Isle of Man takes swift action to update funds regime

Date: Friday, September 21, 2007
Author: Hedgeweek.com

The Isle of Man, which has seen alternative fund assets grow from USD7bn in 2003 to a current level of USD50.1bn, is aiming for an ambitious total of USD100bn under administration and USD50bn under management by the end of 2010 through a new drive to update its funds regime and attract both asset managers and fund domiciliation to the island.

Following the delivery of a report on the future of the fund industry in February, Treasury Minister Allan Bell is planning to bring forward new legislation to the Manx parliament, Tynwald, next month.

The report set out the island's ambition to position itself as the preferred location for the incorporation, domiciliation and management of institutional funds in the alternative funds industry, and as a cost-effective zero tax location for fund managers to locate their middle and back office operations.

Three new measures scheduled to take effect on November 1 will establish the Specialist Fund for institutional investors and the Qualifying Fund for non-institutional sophisticated investors, and put in place transitional arrangements for the existing category of Experienced Investor Funds.

Up to now most fund business in the Isle of Man has involved funds domiciled elsewhere usually in the Cayman Islands, but the Manx treasury department's promotional division, Isle of Man Finance, hopes that the new regime will encourage managers to consider using a Manx investment vehicle instead.

In addition, Isle of Man Finance is launching a campaign to attract hedge fund managers to establish all or part of their operations on the island, offering benefits such as a zero rate of corporate tax, a cap on the maximum income tax liability of individuals, and the ability of managers to demonstrate a substantial and active offshore presence to the UK tax authorities.

The blueprint for the legislation and marketing campaign was set out in the report from the Isle of Man Funds Review Group, comprising leading members of the public and private sectors and chaired by Paul Smith, the former global head of HSBC's Alternative Fund Services who is now based in Hong Kong.

Smith has welcomed the alacrity of the government in implementing the report's recommendations. 'There is no time to waste, with business conditions set to becomes tougher over the next couple of years,' he says. 'Up to now non-domiciled funds have made up the bulk of the island's business, but these funds may not be 'sticky'. In addition, the Isle of Man needs to attract managers and fund domiciliation business in order to move up the value chain.'

According to Smith, Isle of Man Finance officials are already in advanced discussions with two start-up hedge fund management groups about establishing operations on the island, in addition to existing managers such as Laxey Partners. To encourage this trend, the promotional body is appointing a project manager to work with investment managers and guide them through the establishment and regulatory process.

Says David McGarry, a partner with KPMG and past president of the Isle of Man Fund Managers' Association: 'A key step is the revision ands modernisation of the structure of the Isle of Man's fund products, Experienced Investor Funds and Professional Investor Funds have been very successful, but the island has not been getting its fair share of business from the hedge and alternative fund management sector.'

In additional to the fiscal benefits, which also include grants covering up to 40 per cent of the capital expenditure undertaken by firms to establish a presence on the island, McGarry argues that the Isle of Man also offers an attractive quality of life and physical environment, good air links with London, and greater ability to bring in employees from outside than other offshore centres, with easy access to work permits and an unrestricted (and not particularly expensive) housing market.

Gordon Wilson, managing director of the Isle of Man operation of Cayman-based hedge fund administrator Caledonian Fund Services, notes that the island's fund services business enjoys a high reputation among clients for quality, which he attributes to factors such as lower staff turnover than in most competing jurisdictions. He says the ability of Manx firms to bring in extra staff when needed means that administrators are capable of expanding to meet increased demand without service standards slipping.

Brian Donegan, director of foreign direct investment at Isle of Man Finance, says: 'The Isle of Man government treasury is delighted to launch this new initiative with the Isle of Man Fund Management Association.

'The island's fund industry has grown immensely in the past five years, with funds under management and administration standing at USD50.1bn in June. We anticipate that our new funds initiatives, when coupled with the Isle of Man's existing taxation advantages, will treble this figure and position us as the jurisdiction of choice for fund management and fund administration operations.'