Hedge Funds How the Product Works By Antoine Bastian

Transcription

1

2 Hedge Funds How the Product Works By Antoine Bastian

3 WHAT IS A HEDGE FUND? a general, non-legal term, that was originally used to describe a type of private and unregistered investment pool

4 WHAT IS A HEDGE FUND? has traditionally been limited to sophisticated, wealthy investors

5 WHAT IS A HEDGE FUND? Today, the term "hedge fund" really refers not so much to hedging techniques, which hedge funds may or may not employ, but to unregistered pools.

6 WHAT IS A HEDGE FUND? There is no distinction under the Investment Funds Act and the term is synonymous, inter alia, to Offshore Fund Mutual Fund Investment Fund.

7 THE ORIGIN OF HEDGE FUNDS first hedge fund was set up by Alfred W. Jones in 1949 He was the first to use short sales, leverage and incentive fees in combination In 1952, he converted his general partnership fund into a limited partnership

8 THE ORIGIN OF HEDGE FUNDS 1966 was the first public recognition of hedge funds due to Fortune Magazine s article by Jones. Out performed mutual funds.

9 THE ORIGIN OF HEDGE FUNDS In the 1970 s.the Bust In the Mid-1980 s.the Comeback From 1987 to 1993 saw the resurgence of new hedge fund managers and hedge

10 THE ORIGIN OF HEDGE FUNDS The industry has also rapidly grown, with recent estimates pegging its size at $1 trillion after a half century

11 Hedge Fund vs. Mutual Fund Both are managed portfolios Both participate in the gains/losses of the holdings. Both provide diversification and professional management

12 Hedge Fund vs. Mutual Fund The major differences are: normally managed much more aggressively generally take speculative positions in derivative securities such as options and have the ability to short sell stocks typically increase the leverage - and thus the risk - of the fund

13 Hedge Fund vs. Mutual Fund available to a specific group of sophisticated investors with high net worth invested funds may be difficult to withdraw when funds are needed They are more expensive

14 WHY OFFSHORE generally when a money manager has significant clients or prospects who reside outside the United States/Europe the fund would generally not be subject to United States/European taxation Regulatory ease

15 Definition of Investment Fund under the IFA 1. Bahamian Nexus (Connection to Bahamas) Includes (inter-alia): The Fund (if a company), a General Partner (if a partnership), the Trustee (if a unit trust), administrator, investment advisor/manager is incorporated or registered in The Bahamas; or Constitutive Documents governed by Bahamian Law.

16 Definition of Investment Fund under the IFA 2. Equity Interest (share/trust unit/partnership interest) The fund must issue equity interests, which allows the holder: to participate in the profits or gains of the fund; and to redeem at the option of the investor. (So closed end issuers not included, but they may elect to be licensed as an investment fund).

17 Definition of Investment Fund under the IFA 3. Purpose The pooling of investor funds; with the aim of: spreading investment risks; and achieving profits and gains from the investments.

18 Fund Structures/Vehicles 1. Company (most commonly used) The International Business Companies Act, The Segregated Accounts Companies Act, Allows IBC or CA Company to treat the assets and liabilities of each class of share separate from the other classes.

19 Fund Structures/Vehicles 2. Limited Partnership The Exempted Limited Partnership Act,1995 (General Partner controls the partnership). Structures involving US investors. 3. Unit Trust Trustee Act, 1998.

20 Limited Partnership Investors (tax exempt & non-us) Investors (US) Bahamian IBC Fund Delaware Partnership/LLC Exempt Limited Partnership

21 TYPES OF INVESTMENT FUNDS UNDER IFA-FUND CATEGORIES *Professional Fund : Accredited investor fund. *SMART ( Specific Mandate Alternative Regulatory Test ) Fund: Private/structured fund. Standard Fund: Retail Fund (highest level of regulation). Recognised Foreign Fund: Regulated in a recognised jurisdiction. *Licensed by Commission or an unrestricted Administrator

22 PROFESSIONAL FUNDS Offered to accredited/sophisticated investors (i.e. high net worth individuals and banks, broker dealers, security investment advisors, insurance companies, investment funds licensed as such in The Bahamas or in a prescribed jurisdiction). Licensed by Commission or unrestricted administrator.

23 SMART FUNDS Specific Mandate Alternative Regulatory Test No pre-defined categories. No pre-defined regulation (supervision is assigned on a case-by-case basis). No predefined specific requirements for qualification. No limit to number of SMART Fund templates that can be created. Licensed by Commission or Unrestricted Administrator.

24 SMART FUND No pre-defined categories A privately structured fund that it tailormade to fit the specific needs of the client. Compare to previous legislation in The Bahamas & elsewhere, which required a fund to follow a predefined structure.

25 SMART FUND No pre-defined regulation Once a SMART fund structure (the Specific Mandate ) is approved by the Commission, an appropriate degree of supervision is assigned on a case-by-case basis (the Alternative Regulatory Test ). No broad brush regulatory approach. (used in other jurisdictions).

26 SMART FUND No predefined specific requirements for qualification Compare to other jurisdictions which differentiate between public and private funds by pre-defined criteria such as: the number of investors; or the minimum investment.

27 SMART FUND No limit to number of SMART Fund Templates that can be created Once the Commission approves a new structure, templates are published for use by the investment fund community. Valuable precedent base. Currently 5 SMART Fund templates approved by the Commission.

28 STANDARD FUND Does not satisfy the requirements of a Professional, SMART or Recognised Foreign fund. Retail investment fund (available to general public). Highest level of regulation-can only be licensed by the Commission.

29 RECOGNISED FOREIGN FUND Bahamian Nexus- i.e. service provider in Bahamas. Equity interests are listed on a prescribed securities exchange and is not licensed in The Bahamas; or Licensed or registered in a prescribed jurisdiction and not suspended from operation.

30 BAHAMAS INVESTMENT FUNDS AS AT 30 JUNE, 2005 Total Administrators 59 Professional Funds 380 Recognized Foreign Funds 79 SMART FUNDS 73 Standard Funds 121 TOTAL INVESTMENT FUNDS 653 NAV TOTAL (Expressed in Billions) $164.2

31 Contents of the Offering Document Details of Fund Investment Objectives and Restrictions Risks Operators and Principles Characteristics of Equity Interests Subscription Application and Redemption Procedures

32 Contents of the Offering Document (Cont ) Valuation of Property and Pricing Distribution Policy Fees and Charges Reports and Accounts Warnings Investment Fund Law Disclosure Requirements General Information

33 Disclosure Requirements of the Constitutive Documents Name of Investment Fund Governing Law Investment and Borrowing Restrictions Suspension and Deferral of Dealing Meetings Distribution Policy and Date Annual Accounting Period

34 Disclosure Requirements of the Constitutive Documents (Cont ) Base Currency Modification of the Constitutive Documents Termination of Investment Fund Exemption Standard Role of Custodian

35 Disclosure Requirements of the Constitutive Documents (Cont ) Role of Investment Fund Administrator Fees and Charges

36 REGULATORY ENVIRONMENT No restriction on investment. No restriction on investment style. No restriction on borrowing/leverage. No public disclosure of investors or accounts. No taxation of investment fund or investors. No exchange controls. No local auditor required (but must be approved by Commission). No local custodian required. (No custodian if Director certify not required)

37 REGULATORY ENVIRONMENT No local investment manager required. (If local IM used for 1 fund/related funds in Bahamas, not required to have Security Investment Advisors license under SIA) Fast Track (72 hours) approval by Commission of Professional Funds. Immediate registration by Commission of Recognised Foreign funds. Immediate licensing by unrestricted Administrators of professional and SMART funds. Corporate Directors permitted.

38 REGULATORY ENVIRONMENT International Accounting Standards. Commission can waive/modify provisions of IFA and IFR (for any 1 entity if not prejudicial to public interest). Administrator can administer investment funds in other jurisdictions. Administrator can sub-delegate administration. Administrator subject to a reasonable standard of care.

39 Mitigating Risk of Key Participants to Funds Ensure funds employ professionals < Directors < Investment Managers/Advisors < Custodians < Administrators < Auditors < Brokers/Bankers

40 Mitigating Risk of Key Participants to Funds Ensure managers stay within the objectives and policies of the fund Maintain independence Review competitors returns

41 Central Bank Guidelines for Prevention of Money Laundering and Terrorist Finance A) Certified copy of fund s license B) Certificate of Incumbency C) Certified Certificate of Good standing of registrar of the fund D) Certified Certificate of Good standing of administrator E) Certified Certificate of incorporation F) Certified constitutive document G) Certified copy of offering and ancillary documents

42 Central Bank Guidelines for Prevention of Money Laundering and Terrorist Finance Travel Rules Acceptable FTRA list of Acceptable Countries Securities Commission list of Acceptable countries

43 GENERAL COMMENTS AML & KYC challenges OFAC FATF EU Savings Tax Directives The World is Flat a reality. What is the future of the fund industry in the Bahamas

44