
One to watch. Low costs, anglicised and a time-zone that offers overnight services to Asia-focused US clients. “It’s got a huge advantage,” says Abletshauser. Faces competition from Singapore, which has an existing hedge fund industry and recently started its own administration drive.