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Legislation, regulation and institutionalisation

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It is a sign of the strength of the alternative investment industry that there is significant competition among hedge fund jurisdictions.

It is a sign of the strength of the alternative investment industry that there is significant competition among hedge fund jurisdictions. Cayman is a clear leader among offshore fund domiciles, but rival jurisdictions continue to improve and keep the market competitive.

Similarly there is a tug-of-war continuing between onshore jurisdictions such as the US and the offshore market. The jurisdictional fights between the US and Cayman during fund bankruptcies is a minor consideration when compared to effort by US legislators, which gathered momentum in May 2007 with the Senate Finance Committee’s review of offshore structures, to decrease the incentive for a US manager with domestic clients to create an offshore structure, wherever it may be, in the first place.

If a tax-free US investor could invest in a domestic structure without generating UBTI (Unrelated Business Taxable Income), then how many fewer offshore structures would be created by American investment managers?

Interesting stuff, but Cayman, and the offshore investment industry in general, is a well-established part of the service provision landscape for investment managers. It’s more a question of how service providers who are the most effected by the selection of fund domicile – fund administrators, lawyers and accountants primarily – position themselves for future growth; and all indications are that there will be growth.

The overriding issues in the fund administration marketplace are staff quality and development, and the creation and maintenance of capacity to take on new clients. Fund administrators who are serious about maintaining or growing their market share are expanding their capacity in new and innovative ways, within a controlled and consistent framework.

Fortis is committed to Cayman, as we are the eight jurisdictions we operate in globally. But since the repeal of the ‘ten commandments’, it is clear that the effect on fund administrators has been that more rapid new business capacity has been developed onshore in the US. This growth has been driven, in part, by issues that do not relate to US tax legislation, such as the predisposition of investment managers to have key service providers close to the, both physically and culturally.

With these considerations as a backdrop, Fortis Prime Fund Solutions has made plans to open a fund administration operations and client service office in the tri-state New York area during the first half of 2008 and follow on from that with a San Francisco office during 2009; enhancing our current Cayman, Curaçao and BVI presence in the Americas.

Legislation, regulation and institutionalisation are key drivers of change in the fund administration marketplace. It is fair to assume that these factors along with the demands of investment managers and the investors in funds will continue to spawn major changes in the fund administration marketplace.

Mark Lancaster is director, new business development at Fortis Prime Fund Solutions

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