Bermuda:
A world class home for the Funds Industry
Article © Steven J. Trumper Marshall Diel & Myers February 2008 (http://www.law.bm/), All Rights Reserved.
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Bermuda is one of the world’s premier off-shore jurisdictions, and is perhaps best known as the world’s second largest (after London) domicile for insurance and reinsurance companies. Bermuda is also the jurisdiction of choice for over 1500 hedge fund and pooled fund vehicles, and as the hedge fund industry continues its remarkable growth ($200B of net fund inflows in 2007 alone) the choice of Bermuda as a home for hedge funds has never been more compelling.
The following factors are key to Bermuda’s appeal to the fund industry:
The Basics
As a leading off-shore jurisdiction, Bermuda provides all of the basic components that are essential to the international funds industry:
- No Taxes – One of the primary reasons for domiciling a fund off-shore is tax-efficiency, and in this regard, Bermuda is an ideal location. There is currently no tax on income, profits, capital gains, interest or dividends, nor is there any withholding tax, estate duty or inheritance tax. There is no stamp duty payable by a fund on the issue, redemption or transfer of units or shares.
- Stability – Bermuda is democratic, politically stable, free-enterprise oriented and governed by the rule of law. There is an independent legal and judicial system and a final right of appeal to the Privy Council in London.
- Communication – Bermudians speak English, and there is an excellent telecommunications infrastructure throughout the Island that provides state-of-the-art data and voice links to the U.S. and Europe. Most common North American and E.U. based telecommunications devices (cell-phones, laptops, Blackberry’s etc.) work seamlessly on Bermuda’s high-speed networks.
Location
Located in the mid-Atlantic in the same latitude as North Carolina, Bermuda has convenient daily air access to major U.S. eastern seaboard cities such as New York, Boston and Miami, as well as Toronto and London. Bermuda’s accessibility is critical to funds which must maintain their “mind and management” off-shore in order to avoid adverse on-shore tax consequences in the U.S. and the U.K.
Face-to-face Board and investor meetings can be easily arranged to suit a variety of travel schedules and to reduce travel time to the greatest extent possible. Bermuda’s temperate climate and excellent tourist infrastructure (including several new world class hotels coming on stream in the next few years) also provide excellent opportunities for executive retreats and spousal activities.
Regulatory Standards
Bermuda is generally considered a well-regulated jurisdiction, with regulatory standards somewhat more flexible than the strictest E.U. offshore centres (e.g. Ireland and Luxembourg). The Bermuda Monetary Authority (“BMA”), which has sole responsibility for approving mutual fund incorporations, is widely recognized as a world-class regulatory authority that is committed to both strong oversight, as well as a sophisticated and flexible approach to fund regulation. Bermuda’s modern funds legislation, the Investment Funds Act 2006, brings clarity and certainty to the process of registering and licencing both public (retail) funds and non-public institutional funds.
Unlike some off-shore jurisdictions which utilize what might be described as a “black box” regulatory approach (e.g. no inquiry into beneficial share ownership, company’s permitted to issue bearer shares, etc.), Bermuda has adopted rigorous anti-money laundering and “know your client” standards.
The world of hedge funds has changed rapidly in the last few years, and the current global credit crunch, among other factors, is leading to a greater emphasis on fund transparency and disclosure. Funds which might find that domiciling in Bermuda provides a competitive advantage include:
- retail-oriented funds, where investor protection is a priority, and a strong regulatory environment can provide a measure of self protection to funds in the context of investor litigation.
- start-up funds, where the promoter lacks an established track record and greater regulatory oversight can be used as a marketing advantage.
- institutional funds, with a large, conservative client base (e.g. endowments, pension funds etc.) where strong fund regulation may be an important aspect of the investment criteria.
Professional Expertise
One of Bermuda’s great strengths is the depth and expertise of its professional work force and intellectual capital. Regardless of where funds choose to domicile, many funds have traditionally chosen Bermuda for fund administration because of the Island’s skilled service providers. Access to first class funds administrators, clearing brokers, custodians, auditors and legal professionals is widely available, often through skilled Bermudian citizens who are committed to long-term residence on the Island.
Fund administrators in Bermuda are regulated and licenced by the BMA, and subject to professional codes of conduct. A higher level of regulatory protection might imply higher costs of compliance, but the efficiency and expertise of Bermuda’s service sector means that Bermuda’s fund administration costs are competitive with major E.U. and Caribbean off-shore centres.
Conclusion
Many fund sponsors and their advisors have long-established relationships with particular off-shore jurisdictions, and there is a natural human tendency to return to the familiar rather than venture into new territory. But conditions change, and it is often appropriate to re-examine long-held assumptions in light of current market conditions.
Bermuda prides itself in setting the “gold standard” in the world of off-shore jurisdictions, and in light of the tremendous changes in the hedge fund world over the last few years, fund sponsors and their advisors are encouraged to take another look at the competitive advantage that Bermuda may offer as a fund domicile and administrative centre.