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HEDGEFUNDSwww.hedgefundsreview.comTHE VOICE OF THE ALTERNATIVE INVESTMENT INDUSTRYREVIEWProvides an electronic compilationof the articles written on Bermuda, inthe May 2006 edition of Hedge FundsReviewCONTENTSSWIMMING AGAINST THE OFFSHORE TIDEMunro Sutherland, superintendent of banking, trust and investmentat the Bermuda Monetary Authority, lays down the law, according toBermuda’s hedge fund regulatorADMINISTRATORS – THE AXIS IN BERMUDA’SPORTFOLIO PRICING TRIANGLEBy Solomon Teague, Hedge Funds ReviewPLANNING THEN MAKING A SUCCESSFUL ATLANTICCROSSINGBy Solomon Teague, Hedge Funds ReviewOFFSHORE LIFE, ONSHORE WORK ETHICBy Rob Bonehill, JP Morgan TranautBERMUDIAN BY BASE, BUT TRULY GLOBAL BY ITSNATURESolomon Teague of Hedge Funds Review profiles Osmium Capital, aBermuda-based operation whose Osmium Special Situations Fundtrades global equity long/short, to great effectDIRECTOR’S CUT – WHY ADMINISTRATORS AREWELL-PLACED TO TAKE ON DIRECTORSHIP DUTIESBy Thomas Davis, Meridian Fund Services

BERMUDA – REGULATOR IN PROFILESwimming against the offshore tideWhile some international centreshave left due diligence and risk verymuch in the hands of hedge fundinvestors, the Bermuda MonetaryAuthority has taken a more handsonapproach to regulation. It isan attitude, the BMA’s MunroSutherland explains to SolomonTeague, that is increasinglyappreciated as institutions join thehedge fund partyBermuda has always had a reputation for regulatoryrigour, a product of its judicial system, whichis closely linked to that of the UK.Historically, it has paid the price for this bybeing seen as an expensive alternative to theCayman Islands for hedge fund domiciliation,and one where it took longer to get things donethan its south-western neighbour.But this image is becoming increasingly outdated,say the jurisdiction’s practitioners, sincethe registration process was streamlined.A perception of over-regulation and invasivenesson the part of the Bermuda MonetaryAuthority – the island’s financial services regulator– no longer removes the island from considerationby managers as institutional investors’money has brought a new appetite for rigorousregulation, which in turn has improved theappeal of Bermuda for hedge funds as a domicile,Bermuda’s lawyers say.The regulator is in the process of modernisinga number of its rules and procedures to keeppace with the evolution of the island’s hedgefund community.Its current regulatory arrangements were originallyinstalled in 1998 – “quite a long time ago inmodern regulatory terms,” says Munro Sutherland,superintendent of banking, trust and investmentat the Bermuda Monetary Authority (BMA).CHANGING WITH THE TIMESSince 1999, Bermuda has been restructuring andre-engineering its regulatory statutes, includingmost aspects of the regulator’s operations. It hasinstituted the Banks and Depository CompaniesAct 1999, implemented in 2000, the InvestmentBusiness Act 1998 (implemented 2001) and theTrusts (Regulation of Trust Business) Act 2001,implemented in 2002.“We were conscious the Collective InvestmentScheme (CIS) regulation needed the samedegree of updating,” Sutherland says. “This didnot concern any dramatic changes of content,the requirements imposed on [CISs], their obligationsor the way the regulator interacts withthem…They needed updating to ensure we hadthe exceptional powers of intervention neededto deal with a small number of cases,” he adds.There have been fewer than five such cases in thepast 18 months, two or three of which involvedthe examination of books, on occasion causingfunds to wind up.The existing CIS regulation of 1998 is secondarylegislation, set out under the BermudaMonetary Authority Act. Because it is secondarylegislation, it depends on the primary Act for thenecessary powers of enforcement. “The BMAAct is not primarily a regulatory statute. It wasmany years ago but, increasingly, we have movedthe regulatory powers out of the BMA Act andplaced them in these separate acts,” he says.“The ultimate powers to intervene in extremesituations were therefore not as complete as theyshould be.” Bermuda’s new CIS Act is currentlybeing drafted to rectify this, and has been anobject of extensive industry consultation.Key changes are expected to includeexpanding the definition of what constitutes acollective investment scheme. At the moment,CISs are defined as “structures constructed asmutual funds or unit trusts, excluding othertypes of structures, such as limited liability partnerships.”The new law aims to include all structuresset up for the purpose of creating a CIS.“Materially, it doesn’t change the framework forthe funds themselves,” he says.ADMINISTERING LICENCESA licensing regime for fund administrators hasalso been proposed. “They are usually the peoplethat handle subscriptions and redemptions andgetting things to happen,” Sutherland notes. “Theindustry was actually very supportive of theidea of bringing them into the regulatory framework,giving approvals and vetting to check theyare doing their job effectively and efficiently andproviding an appropriate standard of control.”Having administrators licensed would supportthe exceptions-based regime in place for the fundsin Bermuda. The exceptions-based regime meansthat instead of checking each individual fund, youcan monitor the compliance at the administrator,ensuring that filters down to the funds they workwith. “I think they see it as advantageous in theinternational context,” Sutherland says.REGULATORY RECOGNITIONAs funds become increasingly global, they mayhave need for service providers in different jurisdictions,and therefore regulatory recognitionmay be a helpful marketing tool for administratorscompeting for the business of funds lookingto operate in Bermuda.Sutherland notes the BMA already receivesqueries from institutions abroad seeking informationabout administrators, which the BMA isunable to answer, other than to confirm knowledgeof their existence, because it does nothave more detailed information – this in itselfsuggesting a demand from investors for BMAapproval of administrators.The BMA hopes to present suggestions onthis for consideration by parliament during thesummer before the house rises in July for itsbreak. “We originally wanted to introduce thislegislation last year, but we didn’t get it becausethere were too many other legislative priorities,”Sutherland says.“Regulation and supervision are evolvingdisciplines. We have always taken the view thatsupervision needs to be appropriate to the peopleyou are trying to protect,” says Sutherland.“In the mutual fund sector and CIS sector, wehave applied a differentiated approach. You havedifferent levels of funds which vary according towww.hedgefundsreview.com May 2006 | HEDGE FUNDS REVIEW | 27

BERMUDA – REGULATOR IN PROFILEthe perceived needs of the investor. In Bermuda,the overwhelming majority of our fund investorsare themselves sophisticated high-net-worthindividuals who need a much lower degree ofprotection from the regulator than in the caseof a retail fund.” The BMA is not interested incourting more retail business. “We have resistedany push towards retailisation. We are looking atproducts for institutional and professional investors,”he adds. Sutherland notes the extra regulationrequired to make the island more appropriatefor retail funds would bring a cost that would beshared by all. There is a limit to how far downthe road of retailisation the hedge fund industrycan go in any case, Sutherland says.“I don’t ultimately believe most hedge fundscould convert themselves into retail-type operations,in terms of risk management, risk controlsand limitations on their trading profiles.” However,via funds of hedge funds, the retail model isa more comfortable fit, he says.FUND ASSESSMENTThe BMA attempts to appraise a fund first byassessing the strength of its support structure.The quality of the service provider is investigated,collectively and on an individual basis.The BMA asks, on aggregate, “whether a brandof service providers in relation to a product givesa reasonable certainty of delivering the checksand balances necessary to give a reasonablefront-line defence to investors,” says Sutherland.“In the context of schemes that are essentiallyprofessional and non-public, as is a large part ofour market, you move from a system of havingdone your heavy-duty fund vetting of people anddocumentation to an exceptions-based regime.The regulatory structure ought to be able todeliver the right quantum of security and oversight,with protection of the investors’ assets,”Sutherland says.“Bermuda has always gone to enormouslengths to understand people who wanted tomake use of the jurisdiction,” Sutherland says.“Unlike most other jurisdictions, you can’t justgo to a lawyer and say: ‘Here’s an applicationand money, go to the registrar of companies andincorporate a company.’ You need to get consent,which comes through the BMA conducting a vettingprocess.”Sutherland is happy to see the island’s hedgefund community continue to grow. Physical restrictionsof space on the island limit Bermuda’s abilityto welcome large businesses due to office space,parking and ancilliary requirements of large numbersof employees.However, hedge funds, which usually take uplittle physical space or resources, cause no suchproblems. The BMA, therefore, welcomes newcomersto the island, as long as they prove themselvesto be “fit and proper” people.The question of who constitutes a ‘fit andproper’ person to set up a hedge fund is decidedon the basis of a checklist of considerations.Directors, promoters, and service providersfrom custodian through to investment advisorsand auditors are screened to see if they havebeen involved in problems with the BMA before.Prospective funds are checked against applicationsthe BMA has received over the past 50years as well as against a list of businesses thathave been active on the island.This is supplemented by internet searches,which is scoured for references to the applicant.“Most applicants already act in some capacity foran existing Bermuda fund,” he notes.If they have been meeting their obligations,they will be in a strong position to qualify forregistering a new fund. In other instances, therehave been issues; for example, a failure to fulfilreporting obligations on a timely basis. “Wemight ask why, if they cannot meet their existingreporting obligations, we should give them anymore,”explains Sutherland.The BMA wants to minimise the intrusivenessand visibility of its presence to fund managers.“Ultimately, we are relying on the auditors andservice providers as being there and delivering aservice to protect the investors. We are the ultimateback-up when things go wrong.”EYES AND EARSSutherland agrees the island’s service providersact as one set of eyes and ears of for the regulator,though it does not rely on them as the only sourceof information, also garnering details from investors,and conducting searches itself. Checks areconducted on managers, especially newcomers tothe island’s hedge fund industry. The BMA willalso follow up on press articles if there are problemsreported.Investigations are carried out in response tospecific concerns among investors, who oftencome to the BMA if they encounter problems witha fund they are invested in, or if they suspect aproblem. However, such instances are infrequent.The BMA seeks to know as much as possibleabout hedgefunds based on theisland in terms oftheir track records,strategy and backgrounds.A regulator is ina much better positionto oversee theindustry if it hasa clear understanding of the mechanics of theunderlying strategies of the funds it regulates,Sutherland notes.It must be able to read the signs, such as whena fund has made money in a market where itwould not be expected to, or if it has lost moneyin a favourable environment, and whether this isdue to bad luck or the manager deviating from hisstated investment strategy.“If you get your due diligence right to beginwith, you should be in a position where any problemsare localised and are few in number,” he says.“You’ll never avoid every problem. Somethingwill always go wrong, someone will cut a corner,someone with a previously good track record will“We are relying on the auditors andservice providers as delivering a serviceto protect the investors. We are theultimate back-up when things go wrong.”turn bad, and someone will succumb to temptation.There is always a risk, and you need to havethe tools to deal with that.”Although Sutherland says the model of regulationin Bermuda works, he concedes there has beena need to change the regulatory environment.“There has been evidence of an excessivedegree of informality and a lack of clarity on thepart of some investors, and of a lack of willingnesson their part to hold hedge fund managersto account, which is a concern.“Ultimately, we are leaving these people totheir own devices, putting in place a basic frameworkof support and intervention but tellingthem they should not come bleating to the regulatorif it all goes wrong,” Sutherland says.“It’s like with corporate governance generally,where shareholders do not always hold their fiduciariesproperly to account. Hedge fund managershave sometimes got away with a little bit toomuch latitude, where investors would have beenbetter advised to have held them more firmly toaccount,” he says.NOBODY EXPECTS THE SPANISHINQUISITION...This lack of willingness is shifting, he notes,partly through the institutionalisation of thehedge fund investor base – although even theyhave been susceptible to believing in the Midastouch of certain managers, he says, who havesuffered from theresulting fear ofrocking the boatby bothering themwith queries thatmight be construedas criticisms.“It’s like Enron.Everyone knew,looking at thenumbers, that there were risks being taken somewhere.[If not, then] how is this black-box deliveringthese returns?“But people didn’t want to ask,” he adds.“We’ve now seen the wheels come off some ofthese things, seen the shine come off some ofthese high-flying managers, people are startingto ask the right questions.“The managers need to demonstrate not justto the investors but to their intermediaries theyhave a solid structure of governance in place.”This development, Sutherland says, has beenuseful and has yet further to run, though it remainsto be seen what implication this loss of gloss willhave on the further growth of the industry.THE EUSD – A THREAT NULLIFIEDWhile some of Bermuda’s south-western neighbours – notably the Cayman Islands – agreed to implement the EU SavingsDirective, but then negotiated wide-ranging exemptions for funds from its obligations, Bermuda did not agree to implement itthrough its local laws.The problems this brought “were not in any sense foreseen,” says the BMA’s Munro Sutherland.The Directive, introduced in Brussels in July 2005, was not expected to involve Bermuda, and there was surprise from manywhen it was interpreted that funds with paying agents in the EU, or even countries with agreements with the EU pertaining tothe Directive, were suddenly implicated.Before Bermuda’s recent negotiations with Swiss authorities, Bermuda-regulated funds that conducted business throughSwiss paying agents were required by Swiss law to disclose information about savings income of EU citizens. Bermuda’sGazette newspaper estimated 80 funds vacated their Bermuda domicile at least partly as a result.Under renegotiated terms with Switzerland, funds exempted from Bermuda’s CIS Regulations 1998 would be “out ofscope” of the EU Savings Directive in Switzerland.“In the end, it went through very quickly, it was brought into place late 2005, but it had been under discussion with theindustry most of the previous quarter,” Sutherland adds. “It’s the model we were moving towards in the new structure anyway,with the regulation of fund administrators,” Sutherland says. He feels it is a good structure for hedge funds.“There is no doubt the kind of funds we are talking about were never intended to be caught out by the EUSD. The industrynever believed it for a moment,” says Sutherland. However, lacking clarity over to whom the statute applied, all Bermudafunds had been left in a state of uncertainty.28 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com

ADMINISTRATION IN BERMUDAAdministrators – the axis in BerWhile some of Bermuda’s administrators see the maincompetition being from within the island, rather thanother financial centres, they are still equipped to globalstandards, says Solomon TeagueThe nature of hedge fund administration haschanged over the years as technological developmentshave made it less important where theadministrative work for hedge funds is actuallydone. For locations with a history of expertiseand experience in administration, such as Bermuda,this creates particular challenges.The repeal of the ‘10 Commandments’ law (in1998/99) also had a major impact on Bermuda.Previously, certain SEC and tax guidelinesensured no administration business of hedgefunds was conducted onshore, one of the historicalreasons for the strength of the Bermudaindustry, the island conveniently located as theclosest offshore jurisdiction to the United Stateseast coast.Investor servicing, accounting valuation andcorporate secretarial services no longer had to bedone offshore.A BIG SUCKING NOISE“There was an expectation that there would be agreat big sucking sound and all those businessesbased offshore would move back onshore, but itnever happened,” says Tony Riker, head of salesin the alternative fund services group at HSBCSecurities Services in Bermuda.“There will always be a demand for offshoreadministration,” adds Riker, because there willalways be those who, for tax reasons, do notwant their financial details being held onshore.“There was a perception that people did not wantto change. Even though the goalposts had beenmoved, people did not want to risk having theirshareholder information held onshore in the US.”“In terms of the pricing of assets, investorshave completely accepted where that is done isirrelevant,” says Chandra Arandjelovic, head offund administration at HSBC Securities Services.It’s mainly the investor-related information thatis still sensitive, she says.“Our system does not allow New York staff tosee investor-related detail at that level.” Nevertheless,much of HSBC Security Services’ administrationbusiness that was previously done in Bermudahas been moved to New York, Riker says.With a global network of offices, HSBC offersits clients the option of having different parts ofthe administration service conducted in differentlocations. For example, pricing and net assetvalue (NAV) calculation can be done in New York,where many of the fund managers work.Client-facing functions might be conducted inwherever most of the investors of a fund reside– $40bn in assets are administered from the Bermudaoffice, compared to $45bn from New York.Although all aspects of HSBC Security Services’business can be conducted in Bermuda,Riker says the bulk of HSBC’s on-island activityPeter Kneen,Bermuda CommercialBankPeter Hughes,Apexis the corporate secretarial work and the investorservices. These are the parts of the business thatbest leverage the island’s natural advantages,he says. “With the investor services component,there was a perceived reluctance from offshore,non-US investors to move,” he adds.“With the corporate secretarial work, theywanted to keep the directors meetings and registeredoffice offshore. It makes more sense.”OFF THE SHORES OF THE OFFSHOREThis may itself have an increasingly significantimpact on Bermuda over the years as more ofthe labour intensive administration business ismoved out of Bermuda, which, for all its expertiseand skill, is a relatively expensive location.Riker says HSBC Securities Services has alreadymoved a number of its business lines to India, andalthough this has not been the case in administrationyet it is already considering the option.Andrew Collins, managing director at ButterfieldFund Services, says BFS has been consideringsimilar changes, although it has made no decisionsabout the viability or value of such a move.However Andrew Brook, partner at PricewaterhouseCoopers, queries how widespread thetrend of moving labour-intensive business tolow-cost centres will be.He notes such functions are already beingtaken off the ‘to-do list’ of well-paid Bermudansby increasing levels of automation. In this case,it will not be a direct challenge to the Bermudianadministration industry either, as the loss ofjobs conducting labour-intensive manual work iscounterbalanced by more skilled jobs overseeingtechnology and handling exceptions.Chad Critchley, partner at Ernst & Young inBermuda says low-cost centres such as India canbecome “the back office of the back office.” Theadvantage of these locations is it will allow Bermudato continue its pre-eminence in the businesswhile routine processes are outsourced to aneconomic and time zone-advantageous location.”Riker denies Bermuda’s hedge fund administrationindustry is under threat. It will mean highlyskilled and better-paid Bermudans can concentrateon the work that requires a greater level of expertise,exceptions handling for example.NICHE PLAYERSSmaller fund administrators are unable to offerthe same breadth of serviecs as their laregrrivals, though Paul Kneen, general manager atBermuda Commercial Bank, says for the greatmajority of funds that are not multi-nationalcompanies, this is not a disadvantage.In fact, such service can be seen as highlyimpersonal and, for smaller funds requiring faceto-faceattention, a nuisance if different parts ofthe business are done in different places.The knowledge that all stages of the administrationare done in one office by one team ensuresquestions can be addressed quickly and that theadministrator is accountable to clients, he says.Peter Hughes launched independent administrator,Apex, of which he is managing director, inresponse to a perceived lack of quality in servicefrom the existing industry.Apex competes with the established namesby offering flexibility in such areas as the dateof the monthly NAV calculation. Hughes saysestablished houses’ inflexibility in such seeminglyminor details are often highly inconvenientfor the fund managers, especially those of thesmaller funds that are the least likely to be able tonegotiate a compromise.Tom Davis, principal at Meridian Group, another30 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com

ADMINISTRATION IN BERMUDAuda’s portfolio-pricing trianglesmaller player in Bermuda servicing about 110funds with a combined $8bn in assets, started hisfirm for a different reason. “I felt there was roomfor a smaller administration company that metthe needs of groups looking for more of a partnerthan a company that would churn out numbersand NAV calculations,” says Davis.“There are clichés about personal service, but Iwanted to add value through being a partner – anarms-length partner. I like to think we are moreof a fiduciary service than a number-crunchingservice.” For example, Meridian Group focuses onensuring investors meet the necessary tests as ‘fitand proper’ hedge fund investors.“We didn’t feel we had a new method for calculatingNAVs very quickly, or a tremendous insightinto how to value complex securities, or a systemthat would give us a competitive edge. Our role isalmost to be the ongoing compliance or internalaudit department.”WHEN BIG NEEDN’T BE BEAUTIFULHe believes some funds and investors are misguidedin the belief brand-name administratorsoffer a more sophisticated service or greaterunderstanding of complex strategies.“Institutional investors have their checklists.You get calls and you know what questions youare going to be asked. It’s usually a junior person,who has to tick these boxes,” says Davis.With the bigger administrators, the point ofcontact is likely to be a similarly junior staffmember. “You have a false sense of security withjunior people helping each other to tick boxes.”He acknowledges this creates pressure on thesmaller administrators that represent a greaterperceived risk to institutional investors, who maybelieve larger necessarily means better.However, developing a strong relationship withthe manager makes it rare for Meridian to lose aclient once selected.The hard part is capturing the business fromthe bigger players in the first instance. As withApex, Meridian survives on word of mouth fromits clients, Davis says.“There was an expectation that therewould be a great big sucking soundand all those businesses basedoffshore would move back onshorebut it never happened.”TONY RIKER, HSBC SECURITIES SERVICES“There will always be an opportunity for thesmaller fund administration firm,” says Arandjelovic.“It’s healthy, it helps the client find exactlywhat he is looking for.” Riker estimates there tobe 24 administrators in Bermuda, from one-manshops to HSBC and Bisys, the two largest.WHY BERMUDA?Bermuda’s administrators serve clients all overthe world, as well as most if not all of Bermuda’sdomiciled hedge fund business.They have US clients, although where fundsare onshore, in many cases it will make sense forthe administration to be as well.The Bermudian industry serves a largenumber of Cayman-domiciled funds, whereCayman might be regarded as too remote, or thebreadth of choices considered insufficient. BVIfunds are even more likely to be administrated inBermuda as its own administration capability ismeagre, Bermudian commentators say.Increasingly, there is a perceived advantage inan administrator not sharing a time zone with afund’s portfolio managers, especially where thefund is looking for frequent NAVs to be struck.A European manager can finish the workingday by sending data to an administrator, whocan work on it overnight, providing data at theend of the day in Bermuda – in time for the fundmanager to receive this the following morning.This has made Bermuda an increasinglyattractive location for European clients, Rikernotes. However, it stands to reason the island willlose as many clients to Asia for this reason as itgains from Europe.Butterfield Bank’s Collins thinks it is impossibleto predict the long-term future of theisland’s administration industry. There is along history of hedge fund expertise in Bermuda,which has stood it in good stead to thispoint, he says. “However, I’m not convincedthat, going on a few years, the cleverest peopledoing the most-difficult work will necessarilybe based in Bermuda, over New York, Torontoor India,” he says.Hughes agrees: “Who knows what will happenin the future?” he ponders. If managers decideincreasingly to operate the fund from the point ofdomicile, and have it administered from there, Bermudawill face competition, he adds.GLOBAL LINKSDavis, however, is more optimistic about theisland’s long-term future. Its geographical location,and strong historical ties with the UK andSwitzerland, among other locations, will allow itto maintain its market dominance, he says.Bermuda has excellent infrastructure, and the‘ Big Four’ accountants. It has good links with theUS and Canada, a short flight away, direct flightsto London, meaning meetings can be held on theisland and be well-attended.This compares favourably with its Caribbeancompetition. “BVI is a small place, a lovelyplace to visit, but hard to get to. You can’t getthere easily in a day. Cayman has more infrastructurebut, again, as a manager based in NewYork or Boston it’s that much harder to get to,”Riker says, an issue for due-diligence and othernecessary meetings. Bermuda has good schoolsand is large enough to be a relatively easy sellto employees looking at a potential move to theisland, especially when they are looking to bringfamilies with them, adds Riker. “When you’re atwork, believe me, you’re on Wall Street. The differenceis you can get to your beach and sand and sunin 10 minutes. It’s not that you won’t be challenged.“That’s important, because for people that aredeveloping careers it is important they come somewherethat will continue to grow them where theycan leave with huge experience in the industry,”says HSBC Securities Services’ Arandjelovic.However, Oskar Lewnowski, chairman ofOlympia Capital, a fund administrator andfinancial services group based in Hamilton,says career prospects on the island are inferiorto those in London, New York and other placesOlympia Capital looks to recruit from. To hirethe best people, it is easier to open offices abroadthan entice them to move, he says.STAFFING ISSUESThis debate has important implications asstaffing is an important issue on the island,indeed, the biggest issue, according Lewnowski.There have never been as many Bermudiansas there are jobs, Lewnowski says. Employmentof foreigners is not difficult; it occurs so oftenwww.hedgefundsreview.com May 2006 | HEDGE FUNDS REVIEW | 31

ADMINISTRATION IN BERMUDAthat recruiting them is a well-trodden procedure,well understood by the firms involved.Administration companies must advertisethrice three weeks’ running for Bermudians tofill a vacancy. If this fails, the firm may look elsewhere,bringing in employees from the Americas,Europe or Asia.For the accountancy firms, the process hasbeen made even easier. Advertising is donecentrally by Bermuda’s Institute of CharteredAccountants. It is especially difficult for accountancyfirms to fill their positions as employeesneed accountancy qualifications.Brook notes the accountancy firms struggleto retain their talent for more than two or threeyears as they are a popular recruiting ground forother industries, be it administration or backofficestaff in hedge funds or insurance.I’M A LUMBERJACK AND I’M OK...Both accountants and the administrators have aspecial relationship with Canada, in recruiting.“A lot of our young people go there to be educated.When we recruit, even for local talent, wewill sometimes go to universities in Canada to seewhat Bermuda’s young people are doing that willoffer them opportunities when they come back,”says Arandjelovic.The aerial hop is 150 minutes to Toronto fromHamilton, Bermuda’s capital.“It’s also a cultural thing. Canadians fit in betterthan some other cultures. Irish and English tendto fit in well because they’re island communities.Broadly, in the US, there are those that fit in andthose that don’t. Living on a small island is not foreverybody, although it is a wonderful lifestyle,”adds Riker.Recently there has been an influx of staff withhedge fund experience, which has seen a largeamount of recruitment made from Dublin, thoughBrook says it has not been occurring for longenough to say if it is new long-term trend.GRASS ISN’T ALWAYS GREENERLewnowski notes it can be difficult to hire fromabroad, both because of restrictions on immigration,and because the appeal of living in Bermudahas waned compared to 20 years ago.The government has a part to play here. Thereare rules in place restricting the immigrationof people onto the island, which, coupled withrestrictions on the ownership of property for foreigners,does limit the number of professionalsmoving to Bermuda.However, Robert Bonehill at JP Morgan Tranautis confident the government will always do whatit takes to promote the standing of the island’sfinance industry globally.CHALLENGESThere is a question over how much more the Bermudianadministration industry can grow.As a small island, there is finite room for growth,although small niche administrators, and indeedsmall funds domiciled on the island, do not take upthe room of a multi-national corporation.Tom Davis,MeridianCollins believes the industry is not far fromcapacity. “There is enough administration in Bermudaalready, I don’t think it will expand all thatmuch now,” he says.“The competition is between us and the otherBermuda administrators, rather than betweenjurisdictions.” Ernst & Young’s Chad Critchleyagrees Bermuda has capacity constraints on itsadministration business.However, as some administrators currentlyturn business away, the industry clearly has furthergrowth potential. Administration businessesare not necessarily labour-intensive, while theincreasingly global playing field ensures there isplenty of supply.“Bermuda’s reputation is crucial. We may not begetting quantity but the focus of our hedge fundindustry has always been on the quality of thebusiness we are attracting,” says Jessel Mendes,partner at Ernst & Young.“Canadians fit in better than someother cultures. Irish and English tendto fit in well because they’re islandscommunities. Living on a small islandis not for everybody although it is awonderful lifestyle.”TONY RIKER, HSBCE SECURITIES SERVICES“Competition from other offshore jurisdictionsis a challenge but I believe we are holding ourown. When people think of Bermuda as an offshorefinancial centre, insurance is probably thefirst thing that comes to mind but I believe that isstarting to change.”Collins concedes the industry may be split toan extent between administrators working withhighly complex strategies or funds, and thoseconcentrating on more simple ones, though thisis not a new phenomenon, he says, nor a trendevidently on the increase.INVESTOR-LED BIFURCATIONA more pronounced bifurcation is that whichhas arisen between those serving high-net-worthindividual clients and those serving institutions.The two investor types are pulling the industryin different directions, creating two differenttypes of fund, and administrators need to caterto these needs.“To a certain extent, the move of the industrytowards institutional investors does change thename of the game in terms of what is expected(of administrators),” Collins says.In other ways, administrators will continueto be challenged by the inherently evolutionarynature of hedge funds.The recent increasing interest of hedge fundsin areas traditionally the domain of privateequity funds, in particular, has created a realchallenge. Kneen notes BCB has worked witha number of funds on side-pocket structures.“We’ve come across side pockets but not as anoverwhelmingly important issue,” says Collins.Different strategies require different types ofwork in administration, as larger funds are lesslabour intensive for each unit of capitalisation.For this reason, a centre specialising inadministration, such as Bermuda, can supporta significant number of businesses, somecatering only to large funds, other only to smallones, and others to niche strategies.Butterfield says it has no minimum size offund that it will administer, though it viewsitself as a conservative business, making a consciouseffort not to overstretch itself and makecommitments it will not be able to deliver on.It is, therefore, highly selective about thebusiness it takes on, and not just on the basisof funds it considers to be susceptible to fraud.BCB actively focuses on smaller hedge funds,capitalised at less than $100m, where it believesit has an edge as a smaller local player, able totake quick decisions and with good technologyplatforms and a full suite of banking productsto offer clients at competitive rates.ON THE FRONT LINEAdministrators are one of the first lines ofdefence for the investor against fraud, and it iscertainly the administrator that is in the bestposition to detect early irregularities that couldbe indicative of misbehaviour by the hedgefund manager.As such, administrators seem unanimous thatthe reputation of the industry is of paramountimportance.Plans for compulsory registration of theisland’s administration community met withlittle resistance (see regulation piece on page 27-28), while all practitioners espouse the importanceof maintaining the highest standards.Kneen says it is not difficult to detect fraudulentactivity in a fund if the due diligence andoversight proceduresthat are put in place aresufficiently stringent.Warning signs, he explains, typically includedeviation of a manager from their normaltrading patterns, or unusual returns. Hughesnotes frauds such as that perpetrated at WoodRiver are more frequent at funds that do nothave independent administrators.Bonehill says the chance of fraud whenadministration is conducted properly is remote.Hughes disagrees, noting that a monthly netasset value (NAV) calculation leaves a long gapfor a fund manager to act fraudulently beforean administrator checks the figures again.Certainly, the evidence suggests that independentadministration is not a guaranteeagainst fraud.KEY POINTSBermudian administrators see the lifestyle,proximity to the US and direct flights to Europe askey drawcards in attracting and retaining staff.Bermuda has a selection of large global playersand administrators who specialise in servingsmall- to mid-sized hedge funds.While comulsory licensing of administrators metwith little resistance administrators note theyshould not be seen as the only way investors candetect fraud.32 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com

AUTHORISATION IN BERMUDAHow to plan and then make a sHedge funds don’t just cometo Bermuda for Hedge FundsReview’s annual allocationconference, in Hamilton from17-19 May. Solomon Teaguediscovered yet other reasons tomake Bermuda your baseBermuda has probably attracted more attentionfor its insurance activity than as a domicilefor hedge funds in the past, but with a thrivinghedge fund administration industry and a convenientlocation, it has always been a popularchoice for hedge fund managers looking for anoffshore base.There are 1,800-1,900 funds in Bermuda, ofwhich 450 are unit trusts.Bermuda had three types of vehicle availablefor hedge fund managers to choose from, beforethe EU Savings Directive forced it to create a newexempt-status fund qualifying managers for taxexemption for European investors. A managerwishing to launch a fund in Bermuda may nowchoose an Exempt Scheme format, or from theprevious options of Recognised Funds, StandardSchemes or Institutional Schemes.Created in late 2005, the Exempt Schemesolved the problem created by the Swiss assertionthat the oversight of the hedge fund industry inBermuda by the Bermuda Monetary Authority(BMA) meant they were, in fact, regulated funds,and were therefore subject to tax, even in the caseof Institutional Schemes.“The BMA still had the requirement to havethe offering document submitted for review. Theservice providers had to be approved. This qualifiedit as regulated,” says Alex Erskine, a partnerat Appleby Spurling Hunter.QUALIFYING FOR EXEMPTIONThe Exempt Scheme offers managers thelightest regulatory touch of all the hedge fundproducts overseen by the BMA.To qualify to be able to use it, its administratormust be BMA pre-approved.The preconditions surrounding the choice ofservice providers are the most significant differencebetween the Institutional Scheme fund andthe Exempt Scheme fund.“Provided the fund appoints an auditor andselects an onshore entity to maintain the books andrecords of the fund, which would be responsiblefor providing such material to the BMA if it didhave to intervene, the BMA exempts the fund fromclassification,” Erskine says.So long as service providers are all BMAapproved, the BMA provides no oversight intothe fund and therefore qualifies for tax exemptionunder European Union law and the Swissinterpretation of that law.“Out of the difficulties of the EU Savings Direc-tive, we have a very flexible regulatory structurefor our funds. I have found a lot of interest in itfrom institutions,” Erskine says. “It is really anextension of the institutional scheme,” he adds.“I think you will find a lot of migration fromexisting schemes to Exempted Schemes. It offersa real institutional and sophisticated investorvehicle that offers all the flexibility big investorswould like: the ability to appoint their own investmentmanager, administrator or prime brokerirrespective of domicile or BMA approval.“It is now a regime purely focused on what isdisclosed in the offering document.”Julie McLean, a partner at lawyers ConyersDill and Pearman (CDP), believes the ethos inBermuda has remained largely constant over theyears, a balanced approach of light regulationand flexibility.Other jurisdictions that opted to impose lessregulation on their domiciled funds have had torevise their practices as institutional investorshave demanded a greater regulatory presence,she says, which has played into Bermuda’s andthe BMA’s hands.In future, hedge funds may opt to select theExempt Status fund. This can occur only ifinvestors will qualify as sophisticated investors:an institution or trust with assets totallingmore than $5m; or an individual with marketunderstanding and making a minimum investmentof $100,000; a high-income investor withan income of more than $200,000 alone – or$300,000 with a spouse – or a high-net-worthinvestor with assets to his or her name in excessof $1m.If the investors fall into these categories, andproviding the manager was willing to work withthe service providers fulfilling BMA approvaland had an entity on hand to keep the company’sbooks, exempt status offers the maximumflexibility. Having picked the fund category, themanager must prepare a prospectus with all thedetails required for the investor.“The contents of the prospectus are guided bybest practice,” says ASH’s Erskine.“The disclosure regime is normally set out onthe collective investment scheme regulations. Ifthe fund is not subject to collective investmentscheme regulations, those requirements don’tapply, and therefore the only thing the prospectusneeds to disclose as a matter of law is what iscontained in the Companies Act.”Disclosure requirements include naming theofficers of the scheme; the dates of the offeringopening and closing; the financial statementsof the scheme, if it was not new; and any commissionpayable in connection with the offer; therights attached to the shares on offer; and theminimum level of assets required to make theventure operable.“You’re really left with very core requirements,so it’s a major change,” Erskine says.“The industry is going to find its equilibrium,which will be an interesting balance between the34 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com

AUTHORISATION IN BERMUDAccessful Atlantic crossingneed to disclose critical information that allowsinvestors to make informed choices, and to givethe company the protection it needs as a matterof law.” The board needs to fulfil its fiduciaryduties, which includes proper disclosure as towhat the investors are going to get.For partnerships, Bermuda’s CompaniesAct does not apply, and there are no disclosurerequirements.“As a matter of good practice, you would wantto ensure that you had the investment objectives,restrictions, expertise of the management,fees payable, a summary of the background ofthe custodian, administrator and investmentmanager. That’s what is going to sell the fund,”Erskine adds. The list is far from exhaustive– inclusion of factors such as risk warnings, themeans of calculating the NAV and how redemptionswill be carried out is strongly advised forthe prospectus.FURTHER FINE TUNINGThe scrapping of the requirement for submissionto the BMA for approval has acceleratedthe process of setting up a fund domiciled inBermuda. This occurred as other factors on theisland combined to speed up the process, whichErskine estimates as four or five working daysfrom application through to classification.“If you’re facing Cayman, who can turn itaround in 24 hours, it’s a tough sell sometimes,”he notes. (Conyers Dill & Pearman’s McLeandoes not believe most managers can utilise Cayman’sability to incorporate a fund in 24 hoursin any case. Considering the other practical andlegal elements involved in the process, she saysthat, on average, it takes a month for a managerto get from the start of the process through tocommencing trading, regardless of where youare looking to domicile.)The removal of mutual fund business as a‘restricted activity’ under Bermuda’s CompaniesAct sped up the process considerably.Previously treated as a restricted activity, aMinistry of Finance sign-off was required to setup a Bermuda hedge fund. If the minister wasnot on the island, the process stalled until theirreturn. This requirement was eradicated by thechange in status.“Whether it actually added anything was amatter open to considerable debate,” Erskinesays. “The mere fact that the minister has signedoff on a fund does not of itself add much protection.”This situation might actually be argued tohave harmed the investor, since it gave the fundan aura of regulatory scrutiny that was not, infact, present.There was additional streamlining to allow theincorporation of the legal entity first, before thescheme was formally classified. “In the old days,you couldn’t have a fund incorporated until theBMA had completed its review process,” saysErskine, analysing the service providers andensuring the prospectus was adequate.“There were virtually no cases where a fundwould not obtain classification after going throughthe incorporation process because of the level ofdue diligence involved in incorporation,” Erskinenotes. Erskine says the change away from havingmutual fund business as a restricted activity was“a fantastic move” as it allowed the company toprepare itself fully for final classification by settingup bank accounts and taking other practicalmeasures. McLean says in some instances there isa pre-notification process where the BMA startsvetting the manager even before the applicationfor authorisation has been submitted to furtherspeed-up the registration process. It has neverbeen a requirement for managers to be regulated,though it can help secure BMA approvalif a manager is already regulated by a reputableregulatory authority.BMA approval is almost automatic for SECregisteredmanagers, notes McLean. The BMAwill do a quick background check of prospectivemanagers that are not registered with theSEC, running their name through databases forobvious causes for concern, but applications arerarely rejected on this basis, she adds, especiallyas Conyers Dill & Pearman performs a similarcheck before it makes any submission.“As a matter of good practice, youwould want to ensure that you hadthe investment objectivesrestrictions, expertise of themanagement, fees payable, asummary of the backgroundof the custodian, administratorand investment manager.”ALEX ERSKINE, CONYERS DILL & PEARMANThe BMA must actually focus on the trackrecords of the managers, and whether their experienceis relevant to the product being offered.“It is very subjective, they have their owninternal guidelines as to how they will evaluatethe skills of the investment manager,” saysErskine. “We have never been given a list stipulatingwhat these are,” unlike in the UK, he says.“In some ways this makes it more difficult,” henotes, although local lawyers will have acquiredsome skill at detecting what will or will not beacceptable to the regulators.Once the manager has made the decisionregarding the structure of the fund and theinstitutions that will service it, the lawyer has aresponsibility to oversee the service providers,especially the auditor, to ensure it is fulfilling itsfunction, McLean says.OTHER AVAILABLE STRUCTURESInstitutional Schemes had been the traditionalchoices most likely for a hedge fund manager.They are appropriate when the investors in afund will comprise, exclusively, sophisticatedinvestors or institutions.The Bermuda Monetary Authority is flexiblewhen it comes to the service providers enlistedby a manager for Institutional Schemes. “Theflexibility that the institutional schemes provideis making them more and more popular,” saysAlex Erskine.Standard Schemes offer more flexibility in thechoice of investor, and may also be suitable forsome hedge funds, where “the investor base isvery keen on being subject to regulatory oversight.”The BMA requires the custodian andadministrator of a Standard Scheme to be Bermuda-basedfinancial institutions or, on occasion,reputable offshore ones.This is in line with the Cayman Islands, whichalso requires its home-domiciled hedge funds totake administrators that are registered with theCayman Islands Monetary Authority.“Those institutions provide the frameworkwithin which those funds could be subject tointervention by the BMA if it believed therewere unsavoury activities such as fraud goingon. The focus is principally on the reporting thefund administrator needs to make on a periodicbasis,” Erskine adds.Recognised funds, the third available option,were designed for UK investors’ consumption,and designed to be the Bermuda’s equivalentof a UK Authorised Unit Trust. However, theyhave never been popular in the target market,according to Erskine. The Japanese have beenenthusiastic and have used the structure forretail and non-retail products, he says.“A lot of Japanese clients like the regulatorystructure of these retail schemes and haveshown a lot of interest in using the RecognisedSchemes, and using them as a basis for theirfund structures to provide their domestic investorswith the protections these retail schemeswould afford. These come in the form of veryprescriptive investment restrictions and parametersand prescriptive functions the administratorand custodian of the manager need tocomply with ,” says Erskine.WINNING ESTABLISHED BUSINESS“We are seeing an attempt to make these schemesmuch clearer,” he adds. He says Appleby Spurling& Hunter is taking a more active role in recommendingdifferent types of scheme it believes areappropriate for investors, according to the fund’sexpected investor clientele.Erskine says the most important thing for Bermudaas a fund jurisdiction is to get the messageacross that the island has changed. “People whohave encountered difficulties in terms of speed ofincorporation and who have then gone to Caymanwill be hard to bring back.“All they’ll remember is how slow it was,and with it, the expense,” he says. A companywishing to move a fund from another jurisdictionto Bermuda needs to fulfil the same criteria as acompany establishing a new fund there, thoughMcLean notes it is rare for a fund to move itsdomicile. A fund wanting to move to Bermudais more likely to launch a new fund in Bermudaand then move assets across, before winding theold fund up, she adds. The existence of financialstatements giving some financial history of thegroup can assist in BMA registration. A similarprocess is more common when onshore US fundscome to Bermuda to set up an offshore fund fornon-US taxable investors.www.hedgefundsreview.com May 2006 | HEDGE FUNDS REVIEW | 35

OFFSHORE STAFFINGOffshore life with an onshore work ethicGiven the nature of hedge fund transactions,people involved in hedge fund administrationshould have strong accounting backgrounds,which are often unavailable outside major cities.The dramatic increase in automation, on topof this, means an increasing need for IT-literateAUTHOR: ROB BONEHILL, JP MORGAN TRANAUTRob Bonehill is Bermuda operations manager at JPMorgan Tranaut inBermuda. JP Morgan Tranaut is part of JPMorgan Hedge Fund Servicesgroup and Morgan Treasury and Securities Services. The hedge fundadministration (HFA) business has around 100staff servicing more than 40 hedge fund managerswith assets in excess of $13bn. The company’smain product is full-service HFA, conducted out ofBermuda, Boston, Dublin, Luxembourg andGreenwich, Connecticut. Its local business is splitinto two distinct categories. The fund accountinggroup prepares the net asset value (NAV) byRob Bonehill,JP Morgan TranautBY ROB BONEHILL,JP MORGAN TRANAUTconfirming all positions and prices of a fund’s assetswhile preparing the fee calculations. The shareregistergroup processes subscriptions andredemptions, distributes NAV confirmations and fields investorquestions. Part of the share-register group activity relates to supportingfund accounting groups in our other locations.accountants. Administrators are thereforeincreasingly attempting to attractthe best accountants in the business,and the packages available in offshorejurisdictions go a long way towardsproviding those benefits.With the experience and benefitsavailable in hedge fund managers’offices, this is no mean feat, althoughit is often claimed that there is a lackof administrators able to offer a topqualityproduct, both in terms ofquality of service and experience.In Bermuda, there is a high demandfor jobs in hedge fund administration,especially for openings.Potential employees are often scepticalabout moving to Bermuda, particularlyin the case of a newly qualifiedaccountant who has never venturedaway from his or her home country.However, it normally does not takelong to convince someone to make themove – the lifestyle sells itself.The fact that Bermuda is virtuallyfree from income tax, with the exceptionof a small payroll deduction whichamounts to up to 4.75% for employees,means that savvy accountants from anumber of countries are keen to makethe move on account of the potentialfinancial benefits.The reduced burden of state taxesadds an additional 30% to net incomes.Average salaries in Bermuda are abovethat of those in onshore locations.Based on internal statistics, we expectto pay more for an account manager inBermuda than one in Dublin or Boston,for example.High net wages also mean a relativelyhigh cost of living. Rents are highand a basket of goods at the supermarketcan feel like it is three times thecost in most countries. However, manypeople looking for work in this kind ofdestination are young and may not yet have families,so flat- or house-sharing is common.Bermuda also offers lifestyle benefits such asshort commuting times, long pink beaches, warmtemperatures and a relaxed lifestyle allowingworkers to wear the island’s eponymous shortsthroughout the year.WIND-PROOF LOCATIONGeographically, Bermuda benefits from itslocation away from the devastating hurricaneactivity experienced recently in the Caribbean.The Cayman Islands, for example, was impactedby Hurricane Ivan in September 2004.A significant proportion of the expatriate communityleft for safer climes for a period after thestorm while the local community worked to getthings back in order.While Bermuda is certainly not free from theeffects of hurricanes, it is positioned in coolerwaters where it is less likely to be hit by a hurricanethan are Caribbean countries. Much ofthe island is elevated so it is also less prone toflooding than some Caribbean islands – andthese factors can affect the decision of where tolocate when looking for employment.DIVERSE WORKFORCEHistorically, a significant proportion of theaccountants arriving on the island have arrivedfrom the UK, Ireland, Canada, and the US.Recently, there has been a growth in thenumber of people from locations including SouthAfrica, Australia, India and the Philippines.It is important to note that there are some tightrestrictions regarding immigration to offshorelocations in order to support employment for thelocal population, and Bermuda is no exception.There are restrictions on work permits, andjobs can only be given to an expatriate if the jobhas been advertised in the local community.Sufficiently qualified locals are hired aheadof a non-Bermudians. Unfortunately, there is ashortage in the local workforce of qualified and/or experienced accountants, so often there arefew applications meeting the job requirements,forcing companies to look overseas.The highly skilled expatriate workforce inturn trains members of the local community.Foreigners are permitted to work on the islandfor only six years. However, the governmentrecently issued guidance on exemptions to therestrictions. Because of the dearth of accountantswith these particular skills, they are included ona list of jobs for which term limits are waived.OFFSHORE LOCATION WITH ANONSHORE PROXIMITYFund managers normally choose to use servicesin a particular offshore location when they havea local presence there, allowing them to meet theservice provider in person or conduct meetings inthe same time zone.Offshore funds based in the US are attracted toBermuda due to its regulatory environment andits proximity to the New York financial centreand to Greenwich, Connecticut, which is a popularbase for hedge funds.International business in Bermuda is notrestricted to fund administration. In particular,the island benefits from being the largest offshoreinsurance centre.While the hedge fund industry is clearly differentto the insurance industry, both need theservices of high-quality service providers, alongwith a highly skilled workforce.Because they are both highly skilled financial-servicesindustries, staff sometimes transferbetween them and dual-income families on theisland often have one spouse working in insurance,with the other employed by a hedge fundadministration provider.JPMorgan has been successful in retainingstaff recruited locally and from overseas. Mostemployees will initially come to JPMorgan on atwo-year contract, and many of those will be withus for longer periods – a major benefit to hedgefund managers who are looking for consistency.WORK HARD, PLAY HARDSomeone working in Bermuda cannot necessarilyexpect to spend long weekday afternoonsrelaxing on a south shore beach. People workingin JPMorgan Hedge Fund Services’ Bermudaoffice are expected to work as hard as those onthe onshore locations and there is no shortage ofovertime being worked during the busy monthendperiod. That said, once the work is done, theplay time begins.36 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com

BERMUDIAN FUND PROFILE: OSMIUM CAPITALBermudian by its home– but truly global by itsnatureOsmium Capital’s managersand fund may have nestledthemselves in the Atlantic butthey take a truly global outlook tomaking profits for their investorsOsmium Special Situations Fund, a one-year old,Bermuda-domiciled and Bermuda-managed fund,trades global equity special situations in threemain areas: pure arbitrage, including fungiblelistings and capital distributions; event risk, abroad risk arbitrage and event-driven focus; andstructured equity trading.The focus has helped the GBP share class produce20.2% annualised since inception, accordingto figures from the group.The three areas for the $20m portfolio havedifferent P&L and opportunity profiles, as ChrisKuchanny, chairman and CIO of Osmium CapitalManagement explains.Price (HKD)5045403530AMJJ20058 April 2005 - 31 March 2005. Source: BloombergASONDJChris Kuchanny,Osmium CM2006RIDDARHYTTAN RESOURCES SHARE PRICE (SEK)Px LastASM PACIFIC SHARE PRICE (HKD)1413121110987A M J J A8 April - 25 November 2005. Source: BloombergSOFNM“In all market environments, there is alwaysactivity in one or other or preferably multipleof those areas,” he says, although he notes thereis always at least a small exposure, and typicallynever less than 15%, to each sub-strategy.Beyond that allocations between the three varyaccording to opportunity.THE PROCESSThe fund has technical and fundamental aspectsto its investment process, with focus areas basedon forthcoming fundamental events, such asmacroeconomic trends and regulatory changes.Kuchanny is alerted to these by a number ofsources, including his own proprietary tradingmodels. Any fundamental or technical alert triggersfurther research, an input to the firm’s proprietaryanalysis tool, ImProF, which calculates theprobability of certain events occurring. “It enablesus to focus on the most mis-priced situations in thestrategy area we are researching,” he says.“What we are trying to focus on is strategieswhere we believe there is some sort of barrierto entry to competing investors. What we arelooking for is a hurdle to other investors beinginvolved in, researching and arbitraging-out thestrategies we are looking at,” says Kuchanny.While the fund does not extend to examiningmicro-caps, its process looks at small- and midcapsituations, which Kuchanny says are “justbelow the radar” of larger competitors, particularlyin Western Europe and the US. Additionally,opportunities are examined where thevaluation or event entails some complexity, suchas optionality embedded in a deal or uncertaintysurrounding regulation. This also deters largerhedge funds from investing.The fund’s global focus – including investmentsin Thailand, Turkey, China and India– also expose it to areas that many in the crowdwill not consider. “It allows us to be very choosyand pick out only great situations, and nothave to be in the same things as everyone else,”Kuchanny says.ECLECTIC APPROACHA trade undertaken by Osmium on Riddarhyttan,a Swedish-listed Finnish gold-miningcompany, exemplifies the company’s small-capand specialised strategy. Agnico Eagle, a Canadiangold-mining firm, took a 13% stake in amine owned by Riddarhyttan.This occurred alongside a service agreement,assisting the Finns in day-to-day activities, suchas exploration. It also put two new directors onthe Riddarhyttan board.After a year of holding this position itlaunched a bid for the remaining 87% sharesof the company, valuing the company at SEK8.05 per share. “Riddarhyttan was trading at aconsistent discount to the Agnico Eagle offer,”Kuchanny explains. “Then, suddenly, they found33% more resources. That, to me, increases thevalue of a gold mining company by more than33%, as it has large fixed costs.”Osmium, which had between 1%-2% stake,gathered a group of shareholders representing27% and sent letters to both companies askingfor negotiation of an increase in the offer price inAugust 2005.As of 12 September, 2005, the offer valued eachRiddarhyttan share at SEK 12.09, representing apremium of 50.2% more than the 11 May offer.“That’s the type of situation we get involvedin. Small-cap, relatively unheard of, with few ofour competitors involved, few analysts coveringit making it hard to find information, dramaticallymis-priced fundamentals and low probabilityof a drawdown.“There were questions in the market whetherour involvement would break the deal but thatwas highly improbable,” he says.Another representative position was a structuredequity trade involved ASM International,a $1bn semi-conductor equipment manufacturer,which has a controlling stake in Hong KonglistedASM Pacific Technology, which makessemi-conductors.ASM International consistently traded at a discountto its listed assets, in part because it usedits dividends from its Pacific stake to financefront-end businesses such as loss-making semiconductorequipment manufacturers. “The relationshipbecame very, very deeply discounted,completely mis-priced,” Kuchanny says. “It endedup in November trading at a 50% discount to itslisted asset, ASM Pacific.” A cross-border, midcapsituation, highly mis-priced with a complexvaluation and attracting little attention from otherinvestors – a perfect situation for Osmium.Already a shareholder in the group, it discussedthe situation with ASM International, whichcommitted itself in December to take action atits annual general meeting to remedy the situation.The stock subsequently rose by 20%, andOsmium has since been building up a significant38 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com

BERMUDIAN FUND PROFILE: OSMIUM CAPITALposition in the company, which it holds today.Although the position initially moved against thefund by about 25%, it did not suffer a loss in thisperiod due to an active trading policy. Kuchannysaid the downside was less than 10% with anupside in excess of 100%, and that ASM Internationalis still deeply discounted.DIARY OF A FUND GETTING STARTEDOsmium has up to 49 positions at any onetime, diversified across global markets and sectors.The fund’s holdingperiods range from intraday,especially in the arbitragestrategy, through tolonger than a year in thestructured equity trades.“For a longer-term trade,I will have a portionthat is actively traded,making money out of thevolatility on the spread,”he says.UBS is the primebroker, while administrationis provided byDundee Leeds, the fundhaving recently changedfrom Bank of Bermuda.Its new administratorshares the same building,and while they are notone of the largest providerson the island theyhave reputable clients ontheir books, among themCitadel.Kuchanny stressed it was not dissatisfied withthe service received from the Bank of Bermuda,which he said provides a good service, especiallyfor larger clients. However, he noted “for thesmaller clients it does make sense to go with asmall- or mid-cap administrator to some degree.You are much more likely to get a high level ofservice. They’re a good, safe pair of hands.”It is currently looking to recruit to assist withresearch and investment decisions, with twohirings expected within the coming months. “Inthe past, I was a prop trader, so I have alwaysmanaged this number of strategies, and havemanaged a lot more money, with a portfolio ofover $1bn long and short,” he says. “But thereare so many more great strategies out there thatI haven’t got time to research.” He says it wasimportant to reach the one-year mark. Havingan audited track-record for this period is aninvaluable asset for attracting investors.BARRIERS TO ENTRY“The barriers to entry are enormous, andgrowing. Regulation is increasing. The cost tostart-up is increasing. Investor requirements areincreasing. Considering our returns we shouldbe five times the size we are,” Kuchanny says.“The reason we’re not is because you’ve gotto go jump over so many hurdles before a fundof hedge funds can invest. Many FoHFs havebecome institutions with very large amountsof capital, only able to invest in certain types ofstrategies and in certain ways.”As well as seeing a track record FoHFs wantto know the size of the team, and the numberof assets already managed. “The real thingsare track record and assets under management.It’s a Catch 22. You start with less than $10mbut you need to be $20m-$50m before many“The barriers to entry areenormous and growing.Regulation is increasing. The costto start up is increasing. FoHFshave become institutions withvery large amounts of capitalable to invest only in certain...strategies and in certain ways.The real things are track recordand assets under management.”investors will even look at you. The rule is 10%.”He says many talented managers don’t makeit simply because of this rule, which makesraising the first $20m so difficult.One way he tackled the problem was to startsmall, and avoid making big initial outlays onanything but the necessities. Osmium starteddeliberately small, with a small team to remain asustainable business and contain costs.“The asset jump, when it happens, is large anddramatic. You can go from between $20m-$50mto $100m in months. It’s theway the market works.”He feels Osmium is pastthe hardest hurdle in itsgrowth phase.“Returns are the onlyway to make a hedge fundwork. The guys who startwith big teams, buy offthe-shelfmodels and backofficesystems, and thenstill fail are the ones thatdon’t come out of the boxmaking money,” he says.“Forget everything else.The rest will come if youcan make returns, and ifyour strategy is not capableof surviving in all marketenvironments and youaren’t going to have a greatfirst two years, then justdon’t start.”Osmium has posted positivereturns everymonth since it launched, even Marchand April 2005 when most of itscompetitors were losing. It has alsoappeared in Bloomberg’s top 10 performersamong European managedevent-driven hedge funds four times,coming second in October 2005. Its sterlingshare class has delivered annualised returns of20.2% since inception.Osmium is partly owned by The Genesis Foundation, a charitywhich owns 10% of the management company. “Tithing is anessential part of what we do. The Genesis Foundation additionallybenefits by receiving 0.5% of Osmium’s 2% annual managementfee. The 2% is paid monthly pro rata directly to the managementcompany in the normal way, who then pays 25% of this incomedirectly to the charity. Genesis gives this money to a range ofglobal charities, with 50% going to African charities, includingHIV/Aids and self-sufficiency projects,” Kuchanny explains.Kuchanny’s family are based in Zambia, and he chairs theboard of trustees for a UK-based charity involved in HIV/Aids there.The other 50% is donated to other areas, with investorsencouraged to suggest worthy causes. Suggestions for investmentso far have been limited due to the still-small size of the fund,but as it grows, Kuchanny is optimistic it will prove popular withinvestors. “TCI are the only ones that come to anyone’s mind ashaving a charitable element to their structure.”However, Osmium changed its management fee from 1.5% to2%, with the extra money going directly to Genesis.FUNDAMENTALSName of manager: Chris KuchannyName of fund:Osmium SpecialSituations FundAddress of manager: Penthouse Suite,129 Front St,Hamilton, HM12,BermudaFurther information: +1 441 296 7131Launch date of fund: 15 March 2005Size of portfolio: $20mOpen or closed? OpenTarget annualised return: 20.2% (£), 19.8% ($)Geographic focus: GlobalStrategy:Special sits (equity)Administrator:Dundee LeedsPrime broker:UBSManagement/perf. fee: 2%/20%Domicile/listing: Bermuda/NilShare classes/currencies: GBP, dollarMinimum investment: £500,000/$1mRedemption:MonthlyEnvisioned capacity: $400m (hard close)THE BEAUTY OF BERMUDAKuchanny’s previous life as a proprietary traderwas based in London, where he lived for anumber of years, but he says he was no longertied to the lifestyle there anymore. “I wanted abit more greenery, a more outward-bound-typelifestyle,” he says. “In terms of the way I trade,there is no particular advantage to me being inLondon. I’m not reliant on going and seeing com-GLOBAL GIVINGpanies in person. It’s not that type of strategy.In the rare instance we need to, we can catch aplane,” he adds.Neither does he see this as particular to hisown strategy. “There are relatively few fundsthat really do go and kick the tyres and have tomeet companies face-to-face.“Today, telecommunications are sogood, and so fast, you can have a teleconferencewith someone and lookthem in the eye when you ask thema question,” he says. “The advantagesof face-to-face meetings, withthe speed and quality of telecommunications,are lessening.”Kuchanny had already visited the island, andknew a hedge fund and a hedge fund sales groupbased in Bermuda who were able to recommendit. “Bermuda is great from a number of perspectives.From the lifestyle perspective it is dramaticallybetter. It’s more outward-bound, we havea large garden, which I couldn’t have living inKnightsbridge.”Tax is another factor: “There are big taxadvantages. It’s a great offshore jurisdiction. Ofthe offshore jurisdictions Bermuda is leaguesahead in terms of legal protection. The Court ofAppeal in Bermuda is a UK privy council, so ifyou have a legal issue in Bermuda you are prettymuch under UK law. And the Bermuda MonetaryAuthority (BMA) is a good, well-known regulator,”Kuchanny says.He also finds the time-zone convenient, “withinhitting distance of every time zone,” he says. “Itis very difficult to trade Asia based in London,you’ve got to be up in the middle of the night.”He also notes the island, with its large ex-patriatecommunity, is relatively urban with bars andrestaurants, and schools, making it an obviouschoice for managers with families. The only disadvantageis the distance from his investors, whoso far are predominantly European – thougheven that is not a deal-breaker. “Investors enjoycoming over to Bermuda,” he says.Osmium plans to expand its investor-base inthe US, for which its location will be even less ofan issue.www.hedgefundsreview.com May 2006 | HEDGE FUNDS REVIEW | 39

ADMINISTRATION/DIRECTORSHIPSDirectors, administrators, andtheir fiduciary responsibilitiesIt’s not all beer and skittles forfund directors, explains MeridianFund Services’ Thomas Davis, andadministrators are well-placed totake on the responsibilitiesAs the hedge fund industry matures, there isan increasing debate about which entity, entities,person or persons should be charged withprotecting shareholders’ interests. Although Iwill be presenting my views from an offshore(Bermuda/Caribbean) perspective, I thinkmany of the principles discussed have relevancefor effective corporate governance foronshore hedge funds as well.One advantage of having been in the administrationbusiness since 1979 is that I have beeninvolved in many situations that have triggereda debate about who has a fiduciary responsibilityfor what.My involvement has been both as a seniorofficer of companies that provide administrativeservices, and as an individual who sits onquite a few boards of directors of companies,mostly hedge funds, either as a representativeof an administrator or as a so-called independentdirector (I say ‘so-called’ because if thedirector’s fee is substantial, or if you are in thebusiness of supplying independent directors,how independent are you, really?).When I first started in the fund industry in1979, my then employer, Bank of Bermuda,administered about 15 mutual funds having acombined total asset value of close to $100m.These funds were valued weekly and shareholderscould subscribe and redeem on thatsame basis. Our valuation procedures consistedof obtaining the trades being contracted forby the fund directly from the investment manager,recording these in an NCR mechanicalaccounting machine, transposing the outputfrom this very basic machine to an even morebasic 14 column work sheet. We then hopedthat the relevant Wall Street Journal didn’t getbumped off the Pan Am flight so that we couldcheck the prices we had received via telex fromAUTHOR: THOMAS DAVIS, MERIDIAN FUND SERVICES LTDThomas Davis is president of Meridian FundServices Limited. For further details, contactMeridian Group on +1 441 292 8900 or visitwww.meridian.bmthe investment manager to those that were in thisaugust newspaper.Finally, before the net asset value (NAV) wasreleased, the positions of the fund were checkedagainst the bank’s custodian records.INDEPENDENT NAVAlthough these procedures sound pretty quaintand quite slow, what was present, and what cameunder pressure in the intervening years, was avery high level of independence that went intocalculating the NAV of a fund.The agreement that the bank signed with thefund didn’t have all of the fancy indemnificationclauses you see today. The agreement basicallystated that the administrator was responsiblefor the calculated NAV and if there was an errorthen the administrator was expected to make thefund’s investors good for any loss.On the share-registration side, although theterm ‘anti-money laundering’ hadn’t been coinedas yet, we were always on the lookout for whatwe simply called ‘crooks’.We kept the subscription monies separatefrom the fund’s assets until we were satisfied thatthe shareholders wanting to invest in a fund wereacceptable to both the investment manager andourselves as the administrator.The procedures we employed in those dayswould probably be judged as being less formaland certainly less sophisticated than the currentAML ones, but they were effective.When a shareholder redeemed, the proceedswere segregated from the remaining assets ofthe fund and we wouldn’t release the funds untilall concerned were satisfied that the monies weregoing to a properly authorised recipient.EVOLUTION AND REGULATIONThe mutual fund industry has been through anincredible growth period since 1979. In the US,because mutual funds were registered and ina corporate form, the responsibility for shareholderprotection rested with the SEC, which inturn looked to the boards of directors of thosefunds to make sure adequate protective measureswere in place.US money managers continuously lookedfor the most inexpensive and quickest ways toadminister their funds as the competition for theretail investor was intense.This same mindset was applied to the offshoreequivalents of their onshore funds. US fundmanagers didn’t want to hear about the offshoreadministrator’s fiduciary duties and independentchecks. They were used to a board of directorsassuming such responsibilities. They wantedtheir offshore funds valued at least daily, on thatday, and for a decreasing fee.A FUTURE FOR OFFSHORE ADMIN?When the Ten Commandment rules wererepealed, I thought the days of the offshoreadministrator were numbered as funds couldbe valued onshore on a much more competitivebasis than offshore.40 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com

ADMINISTRATION/DIRECTORSHIPSBut then along came hedge funds. An importantdifference between the development of thehedge fund industry and mutual fund industrywas that onshore hedge funds were, in the main,established as unregistered partnerships orlimited liability companies, which were partnership-likevehicles.Onshore hedge funds had a general partner ormanaging member performing similar duties tothe board of directors of mutual funds. As thegeneral partners or managing members weremostly manager-related affiliates, the mutualfund equivalent of independent directors wasnot present.On the administration front, the investmentmanager either provided the resources in-houseor looked to low-cost service providers to performadministrative tasks. The reason onshoreservice providers could provide these services atsuch low cost was that their agreements stipulatedthat they were providing a book-keepingfunction only. They made it clear that they werenot taking on any fiduciary responsibility.The whole question of fiduciary responsibilitywas being ignored in the early growthyears of the hedge fund industry in the US.CAVEAT EMPTORThe argument went that hedge funds were onlyavailable to sophisticated investors and so theyand their advisers were capable of assessing therisks, including fiduciary risk, associated with ahedge fund in which they were investing.Contrast the above with how hedge fundsdeveloped offshore. The first difference is thatoffshore hedge funds were predominantly establishedas companies. This meant that a boardof directors had to be appointed to oversee theaffairs of the fund.Further, because of taxation considerations,there was a requirement of many boards to havedirectors who were independent of the investmentmanager.TICK THE BOXInitially, the appointment of directors waslooked upon as an organisational detail thatneeded to be filled, and so administrators andoffshore legal advisers traditionally put forwardsenior personnel to fill these positions on a nomineebasis.Secondly, on the regulatory front, duringthe 1990s, there seemed to be one study afteranother of offshore centres to see which centreshad regulations that were equivalent to those inplace in ‘developed’ countries and which did not.The consequence of being adjudged as nothaving comparable legislation was getting onan international body’s dreaded black list, a sureway for an offshore jurisdiction to be excludedfrom being a host nation for international business,including offshore hedge funds.To avoid getting on the list, or, for some jurisdictionsthat were initially on the list to get offit, offshore jurisdictions had to update variouspieces of legislation to improve transparencyand to increase the oversight role of a jurisdiction’sregulators.In addition, their legislatures were expectedto adopt anti-money laundering legislation andput in a related system of enforcement.For these enhanced regulations to work, theregulators needed to look to someone, or someentity, associated with a hedge fund that theycould hold accountable, to whom they could formallylook as having a fiduciary responsibility.Although no universal pattern has emerged,in my view these responsibilities are falling inthe main to the administrator of a fund and, ultimately,its board of directors.ARE ADMINISTRATORS BESTPLACED TO DIRECT?There seems to be some difference of opinionas to whether an administrator should supply adirector for a fund it administers.In my view it should.The administrator is in a position to monitorthe day-to-day activity of a fund. The officer ofthe administrator serving on the board can usethe employees performing the day-to-day dutiesas his or her eyes and ears as to what is goingon. Items that appear to be unusual can then bebrought to the attention of the officer who can,in turn, make a decision as to whether the mattershould be brought to the attention of the investmentmanager or board. Let me give an example.One of our accountants and his managercame to me to ask my opinion about how a clientintended to deal with new classes of sharesbeing introduced. The original share class didnot employ leverage, but the new classes hadvarying levels of leverage.The accountant was concerned that all of theassets of the fund were being held in only oneaccount at the prime broker.“The whole question of fiduciaryresponsibility was being ignored inthe early growth years of the hedgefund industry in the US. The argument(was) hedge funds were onlyavailable to sophisticated investors(with) advisers capable of assessingrisks, including fiduciary risks.”The chief executive officer of the investmentmanager, a very strong-willed and opinionatedindividual, who was also on the board of directorsof the fund, had told the accountant thatonly one brokerage account was needed becausethe manager had a very sophisticated system inplace for monitoring the amount of leverage thatcould be used by each class, and the consequentamount of profit or loss that should be allocatedto each class.I decided that we should have a conference callwith the prime broker and investment manager.The call started off well enough. There were anumber of very fast-talking brokers agreeingwith the equally fast-talking and forceful chiefexecutive about the merits of the way the accounthad been set up.We kept questioning how the assets of theshareholders who thought they had invested ina non-levered class were being protected frompotential liabilities of the levered classes.Finally there was a question from a person onthe conference call who seemed to understand thepoint being raised. It was a compliance officer ofthe prime broker.The chief executive immediately ended thecall and then sent me a stinging e-mail askingme to explain why he shouldn’t immediately dismissmy firm as the administrator of his fund.He threatened to sue us for the losses hisfirm would suffer, because we had unravelled inone telephone call what had taken him severalmonths and even more several thousand dollarsto put in place.My response was simple: I did not organisethe call as the administrator of his fund, I organisedit in my capacity as a director. The directorsthen formally met, the issues were discussed andthe fund reorganised into a segregated-cell companywith each cell having a separate account atthe prime broker.HEALTHY DEBATEThe above example also illustrates the importanceof having a representative of the investmentadviser on the board of directors.We were able to have a healthy debate aboutthe rights of shareholders and how these neededto be protected even if it would be more efficientand less costly, and hence provide a higherreturn to investors, if assets were lumpedtogether in one account.Actually, the membership of the board of thisparticular fund was, in my view, ideal.There was a third member of the board whowas independent of the investment managerand the administrator. Although a formal votewas not necessary, it was very helpful to haveto explain the issues to a non-involved party.If the dispute could not have been resolvedbetween the manager and the administrator,then the independent director would have had tomake a decision on whether to support the manageror the administrator. Having the debate wehad, and reaching the decision we did, was, inmy view, very beneficial for the investors.FIDUCIDARY RESPONSIBILITIESIn many ways, I think we have come full circlefrom when I first entered this industry in 1979.Whereas in the early days, the offshoreadministrators – at least those based in Bermuda– voluntarily took on fiduciary responsibilities,now the participants in the industry aredemanding that we do.The directors have an important oversightrole but cannot be expected to know the minutiae.Audit firms concentrate on their importantrole of attesting to the fairness of the financialinformation being presented to shareholdersevery year.The prime brokers don’t seem to want tohave any part to play in fiduciary oversight. In alightly regulated industry, that leaves the administratorto perform the important role of investoroversight. Now that a majority of the investmentmanagers of hedge funds in the US have had toregister as advisers with the SEC, it will be interestingto see which entity, entities, person or personsassociated with a US-based hedge fund willbe expected to represent interests of investors.At the current time, the chief complianceofficer of a registered adviser is expected to playa major role. What is unclear is how much ofthese responsibilities, if any, the SEC will allowto be delegated to third parties.As more and more advisers are outsourcingthe administration of their US-based funds tothird-party administrators, the administratorsare well placed to assume any fiduciary dutythat the SEC allows to be delegated.www.hedgefundsreview.com May 2006 | HEDGE FUNDS REVIEW | 41

EXCHANGESOffshore exchanges get Dublin in their sightsThe Bermuda Stock Exchange isnot alone in its hunger for businessfrom hedge funds and funds offunds, as Solomon Teague reportsListing on the Bermuda Stock Exchange (BSX)is an option for funds domiciled in any one of 16jurisdictions, or elsewhere if the funds are limitedto qualified investors. This is achieved by investinga sum of more than $10,000 or passing an accreditationtest similar to Regulation D in the US.An application to list on the BSX must be sponsoredby a BSX trading member or listing sponsor,and must be supported by a number of documents.These include:■ a formal letter of application;■ a draft prospectus or offering memorandum;■ a certificate of incorporation or the equivalent;■ a certified copy of the issuer’s constitution;■ audited annual reports for three years, or sinceinception;■ certified copies of resolutions authorising theissue of securities;■ issuer’s undertakings and directors’ declarationsand undertakings;■ document of title to be used for the issue; and■ a certified copy of material documents referredto in the prospectus.Filing these ensures a response from the listingcommittee within seven business days of the submissionof a complete application.PROSPECTUS MATERIALThe draft prospectus, to which the BSX seeks torespond with comments within two business daysof submission, “must contain information thatenables an investor to make an informed assessmentof the activities, assets and liabilities, financialposition, management, and prospects of theissuer,” according to the BSX.It must also contain details of profits and lossesand the rights attached to offered securities. ListedGregWojciechowski,BSXfunds have a continuing obligation to notify theBSX and shareholders of events likely to affect theprice of listed securities, to allow them to evaluatethe financial position of the fund.Net asset value (NAV) calculations, auditedannual reports and shareholder notices must alsobe submitted. Initial fees are payable on applicationfor the BSX listing, while annual fees are chargedat a rate of $2,000 per share class on the first twoshare classes, or $5,000 as a fixed charge for threeto 15 classes or $10,000 for 16 to 25. For more than25 classes, each is charged individually at $400.The BSX has worked on allowing both NorthAmerican GAAP and IFRS, or any other suitable,internationally recognised accounting standardsto underpin the accounts of an entity listed on theexchange. This saves funds from large swings inNAVs that can occur when switching between theaccounting systems.“We’re making sure the risks inherent areclearly stated and the investor can see what it isthey’re investing in. Our approach can be that waybecause most of our clients and most of our targetdemographic is institutional or high-net-worthindividuals,” says Greg Wojciechowski, presidentand CEO of the BSX.Most of the funds listed on the BSX are fairlysophisticated products,” he says. Most clientslisting on the exchange far exceed the minimumsubscription of $10,000.DIFFERENTIATORS“I think if a user or a fund structure really needs alisting, it should be looking at the substance of theexchange on which they are listing,” he adds.“If they are seeking to do it to have regulatoryoversight, then the credibility of the regulatoris important. The only way to firmly establishyour credibility is to show you can run the capitalmarket mechanism,” says Wojciechowski.“The BSX is the only true offshore exchange thathas a full suite of trading, settlement and depositoryfeatures.”Wojciechowski admits the exchange in Hamiltoncompetes with Dublin from the former’s positionoutside the EU.“We’re not bound by the EU listing and prospectusdirectives, so there are some flexibilitiesfor funds that don’t want to qualify for retail consumptionin the EU,” he notes.HISTORY LESSONWojciechowski notes Bermuda’s exchange’s originsdiffer from those of most offshore exchanges.It came about due to the high number of successfullong-standing companies on the islandrelative to the size of its economy. In the earlydays, they raised capital through equity participation,leaving a legacy of a very strong equitymentality, Wojciechowski says.“We needed a structure around the capitalmarket to provide a basic level of investor protection,”he says.“In Cayman and the Channel Islands, theyhave an exchange to support the internationalfinancial mechanisms they are trying to develop,”he adds. “Our exchange does that too, but oursfundamentally came about to protect domesticinvestors.” Consequently, the infrastructure isvery different in both its design and deployment,he says.The BSX’s focus is two-fold. Its regulatoryresponsibilities focus on domestic retail investors,with such duties as providing regulation,equal secondary and after-market access, andassisting issuers with raising capital. “The regulationput in place here provides safeguards butallows creativity and product development,”Wojciechowski says. “Serious players subjectthemselves to voluntary regulation.”INTERNATIONAL FOCUSThe BSX also has a focus on the internationalworld. Primary listings for retail domestic securitiesare treated very differently, or “commerciallysensibly” with regards to international issuers.“Because we’re targeting an institutional orhigh-net-worth base, they have the economicwherewithal either to understand the product orseek the assistance of a professional,” he says.This leads to a disclosure and transparencyapproach, rather than a prescriptive one.Name ofExchangeInitial cost to listOngoing costs ofbeing listedNumber of hedgefunds listedNumberof FoHFslistedNeed a localsponsor?InternationalrecognitionsData releaseContactdetails/websiteBermuda StockExchange$2,000 per class onthe first two classes,$5,000 three-15classes, $10,000 16-25 classes, $400 perclass for 25+Annual charge ofinitial feesApprox 300 listedfundsAs HFBSX trading memberor listing sponsorrequiredUK FSA, LSEregistered, US SEC,IOSCO affiliatemember, Australian TaxOffice approvedTrade informationdisseminated to keyfinancial informationproviders, i.e. Bloomberginfo@bsx.com+1 441 292 7212www.bsx.comIrish StockExchange€1,900 for EU/€1,980 for non-EUfunds (€900/€940subsequentapplication fee)€1900/€1980per fund for upto five funds,€1150/€1200five-10 funds,€760/€800 perfund after 10 fundsN/A due to difficultyin defining ‘hedgefund’ though mostforeign domiciledfunds are hedgefunds or FoHFsN/A due toreasonscited inpreviouscolumnAn ISE registeredsponsor must beappointed by everyapplicant fundNumerous includingJapan and USAll NAVs notifiedand announcementsreported through the ISEinformation disseminationsystem and are carried byReuters, Bloomberg, othernews services and alsoappear on the ISE websitefunds@ise.ie+353 1 6174255,www.ise.ieChannel IslandsStock Exchange£3,000. Additional£300 per class formulti-class£1,500 per year +£300 per classNot disclosedNotdisclosedMust be sponsoredby a CISX member,have relevantexperience and beestablished in the CIUK FSA, InlandRevenue, IOSCO andWorld Federation ofExchanges+44(0)1481713831,www.cisx.com42 | HEDGE FUNDS REVIEW | May 2006 www.hedgefundsreview.com