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Fund industry ready to exploit crisis opportunities

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The challenges for Guernsey’s hedge fund industry in the coming months and years are slowly emerging from the continued fog that is the current banking and economic crisis.

The challenges for Guernsey’s hedge fund industry in the coming months and years are slowly emerging from the continued fog that is the current banking and economic crisis. The opportunities that will result are equally unclear, but many people are contemplating what they may be. With markets at a five-year low and still extremely volatile, only time will tell whether the fog is lifting or becoming thicker.

The hedge fund industry in Guernsey is diversified across many different asset classes but with a preponderance of fund of hedge funds vehicles. There are certainly challenges for some of these asset classes, particularly in the fixed-income and asset-backed securities arenas where fair values are under severe pressure and liquidity is thin.

There are also potential exposures to troubled counterparties that need to be swiftly identified and managed. The fund of hedge funds sector is also encountering both liquidity issues in underlying funds and increased pressure on investor redemptions. We are having discussions with our clients on all of these issues, but it will take time before the outcome becomes clear for all of them. We may see increased use of side-pockets and redemption gates, but the employment of these mechanisms remains minimal among Guernsey funds for the time being.

These are issues that are common across all fund jurisdictions at the moment. Guernsey is not unique in having to tackle the challenges posed by market conditions. It is clear that a few funds will struggle in the short term, but the positive signal for the island is that there are plenty which will not, while a range of new funds are being launched to take advantage of the bottom of the market.

As convergence of asset styles across market players continues apace, plenty of private equity houses are sitting on large amounts of cash in their hedge fund-style distressed debt funds. Notwithstanding this, we are still seeing funds preparing to come to market in some of the supposedly out-of-favour asset classes such as property, again looking to buy cheap assets from forced sellers.

The key message from Guernsey is that the island is very much open for business, with a cross-asset class offering that enables all managers to launch their products from the jurisdiction. The lack of any material problems to date may be considered as evidence of the benefits of the Guernsey fund regulatory model, which is largely considered to be more robust than those of many of its competitors.

In fact, the fund industry on the island still appears to be in good health, with the latest figures from the Guernsey Financial Services Commission indicating substantial year-on-year growth. On the service provider side, now is when future reputations are made. Guernsey’s service providers are known for both their flexibility and their ability to offer niche services.

In these difficult times, decisions will need to be made on whether it is time to reconsider business models for the future, and whether it’s the moment to invest for growth or simply maintain the status quo. If Guernsey is largely isolated from the worst of the crisis by its diversified fund industry, as many believe, it may be foolish not to seize the opportunity to invest for the future.

Neale Jehan leads KPMG’s services to the alternative investment sector in Guernsey and is a member of KPMG’s global alternative investment leadership team

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