The hedge fund centre on the move - Incisive Media

THE VOICE OF THE ALTERNATIVE INVESTMENT INDUSTRY
October 2007 l british virgin islands supplement
British Virgin Islands:
<strong>The</strong> <strong>hedge</strong> <strong>fund</strong> <strong>centre</strong> on the move
REGULATION:
A helping but firm hand
<strong>The</strong> BVI’s Financial Services
Commission’s Glenford Malone
oversees <strong>hedge</strong> <strong>fund</strong> regulation.
He outlines the Financial Services
Commission’s philosophy and the
latest, and upcoming,
changes to BVI’s <strong>hedge</strong>
<strong>fund</strong>s laws
ADMINISTRATION:
Minnows to mammoths
Whether you’re in the $1bn club
or still raising <strong>fund</strong> assets, the BVI’s
administrators outline what they
can offer to big and small alike and
explain key regulatory challenges
in the offing, in the BVI and further
afield, to be mindful of when getting
your venture going.
THE CHINA CONNECTION:
Enter the dragon via BVI
<strong>The</strong> BVI’s lawyers explain why
the tax- and regulatory-neutral
Caribbean <strong>centre</strong> is the home of
choice when
it comes to
joint ventures
into China
S6 S10
S15
S4
MUCH A-BUZZ ABOUT THE BVI
Jurisdiction selection
<strong>The</strong> BVI’s a hive of activity with new
<strong>fund</strong>s law and leading service
providers helping <strong>fund</strong>s to run
smoothly. Its
experts explain
what makes this
attractive Caribbean
financial
<strong>centre</strong> tick

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Mr Ed
DavidWalker
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US Editor and this report’s writer
Phyllis Feinberg
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british virgin islands report
Contents
S4-S5 I spy with my little eye reasons to choose the BVI
<strong>The</strong> British Virgin Islands’ expert <strong>hedge</strong> <strong>fund</strong> practitioners explain how the BVI stands above competing
jurisdictions when it comes to domiciling <strong>hedge</strong> <strong>fund</strong>s.While in the past, speed to market may have been
top of the list, Phyllis Feinberg discovers a jurisdiction focused as much on regulation and high standards
of corporate governance, as it is on helping <strong>fund</strong> managers get their product into the marketplace.
S6 <strong>The</strong> regulator in focus
We speak with Glenford Malone, acting director, investment business at the BVI Financial Services
Commission, about <strong>hedge</strong> <strong>fund</strong> regulation on the Caribbean island and find a financial <strong>centre</strong> equally
interested in partnering with other international <strong>centre</strong>s to facilitate <strong>hedge</strong> <strong>fund</strong> business as it is in
assisting managers to get up and running.
S8 Crunch time
When it comes to number crunching, the British Virgin Islands’ auditors know a thing or two. From the
valuing of complex instruments to signing off books of <strong>fund</strong>s involved in illiquid instruments, they sit at the
<strong>hedge</strong> <strong>fund</strong>s industry’s cutting edge.As they explain to Phyllis Feinberg, new ‘fair value’ accounting standards,
such as FAS 157 are set to change the way the industry sets its pricing benchmarks, so picking a savvy
auditor up to date with such changes is key.
S10-S11 Administration – from minnows to mammoths, the BVI can help
Whether you’re in the billion-dollar club or have a smaller, pint-size portfolio, the BVI’s administrators can
help with a plethora of services beyond just NAV. Phyllis Feinberg sat down and asked a few to set forth
what they have to offer large and smaller <strong>fund</strong>s alike.
S12-S13 Divide and conquer? Segregated portfolio companies in the BVI and how to use them
Phyllis Feinberg finds out how segregated portfolio companies work and what their attractions are to
those constructing new vehicles. She also asks the BVI’s leading practitioners whether converting an
existing vehicle to an SPC is possible and worth it.
S15-S18 Enter the dragon via the BVI
<strong>The</strong> BVI as the world’s second largest investor in China? Fancy that! <strong>The</strong> BVI’s experts explain how (and
with which vehicles) to establish a joint venture in the Caribbean island to invest into China – and why with
growing wealth and infrastructure, China should be on every <strong>hedge</strong> <strong>fund</strong>s’ radar screen.
S19 Future perfect
From the Securities and Investment Bill, to keeping set-up prices low, to international roadshows, the
British Virgin Islands is making the most of telling a good story about its proposition for <strong>hedge</strong> <strong>fund</strong>s. Phyllis
Feinberg hears about some of the latest chapters.
S20 Administrator in profile
Fortis Prime Fund Solutions entered the BVI by acquiring Hedge Fund Services (BVI) in 2006. Clayton
Burton, managing director, outlines Fortis’ where to from there, and where to from here, for the global
<strong>hedge</strong> <strong>fund</strong> administration giant.
S21-S22 Hard-nosed flexibility
Sherri Oritz, COO at the BVI’s International Finance Centre makes the case for the BVI globally.
S23 <strong>The</strong> BVI at a glance
All you ever wanted to know – maybe even some things you didn’t need to know – about the British Virgin
Islands
www.<strong>hedge</strong><strong>fund</strong>sreview.com October 2007 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | S3

JURISDICTION FOCUS
Why there’s a buzz around the BVI – the bee’s kn
As the BVI benefits from having all the major offshore
law firms present, its introduction of new <strong>fund</strong>
laws and a regulator actively involved with the local
practitioner industry is a key to its ongoing success,
the <strong>fund</strong> services industry tells Phyllis Feinberg.
Robert Briant, a young lawyer with
Conyers Dill & Pearman in 1998,
went to the British Virgin Islands
to fill in so the one lawyer who
worked in that office could take a
two-week vacation.
Today, he’s the managing
partner in charge of 10 lawyers in
Conyers Dill & Pearman’s British
Virgin Islands office. “I personally
saw how little legal representation
there was down here,” says Briant.
“<strong>The</strong>re were 450,000 companies
there and none of the other offshore
‘magic circle’ offshore law
firms had an office here.” (<strong>The</strong>
‘magic circle’ refers to a group
of large and powerful law firms
in the City of London).
VIRTUOUS CIRCLE
Now all of the so-called offshore
‘magic circle’ law firms — Maples
& Calder, Walkers, Appleby and
Ogier, in addition to Conyers Dill
& Pearman — have offices in the
BVI with thriving practices.
Ogier was the last to solidify
its presence, when it acquired W.
Smith on 1 February 2007. “Essentially
Ogier wanted to be in every
key offshore financial market and
the only one that they weren’t in
was the British
Virgin Islands,”
says Simon
S c h i l d e r,
the partner
now in
charge of
the corporate
and
<strong>fund</strong>s practice
at Ogier
in the
Robert Briant
Conyers, Dill &
Pearman
British Virgin Islands. “With all
the major international players in
the offshore market now in every
key market, Ogier could see where
the British Virgin Islands market
was going,” he adds.
And how did it find W. Smith?
“We’ve been ‘best friends’ with them
for a long time,” says Schilder. “We
had close relations with them for a
long time and anything that they
did in the British Virgin Islands
where they needed help in the BVI
they got us involved in the work.”
Negotiations for the actual
merger didn’t begin until last
year. “<strong>The</strong> negotiations went very
smoothly and the merger has
really only formally cemented our
existing relationship with them,”
Schilder says.
“<strong>The</strong> key markets where work
is going now in the Caribbean are
the BVI and the Cayman Islands,”
according to Schilder.
“It comes down to the fact that
the BVI as a jurisdiction is developing
all of the time and coming
on in leaps and bounds.”
Robert McIntyre, managing
partner of Maples and Calder, in
the BVI, which moved into the BVI
in September 2004, when it purchased
Smith-Hughes Raworth &
McKenzie, says “it’s been part of
a trend over the last few years. All
of the multi-jurisdictional offshore
jurisdiction law firms have come
to the BVI because they think it’s a
good place to be.”
RUBICON MOMENT
“<strong>The</strong> British Virgin Islands crossed
a threshold several years ago when
it stopped being lumped together
with many of the other smaller
offshore jurisdictions in the Caribbean
and was talked about as an
important offshore destination in
the same way as Bermuda and the
Cayman Islands,” he adds.
Robert McIntyre says that
Maples and Calder has doubled
the number of lawyers it has in its
BVI office since it bought Smith-
Hughes in 2004.
<strong>The</strong>re are very good reasons
why the BVI has become a major
offshore financial center, second
only to the Cayman Islands in the
number of <strong>hedge</strong> <strong>fund</strong>s domiciled
here, according to Briant.
MOMENTS OF CLARITY
“<strong>The</strong>ir regulatory system and corporate
laws are the best and easiest
to understand in the offshore
world,” he says. In addition, the BVI
“<strong>The</strong> pie is growing faster than it can be sliced up.
<strong>The</strong>re is so much more work coming to the jurisdiction.
It is transforming from a purely incorporation
jurisdiction to a transactional jurisdiction.”
Robert Briant, Conyers, Dill & Pearman
Business Companies Act passed in
2004, which is based on the Delaware
corporate law “is the most
efficient piece of corporate legislation
out there,” adds Conyers Dill &
Pearman’s Briant
“<strong>The</strong>y have momentum in the
British Virgin Islands.”
<strong>The</strong>re are now 800,000 companies
domiciled in the British Virgin
Islands and about 2400 <strong>hedge</strong> <strong>fund</strong>s.
“<strong>The</strong>re’s a lot of business coming
here and we’re all competing for it,”
Briant says.
“But the pie is growing faster
than it can be sliced up. <strong>The</strong>re’s
so much more work coming to the
jurisdiction. It’s transforming it
from a purely incorporation jurisdiction
to a transactional jurisdiction.”
Every law firm on the island
is hiring, according to Briant.
<strong>The</strong> British Virgin Islands is
attracting businesses from all over
the world now.
“People in multiple jurisdictions
need to structure transactions in a
neutral jurisdiction,” he says.
TAX NEUTRALITY
Hedge <strong>fund</strong>s may have United
States managers, but also European
and Australian investors are
in the <strong>fund</strong>. <strong>The</strong>y need to set it up
in a neutral jurisdiction.
“<strong>The</strong>re’s no tax on an intermediate
vehicle here and the laws are
based on the English legal system
with the House of Lords being the
ultimate court of appeal,” Briant
says. <strong>The</strong> importance of a BVI
presence is also demonstrated by
auditor KPMG, which returned to
BVI in 2005 after having its former
British Virgin Islands unit leave
the KPMG network and join Baker
Tilly in 2003.
“Our return was client-driven,”
says Tanis McDonald, senior manager.
“BVI has an important role in
global corporate structures.”
Moreover, after the firm left the
KPMG network, “we knew we
needed to be back in the British
Virgin Islands so we could continue
to provide a seamless service to our
clients,” she adds.
“Across the board everyone
wanted us back here — our <strong>fund</strong>
clients wanted us back and corporate
clients wanted us, too.
“In the last year our client base
has expanded quite rapidly (in BVI).
<strong>The</strong> majority of this new business
is <strong>hedge</strong> <strong>fund</strong>-related,” she says.
In addition, two major <strong>fund</strong>
administrators also opened offices
in BVI in the last year. Conifer, the
San Francisco-based <strong>fund</strong> administrator,
opened an office and Fortis
Prime Fund Solutions, a subsidiary
of the financial services giant,
bought BVI-based Hedge Fund
Services Co., creating an instant
presence on the island.
OFFSHORE CENTRE
“BVI is coming into its own as an
offshore financial center,” says Peter
O’Connell, managing director and
head of Conifer’s BVI office. “We
wouldn’t have moved to the British
Virgin Islands unless we were sure
it was a major offshore center for
financial services firms. Now it’s
maintaining a solid second place to
the Cayman Islands in the number
of <strong>hedge</strong> <strong>fund</strong>s here, and I think the
gap will narrow further.”
“<strong>The</strong>re are several ways to grow
and we chose to do it through
acquisition,” says Clayton Burton,
managing director, Fortis. <strong>The</strong> firm
liked the way that HFS was structured
— “they had a nice book of
business,” he says — “and we could
incorporate it into our systems and
business processes.”
HFS had about $4bn in assets
under administration and 70 <strong>fund</strong>
clients which could be easily added
to Fortis’s worldwide $280bn in
S4 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

assets under administration and
750 <strong>hedge</strong> <strong>fund</strong> clients.
“We’re very excited to be down
there,” says Burton
“<strong>The</strong>re are a lot of large <strong>fund</strong>s
down there and it’s a lower cost
environment for registration and
the cost of services.”
GOVERNMENTAL SUPPORT
“BVI has really taken off in the
last couple of years,” says Heidi
de Vries, managing partner of
Walkers’ BVI office. She points out
that the BVI Business Companies
Act which was enacted in 2005
“is very flexible and innovative
— <strong>fund</strong>s can be structured in a
flexible way.”
She also points to the BVI Financial
Services Commission being
granted full membership to IOSCO
as providing an acknowledgement
that BVI regulatory standards are
on a par with the rest of the world.
And she points to the arrival of
major service providers—including
all the major offshore law firms
and all the major accounting firms,
as well as Fortis and Conifer, as
giving a strong push to BVI’s offshore
business.
“<strong>The</strong> infrastructure here has
improved a lot,” she says. “<strong>The</strong>y
are up to speed on new regulations
and as the jurisdiction continues to
grow and as the next generation of
<strong>fund</strong>s comes, they have laws to deal
with it in a responsive way.”
“We always thought BVI was
well regulated and respected,” says
William Harris of Folio Administrators.
“<strong>The</strong>re’s no exemptive legislation
like there is in the Cayman
Islands,” he adds.
“We’re also seeing the infrastructure
of the island getting
much stronger,” says Folio Administrators’
Daniel Cann (pictured,
page S4). He also points out that,
because of the weakness of the
dollar, certain offshore domiciles
in Europe “are twice as expensive
as BVI. Also the BVI is “less rigid
than other offshore jurisdictions.”
“<strong>The</strong> territory has matured from
being a traditional start-up center
to one which is primarily used for
the launch of new <strong>fund</strong>s by institutional
managers,” says Kieron
O’Rourke, partner at Harneys’
<strong>fund</strong>s practice in the BVI.
“<strong>The</strong> BVI is a strong second to
Cayman for the domicile of <strong>hedge</strong>
<strong>fund</strong>s,” he says.
Ogier’s Schilder adds that as it
is slightly cheaper to set up and
maintain <strong>fund</strong>s in the BVI than in
Cayman, this cost saving is often
an important consideration for
start-up investment managers.
Schilder adds that the BVI is for
some United States counsel the preferred
offshore domicile.
“One firm we work with likes BVI
because of the ease with which you
can amend a <strong>fund</strong>’s constitutional
documents – its memornadum and
Articles of Association – in order
to create additional share classes,”
he says. “To amend a <strong>fund</strong>’s memorandum
and Articles of Association
and so create a new share class
here you need only the approval of
directors, but in Cayman you also
need shareholder approval. <strong>The</strong>re
are some US lawyers who prefer the
using the British Virgin Islands for
this very reason.”
On a more mundane note, he notes
that, as the BVI sits in the same time
zone as the United States east coast,
it makes doing business easy.
In a note to clients on the virtues
of the BVI, Walkers says,
“as a British Overseas Territory,
the BVI offers all the security and
stability traditionally associated
with the British flag. <strong>The</strong> territory
is responsible for its own internal
self-government. <strong>The</strong> BVI has an
independent legal and judicial
system based on English Common
Law, with a right of final appeal to
the Privy Council in London.”
It goes on to say that while the UK
remains responsible for the British
Virgin Islands’ external affairs,
defense, internal security and the
courts, “based upon BVI’s integrity
and responsiveness to the interests
of the financial community, it has
become the only Caribbean Overseas
Territory to which the British Government
has devolved responsibility
for developing and managing its
own financial services industry.”
<strong>The</strong> note also points out that
“BVI offers state of the art telecommunications,
infrastructure and
support services, and a well-trained
management and workforce. <strong>The</strong>
BVI enjoys one of the world’s
highest literacy rates at 98% and
has developed a wide range of
specialised programs to train its
people in financial service skills,”
Walkers says. In a presentation he
made to potential BVI companies,
Mark Chapman, partner at Deloitte,
said that BVI “is an island paradise…but
more…it has modern
laws, a tax-free environment and
sound regulatory procedures.”
RELEASING THE BURDEN
Chapman also points out a “close
and effective working relationships
between the financial industry and
the BVI regulatory authorities,”
and “efficient and reasonable government
regulation and the absence
of burdensome bureaucracy.”
Chapman, in an interview, also
said that more and more investment
managers “are physically locating
here. If you’ve got a manager who
wants to demonstrate they are offshore,
there’s only one way to do it
— move their offices here.”
He adds that the managers “see
the advantage of operating a management
company out of here.”
In his presentation, Chapman
points out other things that favor
BVI, including “attorneys, bankers,
administrators and accountants
with diverse expertise drawn from
around the world; no restriction on
the amount of money which may
be brought into or taken out of the
BVI and companies can easily be
listed on stock exchanges in other
countries such as Luxembourg, Ireland
or Bermuda.”
He also pointed to the BVI Business
Companies Act (BCA) and
said that “the concept of capital
has been replaced with rules which
determine when a company may
make distributions.
“<strong>The</strong> Business Companies Act
acknowledges that the concept
of preserving share capital is an
archaic method of protecting creditors
and shareholders.”
Deloitte’s Chapman also points
to the power that the Act gives to
directors of British Virgin Islands-
registered companies.
“Directors of a British Virgin
Islands company can be given the
power to amend its Memorandum
JURISDICTION FOCUS
nees when it comes to domiciling <strong>hedge</strong> <strong>fund</strong>s
Mark Chapman
Deloitte
Tanis McDonald
KPMG
“We always thought BVI was well regulated and
respected. <strong>The</strong>re is no expemptive legislation like
there is in the Cayman Islands. We’re also seeing the
infrastructure of the island getting much stronger.”
Daniel Cann, Folio Administrators
Robert McIntyre
Maples & Calder
Calum McKenzie
Folio Aministrators
Simon Schilder
Ogier
and Articles of Association and to
vary shareholders’ rights without
requiring shareholders’ consent,”
he says.
<strong>The</strong> benefits of these provisions
are that “this avoids time delays
and legal costs when restructuring
is required,” and points out that
“other jurisdictions require shareholder
consent.”
SEE-THROUGH ADVANTAGE
Although some firms like offshore
jurisdictions because of their supposed
secrecy, Robert Briant says
that BVI supports transparency in
its laws. <strong>The</strong> type of secrecy associated
with a country like Switzerland
is not here, and Briant believes
it helps boost the reputation of the
British Virgin Islands.
“A proper request (to appropriate
authorities) concerning criminal
conduct will get information from
the British Virgin Islands,” says
Briant. “<strong>The</strong> company structures
here are not about tax evasion or
even tax avoidance.”
Moreover, he points out, “there is
a tax information exchange agreement
between the British Virgin
Islands and the United States and
the British Virgin Islands is committed
to entering into them with
all OECD member countries.”
Briant says that while some
members of the US Senate are
proposing laws to “stop tax haven
abuse” which are aimed at places
like the British Virgin Islands and
Bermuda, they are really not aware
that there is reasonable transparency
in the laws.
He adds “there are jurisdictions
where people can hide assets and
which won’t give out information
to authorities. “This is not one of
them.”
www.<strong>hedge</strong><strong>fund</strong>sreview.com October 2007 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | S5

egulator in profile
Wisdom through experience
While the BVI sets itself up as a prime position for
<strong>fund</strong>s’ domicile, Glenford Malone from the
Financial Services Commission tells Phyllis Feinberg,
the FSC also brings some weighty powers to help
allay investors’ fears if things in <strong>fund</strong>s set up there
should go awry...
<strong>The</strong> British Virgin Islands Financial
Services Commission (FSC)
is the regulatory authority for
all financial services businesses
operating within the British Virgin
Islands.
<strong>The</strong> Securities and Investment
Business Act is proposed legislation
that will cover the investment business
industry. “We will develop new
securities legislation in the coming
months or early next year,” says
Glenford Malone, acting director,
investment business at the BVI
Financial Services Commission.
“<strong>The</strong> contents of the law are yet
to be determined but it will contain
regulation of intermediaries and
public offerings.”
“As a regulator we strive to have
the best possible legislation,” says
Malone, pointing out that the FSC
has been granted full membership
in IOSCO.
INDUSTRY CHIT-CHAT
<strong>The</strong>re will be consultations with
financial professionals working
in the BVI for the new legislation.
“BVI as a jurisdiction has always
prided itself on having good relations
with people in the financial
services industry—we consult with
them on a regular basis,” he says.
“Insofar as possible, the FSC
includes consultations with the
financial industry as part of
the legislative recommendation
process where we advise the government
on bills,” says Malone.
“One of our major responsibilities
is the protection of investors,”
says Malone.
CROSS-COUNTRY FRIENDSHIP
<strong>The</strong> Financial Services Commission
prides itself on good relations with
other jurisdictions and co-operation
between them. In August, the FSC
signed a Memorandum of Understanding
with the Jersey Financial
Services Commission strengthening
its commitment to international
cooperation, information sharing
and investigative assistance.
Robert Mathavious, managing
director and CEO of the FSC said
that “as premier international
finance centers, it is vital that we
engage and co-operate to effec-
tively serve the international community
and to ensure that our
regulatory regimes benefit from
a robust exchange of information.
This MoU certainly helps
us achieve this goal as well as
strengthens our working relationship
with Jersey which has prospered
for many years.”
MoUs have been a vital tool for
the FSC. In the last five years, the
FSC has entered into nine MOUs
fostering a greater level of international
communication and cooperation.
<strong>The</strong>y have been valuable
assets that greatly enhance the
overall regulatory regime in the
British Virgin Islands.
Through the MoUs, the authorities
involved recognise the importance
of mutual assistance and
exchange of information. <strong>The</strong>
MoU underscores the authorities’
willingness to co-operate with each
other on the basis of mutual trust
and understanding.
<strong>The</strong> BVI published a Handbook
on International Cooperation in
September. A large part of the
book deals with the FSC’s co-operation
with international regulatory
authorities and its power to
gather information and facilitate
co-operation with foreign regulatory
authorities and domestic
law enforcement authorities, as
well as effectively enforce its own
domestic regulatory requirements.
<strong>The</strong> FSC’s duty to co-operate
and the scope of assistance it must
provide requires that FSC take
such steps as it deems appropriate
to cooperate with foreign regulatory
authorities.
<strong>The</strong> co-operation extends to persons,
whether within or outside the
BVI, who perform functions relative
to the prevention or detection
of financial crime; to the sharing
of documents and information
that the FSC is not prevented from
disclosing by virtue of any enactment;
and to making requests to
foreign regulatory authorities for
legal assistance.
CRIMINAL INTENT
<strong>The</strong> Handbook says that the definition
of a financial crime is an
offence which involves money laundering,
the financing of terrorism
or misconduct in, or misuse of
information relating to a financial
market. <strong>The</strong> FSC has the power to
request documents and information
for investigations, the handbook
says. <strong>The</strong> FSC has the power, where
it is reasonably required, for its
function or in ensuring compliance
with any financial services legislation,
to require a person to provide
to the FSC specified information
or any information of a specific
description, or to produce specified
documents or any documents of a
specified description.
To get this information, the FSC
must give written notice to the
person involved that specifies the
place where, the time within which,
the form in which, the manner of
“As a regulator we strive to have the best possible
legislation. BVI as a jurisdiction has always prided
itself on having good relations with people in the
financial services industry.”
Glenford Malone, BVI Financial Services Commission
verifying or authenticating, and the
person to whom the information or
document is to be provided or produced.
In addition, the Financial
Services Commission also has the
power to apply to a Magistrate
for a search warrant to conduct a
search of any premises and retrieve
any documents or information to
which the warrant relates or to take
copies or make extracts of or to
require any person on the premises
to provide an explanation of any
such documents or information.
<strong>The</strong> FSC also has the power to
quiz a person under oath during an
investigation. This may be before a
magistrate or before and FSC Commissioner
or officer.
INTERNATIONAL HELP
When the FSC receives a request
for assistance from a foreign regulatory
authority and it agrees that
the foreign regulatory needs the
assistance for its regulatory functions,
it may perform the following
in rendering assistance:
b <strong>The</strong> FSC may use its powers
to request documents and information;
b It may appoint such person or
persons as it considers necessary as
examiners to investigate any matter
that is part of the request;
b <strong>The</strong> FSC may use its power to
examine persons under oath; and
b It may disclose information or
provide relevant documents to the
authority making the request.
<strong>The</strong> Handbook says, when
deciding whether or not to provide
assistance to a foreign regulatory
authority, it is entitled to consider
whether corresponding assistance
would be provided to the FSC in the
country or territory of the foreign
regulatory authority; in doing so the
FSC may require the said authority
provide a written agreement to provide
corresponding assistance when
requested, the essence of international
co-operation.
Before providing assistance, the
FSC may also consider if the matter
is a breach or possible breach of a
law or other requirement that does
not have any close parallel in the
BVI or involves the assertion of a
jurisdiction that is not recognised
by the BVI; the seriousness of the
case involved and its importance to
persons in the BVI; the relevance
of the information or documentation
request to which the request
for legal assistance relates; and
whether it is otherwise appropriate
in the public interest to provide the
legal assistance sought.
PRIVILEGED PAPERS
<strong>The</strong> Handbook also includes information
on the release of privileged
information and documents. It
says a person may not be required
to produce, disclose or permit the
inspection of any information or
document that he or she would be
allowed to refuse to disclose or produce
on the grounds of legal professional
privilege.
This relates to information or
documents that come to a legal
practitioner in privileged circumstances.
However, no information
is considered privileged if it is communicated
or given with a view to
furthering any criminal purpose.
One of the primary functions of
the Financial Services Commission
is to protect the public interest by
providing statements advising the
public against any dealings with
certain persons or businesses it
considers undesirable, the Handbook
says.
In particular, the Financial Services
Commission may issue statements
for the purposes of protecting
the public, within or outside the
British Virgin Islands, against any
financial loss that may arise from
the dishonesty, incompetence, malpractice
or insolvency of persons
that are engaged in financial services
businesses in the BVI; protecting and
enhancing the reputation of the BVI
as a financial services center; and
reducing crime and other unlawful
activities relating to the financial
services business.
S6 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

AUDIT
A complex crunch
Hedge <strong>fund</strong>s’ edge is auditors’ challenge, the BVI’s
audit commuity tells Phyllis Feinberg, as they
explain what constitutes best practice amid new
instruments and accounting standards that face
them every day
“In an ideal world all the investments
that a <strong>fund</strong> holds would have
a quoted market price,” says Mark
Chapman, partner at Deloitte.
“As products become more
complex today it is sometimes not
straightforward to obtain the fair
market value for investments.”
Valuing securities to get <strong>hedge</strong>
<strong>fund</strong>s ready for their audits is
sometimes difficult as their investment
products become more and
more complicated.”
“A lot of background comes from
the broker’s statement,” says Kay
Reddy, managing director of Blenheim
Fund Services (BVI). “When
a discrepancy arises in valuing a
<strong>fund</strong>’s assets we have to take extra
steps.” She adds that some administrators
prepare general ledgers
from brokers’ statements. “I think
that’s flawed,” she says.
“We want to account for each
transaction unless it is a <strong>fund</strong> of
<strong>fund</strong>s,” she adds. “We do make
sure the numbers are correct—it’s
important to have someone who’s
knowledgeable to give advice to (a
<strong>fund</strong>’s) key people.”
Hedge <strong>fund</strong>s are investing in
more “exotic” products, according
to Peter O’Connell, managing
director at Conifer. “Our challenge
is coming up with ways to value the
securities. We may use a specialist
independent valuation agent. We’ve
done it for a real estate <strong>fund</strong>. It
presents real challenges.”
Valuing securities to prepare
financial statements and get a <strong>hedge</strong>
<strong>fund</strong> ready for audit “involves extra
preparation and we charge extra
for it,” says O’Connell. “Only the
biggest clients have the ability to
do it in-house.” Clayton Burton of
Fortis Prime Fund Solutions says,
“we download information from the
prime broker and use industry specialists
to help value harder stocks.”
He points out that investments in
<strong>hedge</strong> <strong>fund</strong>s “are sometimes quite different
from those in other markets.”
Since an auditor can’t audit a
<strong>fund</strong> for which it’s provided the
valuation of the securities, “we rely
on valuations from market makers,”
says Ryan Geluk of BDO Binder.
Geluk says he would go to BDO’s
pricing department in New York,
for a difficult valuation.
“We request information and
look at the reputation,” of the firm
providing the valuations, he adds.
Deloitte’s Chapman says that “we
look at fair value on a case by case
basis. Where we can’t immediately
find a fair market value for the
investments, we make sure the <strong>fund</strong>
has used every available source.”
He points out that, “at Deloitte
we have the resources to confirm
the value of even the most complex
securities.”
“We rely on professional thirdparty
pricing sources to value the
securities,” says Nigel MacPhail,
partner at Baker Tilly.
He says that the complexity of
the investments in the <strong>fund</strong> affects
how difficult it is to determine the
portfolio value of a <strong>fund</strong>. He adds
that the amount charged for an
audit is determined “on a case by
case basis,” depending on the difficulty
and size of the <strong>fund</strong>.
Chapman says that there have
been no significant changes in
audit requirements in Europe and
the United States, although “there is
a move to have <strong>fund</strong>s audited under
international standards.”
However, he also says “the
accounting profession regularly
brings out new pronouncements.
Moreover, “whatever impacts <strong>hedge</strong>
<strong>fund</strong>s worldwide affects British
Virgin Islands <strong>fund</strong>s — we apply
exactly the same principles in
terms of accounting and auditing
practices as are applied in the rest
of the world,” he says.
When a <strong>fund</strong> uses US GAAP
accounting or International Financial
Reporting Standards, “any
change affecting the <strong>fund</strong> will
impact the audit,” he adds.
“At the end of the day, in general
a <strong>hedge</strong> <strong>fund</strong> is relatively straightforward
to audit,” according to
Chapman. An auditor looks at the
<strong>hedge</strong> <strong>fund</strong>’s investments and the
fair values of them.
“If the <strong>fund</strong> uses US GAAP,
there’s more disclosure required
than if it uses IFRS—under US
GAAP <strong>fund</strong>s have to disclose the
names of significant security positions.”
Chapman says that a <strong>hedge</strong>
<strong>fund</strong> has to decide which auditing
rules it will use.
“Most <strong>fund</strong>s use International
Financial Reporting Standards or
US GAAP accounting,” says Tanis
Tanis McDonald,
KPMG
Mark Chapman,
Deloitte
Nigel MacPhail,
Baker Tilly
McDonald, senior manager, KPMG.
“We have to follow any changes
that are made to the standards.”
She adds that KPMG “has the
depth of experience globally to
handle any potential future changes
in standards.” A new rule by the
FASB—FAS Statement 157 Fair
Value Measurements — is effective
for financial years beginning after
15 November 2007.
<strong>The</strong> statement establishes a
single authoritative definition of
fair value, sets out a framework for
measuring fair value, and requires
additional disclosures about the
assumptions used to determine fair
value measurements.
“It will have an effect on those
<strong>hedge</strong> <strong>fund</strong> investments that
are already difficult to value, by
requiring that it provide additional
disclosures about the fair value of
the investment,” says McDonald.
She says that additional disclosures
about fair value measurements
require that investments are
classified in a fair value hierarchy
in which there are three levels.
<strong>The</strong> fair value hierarchy refers to
the relative reliability of inputs to a
valuation technique used in arriving
at a fair-value estimate. <strong>The</strong> first
level, according to McDonald, are
investments “that will have a quoted
price in an active market for identical
instruments, such as stocks listed on
a stock exchange.”
Level two — a step up in difficulty
— “might be a security with
an observable price in an active
market for similar instruments
or prices for identical or similar
instruments in markets that are not
active,” says McDonald. However,
besides stocks and bonds, this level
may include securities, such as over
the counter derivatives; exchangetraded
derivatives or possibly an
interest rate swap based on Libor.
“Libor would be the observable
input if available at commonly
quoted intervals for the full term of
the swap,” says McDonald.
“<strong>The</strong> assumption here is that
there are no quoted market prices
for these instruments, but only calculated
fair value based on market
inputs such as yield curves.”
Level three investments are
the most difficult for which to
determine a fair value, according
to McDonald. She says, a good
example of such a security would
be a derivative instrument, such as
Zimbabwe dollar/Malawi Kwacha
30-year currency swap.
“<strong>The</strong>re are no observable FX
rates because it’s long-dated it
cannot be corroborated by observable
market data at commonly
quoted intervals or otherwise for
substantially the full term of the
swap,” she explains.
“When you prepare the financial
statements you have to determine
where the investments fit in this
hierarchy,” KPMG’s McDonald says.
“<strong>The</strong> grayest area is between
levels two and three.” Moreover, she
points out, “because <strong>hedge</strong> <strong>fund</strong>s
have not applied the standard there
isn’t a basis to guide you as to which
level the instrument might fall into.
It’s important for <strong>hedge</strong> <strong>fund</strong>s and
investment companies to liaise with
their auditors and have discussions
about this early on.”
However, she points out, “the new
disclosures required by FAS 157 are
not particularly complicated. It’s
information that should be at hand
from the investment manager, in
which they will be required to provide
input as to the classification of
investments held at each level based
on the valuation techniques and
inputs used.
“What could be controversial is
that the disclosures will make the
level of risk more transparent to the
users of the financial statements.
Investors and potential investors are
likely to be particularly interested in
the amount and type of level three
classified investments.”
Problems come when a <strong>fund</strong> may
have financial problems and an auditor
in good conscience cannot sign off the
audit. Chapman notes: “Sometimes
a <strong>fund</strong> auditor will choose to resign
for any number of reasons and <strong>fund</strong>
managers need to be aware of the
impact on shareholder perception if an
auditor resigns.”
<strong>The</strong> issue of a <strong>hedge</strong> <strong>fund</strong> having
its fiscal year end on a date other than
31 December is also under discussion
for some <strong>fund</strong>s. “If a <strong>fund</strong> does its
audit in June and not December, the
audit fees may well be less,” says
Chapman. However, he says “most
US <strong>fund</strong>s have a December yearend,
but using the calendar tax year
is often not an issue for European
and Far East <strong>fund</strong>s.” He also points
out that for <strong>fund</strong>s of <strong>hedge</strong> <strong>fund</strong>s—
which usually wait for the audits
of the <strong>hedge</strong> <strong>fund</strong>s in which they
are invested before doing their own
audit—the 31 December date is often
a pre-requisite.
At KPMG McDonald says, “we’ve
suggested it (<strong>fund</strong>s changing from
the traditional year-end) and said we
may be more accommodating if they
move their year-end.” She says that by
moving the timing of an audit out of
the traditional busy season, the audit
can be completed more efficiently.
A more efficienct audit can result
in cost savings that could be passed
onto the client. MacPhail says that, “it
would be lovely if a <strong>fund</strong> could use
a year end other than 31 December
and if we could spread the work out.”
However he says Baker Tilly would
be amenable to a lower fee.
“Globally there is a shortage of
good quality accountants,” says
Tanis McDonald. “Salaries have been
the biggest hurdle, a problem which
has been exaccerbated by the recent
weakening of the dollar,” she adds.
S8 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

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administration
From minnows to mammoths, BVI’s
Whether your <strong>fund</strong> is a tadpole or a bullfrog – the
BVI’s administrators make sure they know their
customer and can bring them a plethora of services
on a plate. As you set up, though, they tell Phyllis
Feinberg, don’t expect a lack of due diligence or
any lack of regulatory oversight...
Whether it’s a small <strong>hedge</strong> <strong>fund</strong>
or a large one, the administrative
needs of <strong>hedge</strong> <strong>fund</strong>s domiciled
in the British Virgin Islands don’t
really differ that much, according
to Peter O’Connell, managing
director at administrator, Conifer
Fund Services.
“I’m not sure needs do differ
when investment managers are
looking for service — regardless of
the <strong>fund</strong>’s size,” he says. “<strong>The</strong>y’re
all looking for net asset value
(NAV) customisation (and) smaller
clients want the same customisation
as the large ones,” he says.
ON-TIME DELIVERY
O’Connell adds that <strong>hedge</strong> <strong>fund</strong>
managers want “a timely NAV, an
independent administrator, assurances
of quality service from their
administrator, such as limited staff
turnover, and the depth of contact
with a client.”
Conifer uses a “team approach”
with its clients and three people
from the firm have links to the individual
clients for business continuity
purposes.
Simon Schilder, partner in charge
of the corporate and <strong>fund</strong>s practice
at Ogier in the BVI, says, “small
<strong>fund</strong>s can have complex investments
— and sometimes some
small <strong>fund</strong>s try to do more with the
money they’ve got — so it doesn’t
mean working with a small <strong>fund</strong>
is an easier job.” He says the firm
works with both small managers
and larger ones.
“<strong>The</strong> legal fees you earn to set
up <strong>fund</strong>s are the same, whether the
<strong>fund</strong> has a seed capital of $10m or
$1bn,” he says.
O’Connell says that Conifer bases
its fees on “a mixture of size and
complexity of the <strong>fund</strong>.” In general,
as <strong>fund</strong>s grow the percentage
fee decreases, but the amount of
work it will take to serve a client
also comes into play.
“If it trades US securities it’s
cheaper; if they trade unlisted over
the counter derivatives it will be a
higher price,” O’Connell notes.
“It all boils down to price,” says
Clayton Burton, managing director,
Fortis Prime Fund Solutions in the
BVI. He explains that the cost of
administration is determined by a
variety factors, but for <strong>hedge</strong> <strong>fund</strong>
<strong>fund</strong>s. While its BVI office, together
with the legal team, prepare all necessary
legal documents and handle
the registration and set-up of <strong>hedge</strong>
<strong>fund</strong>s, once the <strong>fund</strong> is set up, the
actual administration is handled by
the firm’s office in the Netherlands.
“Circle has been using outside
trust companies in BVI to handle
setting up <strong>fund</strong>s,” says Cova.
“Now we have our own trust
company in British Virgin Islands
and provide the administration
from the Netherlands.”
WHEN THE LOVE FADES…
“Investment managers need to keep
close to their administrators,” says
Mark Chapman, partner at Deloitte.
He explains that <strong>fund</strong>s ranging in
“<strong>The</strong> strategy for us is different with each client.
We don’t look at a client as mid-, small- or large
size – each client gets a tailored solution. We meet
the clients, find out what their needs are and go
from there.”
Monique Cova, Circle Partners
Peter O’Connell,
Conifer Fund
Services
managers, the final price is the most
important thing.
TAILOR-MADE TO SUIT
“<strong>The</strong> strategy for us is different
with each client,” says Monique
Cova, head of Circle Partners’ office
in BVI. “Each client has different
needs and our solutions are tailormade.
We don’t look at a client as
mid-, small- or large size — each
client gets a tailored solution. We
meet the clients, find out what their
needs are and go from there.”
She also says that the complexity,
not just the size is an important
factor in the fees charged to clients.
“We have a questionnaire that
the client fills out. It depends on
their investment approach, trading
and reporting frequency – it can
be a small <strong>fund</strong> set up in a way
that’s costly to administer — if
they want weekly net asset values,
for example. But it can be the other
way round if a different set-up and
administration structure is chosen.”
Circle Partners’ Cova says, “I
wouldn’t say that small <strong>fund</strong>s
always pay a larger percentage (of
their assets) in fees than mid-size
<strong>fund</strong>s. We talk to the clients and
work with them to give them what
they want.” Circle has what it says
is a unique method of handling its
size from $50m to $100m have to
look after their relationships with
their administrators, “because an
administrator can suddenly say, ‘you
don’t fit our model.’
“Some of our <strong>fund</strong>s that had larger
administrators are being moved to
smaller administrators. You can’t
take your eye off the ball — be close
to your administrator,” he adds.
Chapman says, one <strong>fund</strong> he
works with had been with an
administrator for 10 years when the
administrator suddenly told them it
didn’t want it as a client anymore.
Fortis’ Clayton Burton acknowledges
Fortis “concentrates on larger
<strong>fund</strong>s,” although, “we will deal
with start-ups of $10m to $25m
depending on who the manager is
and his track record.”
Burton says the firm’s natural
client base is <strong>fund</strong>s ranging in size
from $100m to $500m and that
Fortis is now in several searches
for <strong>fund</strong>s with more than $1bn
in assets. “Funds with less than
$100m make up about 15% of our
business; the rest of our <strong>fund</strong>s are
over $100m,” Burton says.
“We work with <strong>fund</strong>s generally
ranging in size from $10m to
$50m,” says Kay Reddy, managing
director, Blenheim Fund Services.
“Large-name clients want to deal
with a large firm. Middle-tier clients
deal with mid-tier firms.”
FACE-TO-FACE CONTACT
Blenheim Trust recommends that
people setting up <strong>hedge</strong> <strong>fund</strong>s
visit the British Virgin Islands to
meet with administrators, bankers,
lawyers and other professional
resources. Reddy says it’s important
for a start-up <strong>fund</strong> “to know
you’ve been around for a while and
will be around for a while.”
Blenheim is “more of a boutique
operation,” says Reddy.
“We don’t pigeon-hole clients in
certain boxes. Each <strong>fund</strong> is slightly
unique. We hold preliminary meetings
with clients to ascertain their
needs and we can react quickly to
develop new strategies for a manager
who wants to launch a new
product,” she says.
<strong>The</strong> average administration fee
for small <strong>fund</strong>s is 20bps, which
goes down to 10bps–15bps for
larger <strong>fund</strong>s, according to Reddy.
“Our largest <strong>hedge</strong> <strong>fund</strong> is around
$500m to $600m. But, if we take out
our top 15 <strong>fund</strong>s, the average size
of the <strong>fund</strong>s we administer is small,
$30m to $40m,” says Daniel Cann,
marketing director of Folio Administrators,
which administers 103
<strong>fund</strong>s with $5bn in assets.
He says his firm focuses on providing
a value-added service to
“building a strong relationship with
our client during the set-up and incubation.
<strong>The</strong>n when they grow, they
stay with us,” he says.
Folio provides a full range of
services to <strong>hedge</strong> <strong>fund</strong>s so potentially
“all they have to do is trade
the accounts and we do the rest.”
Folio “was set up specifically to
provide high value services to niche
<strong>fund</strong>s,” says Calum McKenzie, a
director of Folio Administrators.
“<strong>The</strong> person administering the
<strong>fund</strong> has a close relationship with
it from day one. And we have client
liaison managers that deal with the
<strong>fund</strong>s all the time.”
“We provide a full range of client
services under one roof,” says Mara
Alido of ATU Fund Administrators.
“In addition to <strong>fund</strong> administration
we can also provide
banking, custody and corporate
trust services. We focus on giving
specialised services; we have topquality
systems and resources.”
According to Alido, “each administrator
has a different approach.
“For us, we’re not the most expensive
or least expensive, we focus on
offering quality,” she says.
S10 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

REDUCING THE BURDEN
Funds “are looking to rely on their
administrators to deal with third
parties, such as custodians and
brokers, auditors, the regulator,”
she adds. “This way the managers
can concentrate on <strong>fund</strong> management
and don’t have to worry
about the administrative issue.”
<strong>The</strong> “value added,” she
explains, occurs when administrators
deal efficiently with regulatory,
shareholding reporting, and
other ancilliary issues in adition
to the mainstream administration
tasks.” Alido says, “sometimes a
small <strong>fund</strong> requires a lot of work,
while larger <strong>fund</strong>s can be relatively
straightforward.”
In particular, “if it’s a promoter’s
first <strong>fund</strong>, they will need more guidance
to set up the <strong>fund</strong>,” she says.
ATU has a core business of
medium-size <strong>fund</strong>s, according to
Alido. “We have start-ups from
$10m and up — we consider ourselves
to be a medium-size <strong>fund</strong>
administrator.”
She points out that “business
volumes are changing”, with some
larger administrators not wanting
any <strong>fund</strong>s with assets less than
$50m, or in some cases $300m.
“We focus on having the adequate
capacity to provide quality services.
We have recently invested in
new, cutting-edge software systems
for <strong>fund</strong> administration, which has
greatly increased our capacity to
take on more <strong>fund</strong>s and to deliver
an incredibly wide range of services,”
says Alido.
AN EASY ACT TO FOLLOW
<strong>The</strong> BVI Mutual Funds Act of 1996
is still the law that must be followed
when setting up and administering
a <strong>fund</strong>, although a new Securities
& Investment Act is now being
written by the BVI Financial Services
Commission and is expected
to take effect either in late 2007 or
early 2008.
<strong>The</strong> current Act provides for
three types of mutual <strong>fund</strong>s (all
<strong>fund</strong>s, including <strong>hedge</strong> <strong>fund</strong>s, are
referred to as mutual <strong>fund</strong>s for
purposes of the law): professional
<strong>fund</strong>s; private <strong>fund</strong>s and public
<strong>fund</strong>s. A private <strong>fund</strong> is a mutual
<strong>fund</strong> whose constitutional documents
specify that it will have no
more than 50 investors or that the
making of an invitation to subscribe
for or purchase shares is
made on a private basis.
A professional <strong>fund</strong>, by contrast,
is a mutual <strong>fund</strong> whose shares are
only made available to professional
investors who have a net worth of
more than $1m and the initial investment
by a majority of the investors
is not less than $100,000.
A public <strong>fund</strong> is a mutual <strong>fund</strong>
that is neither a private <strong>fund</strong> nor a
professional <strong>fund</strong> and may be sold
to retail investors in any increments.
A public <strong>fund</strong> must be registered
before it carries on business and may
not make an invitation to the public
to purchase shares unless they have
published a prospectus that has been
approved by and signed by the <strong>fund</strong>’s
directors and filed with the British
Virgin Islands’ Financial Services
Commission (FSC).
THE BOTTOM LINE
Blenheim’s Reddy says that it costs
about $25,000 to $50,000 to set up a
private or professional <strong>fund</strong>. For a
public <strong>fund</strong> that is one-quarter to
one-half million in size “the nature
of the offering governs the costs—
if they’re very big it costs more.”
According to William Harris, a
director of Folio Administrators,
the total cost to form and register
a <strong>fund</strong> in BVI is about $20,000 to
$30,000. <strong>The</strong> <strong>fund</strong> license is only
$350 and the management company
fee is $500.
In terms of administration fees,
“certain costs are standard whatever
the size of the <strong>fund</strong>,” says
ATU Fund Administrators’ Alido.
“<strong>The</strong>re’s an administration minimum
fee in most cases; a multishare
class <strong>fund</strong> can grow, it might
start the year at $50m and by the
end of the year be at $150m.”
Administrators “generally charge
minimum fees in addition to basis
points on the net assets of the <strong>fund</strong>,
the greater the discount on the different
layers because of economies
of scale,” she says.
“Getting registered for a properly
structured <strong>fund</strong> can be done
in 48 hours,” says Robert Briant,
managing partner, Conyers, Dill
and Pearman. He says that a <strong>fund</strong>
must submit an application form
to satisfy the test that the <strong>fund</strong> is a
private, professional or public <strong>fund</strong>
and make sure the administrators
and custodian are acceptable.
KNOW YOUR CUSTOMER
In terms of due diligence on clients,
the acronym “KYC” (know your
customer) is particularly important
in the BVI.
“KYC is important,” says Fortis’s
Burton. “We have to look at
the credentials of the investment
manager,” for which the firm uses
the World Check service to investigate.
We look at how they write
the offering memorandums and
the resumes of the portfolio man-
agers; if someone came from (a
major investment bank), it can
help.” <strong>The</strong> due diligence process
takes about two weeks, according
to Burton.
“If someone is using a small
prime broker and we don’t have
an electronic interface with them it
may take more time. But if it’s a US
company registered with the SEC,
it’s quicker.”
“We then package it (the due
diligence) and present to our compliance
committee in Brussels,”
says Fortis’s Burton, “and they go
through it. If it’s passed, our due
diligence is accepted.”
Conifer’s O’Connell says that “if
it’s a new <strong>fund</strong> or a transitioning
<strong>fund</strong> we require proof of identity.”
Conifer uses an external information
service provider to help with
personal references.
Since the majority of new <strong>fund</strong>s
are started by people from other
<strong>hedge</strong> <strong>fund</strong>s or merchant banks, “if
a person starting a <strong>fund</strong> has worked
for another financial services firm,
we can call the prime broker and
ask what someone’s like, to make
a quality assessment,” O’Connell
says. Obviously, “one wants to do
business with good people,” he adds.
“For offshore <strong>fund</strong>s know-yourcustomer
checks are part of the
service,” says O’Connell.
administration
administrators are there to help...
Calum McKenzie,
Folio Fund
Administrators
“Any BVI-based administrator and manager must
be licensed by the Financial Services Commission.
Between the FSC, the anti-money laundering laws
and a compliance association, there is a robust due
diligence environment here.”
Kay Reddy, Blenheim Trust (BVI) Limited (pictured below)
Mara Alido,
ATU
Adminisitrators
“<strong>The</strong> paper chase varies by
category of investor.” Moreover,
he points out, “the British Virgin
Islands has strong anti-money
laundering laws and is a quality
jurisdiction that has been doing
good quality know-your-customer
for a while.”
TURNING THE TABLES
He says another trend now is for
the people running the <strong>fund</strong>s or
allocating money to <strong>fund</strong>s “to check
us out seriously.”
O’Connell explains that the firm
has received a number of detailed
due diligence questionnaires from
potential clients and investors.
“We got an 18-page questionnaire
from a Swiss firm and were on a
phone call with them about it for
90 minutes,” he says.
“<strong>The</strong> onus is on licensed service
providers to do due diligence,” says
Blenheim’s Reddy.
“Any BVI-based administrator
and manager must be licensed by
the Financial Services Commission.
Between the Financial Services
Commission, the anti-money
laundering laws and a compliance
association, there is a robust due
diligence environment here.”
“Administrators have a greater
role connecting KYC information
than we have,” says Walkers
partner Heidi de Vries, “although
from a legal perspective we have to
do due diligence on clients as well.
Typical due diligence is know your
customer — know who the corporate
entities are, who the beneficiaries
are and adhering to the strict
money laundering laws.”
“We follow KYC closely,” says
Simon Schilder, partner at Ogier.
“<strong>The</strong>re are various things we are
required to hold, checks we must
make and information we must
gather. We probably have to go
through a lot more know your customer
hoops than onshore,” he adds.
DIRTY LAUNDRY?
Schilder too, points to the British
Virgin Islands’ strong anti-money
laundering laws. “Our laws are on
par with any other jurisdiction,
there is full and proper legislation
in place, with robust requirements
for due diligence,” he says.
Circle Partners’ Cova says its due
diligence is handled by its office
in the Netherlands, which does indepth
checks. “<strong>The</strong>y verify identity
and there is a screening on clients
and investors on ongoing basis,”
Circle Partners’ Cova says.
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structuring
Blissful isolation – BVI’s segregated portfolio com
Segregated portfolio companies are the latest vehicular
addition to the BVI’s <strong>fund</strong> arsenal. But how do
they work? How do you set one up? Why consider
using one? Phyllis Feinberg, tell us!
<strong>The</strong> creation of segregated portfolio
companies (SPC) was one of
the most important elements of
the BVI Business Companies Act
of 2004 for <strong>fund</strong>s domiciling in the
British Virgin Islands.
“With that Act came the capability
to incorporate segregated
portfolio companies, which is
helpful to <strong>fund</strong>s looking to establish
an umbrella structure which can
now have the benefit of statutory
segregation of assets and liabilities,”
says Heidi De Vries, partner
at lawyers Walkers.
Sherri Ortiz, chief operations
officer at the BVI International
Finance Centre, notes one of the
principal aims of the BVI Business
Companies Act was “to provide
increased choice in the range of corporate
vehicles available, thereby
adding the advantages of establishing
an investment <strong>fund</strong> in the
British Virgin Islands.
“It has built on the old IBC Act
by providing managers with more
flexibility, including the ability to
utilise segregated portfolio companies
and no stated par value shares
as standard with no requirements to
account for share capital,” she adds.
“Other tangible and real improve-
ments relate to the solvency tests
for distributions and redemptions,
which are now more flexible and
straightforward under the BVI Business
Companies Act,” Ortiz adds.
<strong>The</strong> British Virgin Islands is now
one of several offshore jurisdictions
that provide for a statutory segregated
portfolio company, which
brings the benefit of statutory segregation
of assets and liabilities
within a single corporate entity.
<strong>The</strong> law applies to companies
that are, or will be, recognised as
professional or private <strong>fund</strong>s or
registered as public <strong>fund</strong>s under
the BVI’s Mutual Funds Act of
1996, or companies that are, or will
be, licensed as insurers under the
Insurance Act of 1994, according
to a report from Walkers’ De Vries
and her colleague Richard May.
<strong>The</strong> BVI Business Companies
Act does, however, provide that the
SPC structure may be extended to
other forms of company of such
class as may be prescribed by regulation.
At present, no such regulations
are prescribed.
IN BLISSFUL ISOLATION
An SPC is a single corporate legal
entity that benefits from the statu-
tory segregation of assets and
liabilities between segregated
portfolios established within the
same company.
<strong>The</strong> assets and liabilities of each
segregated portfolio within one
legal entity are legally separate and
there is no joint liability between
segregated portfolios.
In the context of a mutual <strong>fund</strong>,
this means that SPCs can establish
segregated portfolios to separate
the assets relating to classes of
shares with different investment criteria,
thus protecting shareholders
from the potential of cross-liability
arising from the adverse investment
performance of other classes
of shares.
(In the context of licensed insurance
companies, this allows one
entity to cater for a number of
insureds without the risk of cross
liability, according to Walkers’ de
Vries and May.)
IDENTIFICATION
<strong>The</strong> assets and liabilities of each
segregated portfolio are legally
separate from those of the other
segregated portfolios and general
assets of the company. To achieve
that segregation, the segregated
portfolio companies must identify
the relevant segregated portfolio(s)
and make clear that business is
being transacted in the name of, or
by or for the account of, the particular
named segregated portfolio(s).
<strong>The</strong> capacity in which the SPC
contracts and the name(s) of the
relevant segregated portfolios
must be set out in writing in the relevant
transaction documentation,
according to de Vries and May.
“<strong>The</strong> SPC is offering good opportunity
to <strong>fund</strong>s,” says Peter O’Connell,
managing director at Conifer. “It’s
attractive to <strong>fund</strong> managers with
multi-strategy ambitions.” At the
present time Conifer has one client
who has formed an SPC. “I expect we
will see more,” he says.
Funds that used multi-strategy
investment programs prior to
the new law had to do it through
separate companies, he points
out. “<strong>The</strong>re is a cost saving for
managers through using the segregated
portfolio companies,” says
O’Connell. <strong>The</strong> benefits of operating
segregated portfolios are not
restricted by the Act to new companies
first incorporated as SPCs, and
it is possible for existing British
Virgin Islands business companies
that are either mutual <strong>fund</strong>s
or licensed insurance companies
to apply to be re-registered as segregated
portfolio companies upon
application to the Registrar of Corporate
Affairs and the BVI Financial
Services Commission.
“<strong>The</strong>re is a lot of interest in segregated
portfolio companies now,
including many <strong>fund</strong>s that are
applying to change their <strong>fund</strong>s to
SPCs,” says Monique Cova, director
of Circle Partners. “Many <strong>fund</strong>s
want either to set up as an SPC or
change their <strong>fund</strong>s’ structure to a
segregated portfolio company.”
S12 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

panies give managers a useful tool to ponder
Key features of an SPC include
the fact that there is no separate
legal personality. <strong>The</strong> SPC is a
single legal entity within which
may be established various segregated
portfolios. Although each
segregated portfolio must be separately
identified it will not be a separate
legal entity from the company,
according to de Vries and May.
“Segregated portfolio companies
are going to be one of the main
areas of growth for <strong>hedge</strong> <strong>fund</strong>s,”
says Nigel MacPhail of Baker Tilly.
“We’re seeing more and more of it.”
According to MacPhail many of
the firm’s new clients are setting up
as SPCs. “With the old share classes
they all had cross-liability,” he says,
“with the SPC they can’t touch the
assets of the individual portfolios. I
expect we’ll see more of it.”
IDEAL HEDGE FUND VEHICLE
Kay Reddy, managing director
of Blenheim Fund Services (BVI)
Limited, says that SPCs “are the
ideal model for <strong>hedge</strong> <strong>fund</strong>s.
“With a normal <strong>fund</strong> of <strong>fund</strong>s
it invests in different products
and different portfolios. Now it’s
all one company with the assets
and liabilities of each cell distinct
from each other.” Reddy points out
that “a claim against one cell is not
against the whole <strong>fund</strong>.”
She thinks it will allow <strong>hedge</strong>
<strong>fund</strong>s to have “risky and non-risky
classes.” <strong>The</strong>re used to be umbrella
companies, through which <strong>fund</strong>s
were structured “but the SPC eliminates
the need for that,” she says.
She adds that “middle-tier investment
managers don’t want to set up
four or five <strong>fund</strong>s—they’d rather
set up four or five cells through a
segregated portfolio company.”
“We have clients who use them
when they are looking to trade different
strategies that have different
risk profiles,” says Simon Schilder,
partner at Ogier. “<strong>The</strong>y may be used
because there are a lot of <strong>fund</strong>s that
want to trade different things.”
He points out that the BVI SPC
vehicle has only been around
for about 18 months and is now
starting to grow faster.
Another requirement of the law
is that an SPC must include the letters
“SPC” or the words “segregated
portfolio company” in its name.
DIRECTORS’ DUTIES
In addition, the directors have a
duty to establish and maintain the
segregation of each segregated
portfolio’s assets from those of
other segregated portfolios and
also the general asset of the SPC,
according to de Vries and May.
When dealing with an SPC, a
third party is needed to establish
clearly which segregated portfolio
of the SPC it is dealing with and so
which of the relevant segregated
assets it has recourse against.
<strong>The</strong> advantages of an SPC over
traditional methods of creating
contractual legal divisions between
asset pools (such as setting up subsidiary
special purpose vehicles
and putting in place contractual
limited recourse provisions with
third parties) include greater legal
certainty, reduced complexity and
administrative costs savings. <strong>The</strong>
SPC is also now an internationally
recognised vehicle for both mutual
<strong>fund</strong>s and insurance companies,
which can provide greater comfort
to shareholders, according to de
Vries and May.
Another advantage of an SPC
is the concept of segregation of
assets and liabilities within one
legal entity. Under the BVI Business
Companies Act the assets and
liabilities of each portfolio within a
segregated portfolio company are
legally separate from those of the
other segregated portfolios.
Creditors of one segregated
portfolio only have recourse to the
assets of that specific segregated
portfolio and to any general assets
of the company (being the assets
not comprised in any segregated
portfolios) to the extent that the
segregated portfolio assets attributable
to such segregated portfolio
are insufficient. <strong>The</strong> segregated
portfolios of the company all reside
within the one legal entity. It is
important to note, however, that the
statutory segregation of assets and
liabilities have not yet been tested
by the courts of the British Virgin
Islands, de Vries and May point out.
CHOICE!
<strong>The</strong> introduction of the segregated
portfolio company structure into
British Virgin Islands law has
continued to improve the BVI’s
position as a jurisdiction of choice
for both mutual <strong>fund</strong>s and captive
insurance companies and the
number of SPC vehicles incorporated
in the BVI each quarter is on
the rise.
<strong>The</strong> British Virgin Islands International
Finance Centre’s Ortiz
notes in regard to captive insurance
business: “the segregated portfolio
companies legislation has undoubtedly
attracted more captive business
to the BVI.
“It provides an alternative for
organisations with similar businesses
and risks to form joint
ventures while segregating their
respective risks, assets and liabilities.
During 2006, a total of 10 SPCs
were licensed with 50 segregated
portfolios between them.”
NO PRECEDENT
De Vries says that the SPC has
never been tested by the courts and
that there is concern an onshore
court could try to apply its local
laws to the structure — say, if it
ended up in a New York court.
In a presentation to potential BVI
companies, Mark Chapman, partner,
Deloitte, said the SPC is appealing
to <strong>fund</strong> managers because it is just
one legal entity, with as many segregated
portfolios as it wishes and
with insolvency isolation for each
one. He also talked about the directors’
duties with SPCs.
He says that SPC directors in
other jurisdictions are personally
liable for misallocations between
portfolios. In addition, BVI SPCs
can invest from one portfolio into
another, albeit through a special
purpose vehicle (SPV), while most
other jurisdictions do not allow
owning shares in another portfolio,
even indirectly.
Other rules laid out in the SPC
legislation say that if the FSC considers
that the name, identification
or designation of a segregated portfolio
is misleading or undesirable,
it may by written notice direct the
SPC to change the name of the segregated
portfolio on or before the
date specified in the notice, which
can’t be less than 21 days after the
date of notice.
STRICT OVERSIGHT
<strong>The</strong> law also says that an SPC that
fails to comply with a notice issued
by the FSC under sub-regulation
(1) commits an offense and is liable
if convicted to a fine of $5,000.
In addition, an SPC shall, by
written notice in the approved form,
notify the Financial Services Commission
of any change in information
that it is required to submit to
the Financial Services Commission
under the regulations, within 14
days of the date that the information
changed.
<strong>The</strong> legislation also says that at
least one director of the company
must sign a declaration on behalf
of the board that: resolutions of
the directors have been passed
approving the registration of the
company as a segregated portfolio
company; that the company is solvent
and; that each proposed segregated
portfolio will, after the assets
of the company have been allocated
to the segregated portfolios, be solvent;
that the company has given
notice to members of its intention
to apply for registration as a segregated
portfolio company; and that
structuring
a copy of the offering document
for each of the initial segregated
portfolios that it is intended will be
created.
EMMA CHISIT?
Application fees for a <strong>fund</strong> that
wants to register as an SPC under
Section 135 of the Act is $1,000
for the company and $250 for
each segregated portfolio.
Application fees to create one or
more segregated portfolios under
regulation 6(1)(a) or regulation
6(1)(b) is $250 for each of the segregated
portfolios.
For the notification of the creation
of one or more segregated
portfolios under regulation 7(1)
of the Act and for each regulated
portfolio included in the notification,
the application fee is $250.
<strong>The</strong> initial fees that must be
paid under the Act include, when
the mutual <strong>fund</strong> is incorporated or
registered on or before 30 June of
any year, an initial fee on incorporation
or registration to be $1,000
for the company and $100 for each
segregated portfolio approved.
<strong>The</strong> initial fee that must be paid
when the mutual <strong>fund</strong> is incorporated
or registered on or after
1 July in any year is $500 for the
company and $50 for each segregated
portfolio.
<strong>The</strong> initial fee when approval is
granted to create one or more segregated
portfolios under regulation
6(1)(a) or regulation 6(1)(b) is
$100 when the creation of the segregated
portfolio is approved on or
before 30 June and $50 when the
creation of the segregated portfolio
is approved on or after 1 July.
<strong>The</strong> law states that the total initial
fees payable by a mutual <strong>fund</strong>
segregated portfolio company in
any year shall not exceed $10,000.
<strong>The</strong> annual fees for mutual
<strong>fund</strong> segregated portfolio companies,
which must be paid on or
before 31 March of each year following
the year of its incorporation
or registration is $1,000 for
the company and $100 for each
segregated portfolio in existence
as of 31 December of the previous
year. <strong>The</strong> total annual fee paid by
a mutual <strong>fund</strong> segregated portfolio
company may not exceed $10,000
in any one year.
<strong>The</strong> fees must be paid — and
there are late fee penalties to be
paid if they are not. A mutual
<strong>fund</strong> segregated portfolio company
that does not pay its annual
fee in full, on or before 31 March
in any year, must pay a penalty
of $250 for each month or part
thereof, that the fee or any part
remains outstanding.
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FUND ADMINISTRATION SERVICES
• TURNKEY PROGRAM
• DAILY NAV
• COMPLETE SOLUTION
International Financial Administration (BVI) Limited
Wattley Building
160 Main Street
PO Box 4443
Road Town, Tortola
British Virgin Islands
Enquiries: Derek Adler +44 1753 705100 or dadler@ifina.com
British Virgin Islands – United Kingdom – United States of America – Channel Islands – Luxembourg – Switzerland

Entering the Chinese dragon via the
sunny shores of the BVI…
<strong>The</strong> BVI is offering investors in China a tax-neutral base
from which to operate investment vehicles, writes Phyllis
Feinberg, while at the same time reducing the danger
of any legal issues ending up in United States or Chinese
courts. <strong>The</strong> BVI’s lawyers are also making use of special
purpose acquisition vehicles for venturing forth, over the
Great Wall and beyond…
Which country is the second largest
investor in China, after Hong Kong?
<strong>The</strong> United States or another Asian
country probably comes to mind
first. But no, actually it’s the British
Virgin Islands.
How so? Besides providing an
offshore jurisdiction for mutual
<strong>fund</strong>s and <strong>hedge</strong> <strong>fund</strong>s, the British
Virgin Islands has become the destination
of choice for companies
setting up joint ventures with ChiChinese companies.
TAX NEUTRALITY
“A A country has to be
tax-neutral, so cash
can flow through
without tax issues,”
explains Robert Briant,
m a n a g i n g
partner of
Conyers, Dill
and Pearman.
<strong>The</strong> British Virgin
Islands is the choice for that and
the English law system, where
the House of Lords is the ultimate
court of appeal, not United
States or Chinese courts, has also
boosted the British Virgin Islands
as a jurisdiction of choice
for offshore joint ventures,
including many
with China.
“British Virgin
Islands companies
are big in China,” adds
Briant. “It’s become the
jurisdiction of choice for
joint ventures between Chinese
and US companies.” He says the
business really began to take off
about five years ago.
<strong>The</strong> interest in China and its
opportunities is clearly worldwide,
and having structures available in
the British Virgin Islands might
come at just the right time for China’s
domestic investor market, if
the findings of a Pricewaterhouse-
Coopers study continue to develop
in the future.
<strong>The</strong> study of distributors
Chiang Hsien,
Guotai Junan Allianz FM
of investment products found
respondents were “optimistic
about future changes (in
China) that will
create demand
for a host of
new products,
including seg-
BEYOND THE GREAT WALL
“We’re seeing more people looking
globally into the ‘frontier markets
niche’ including Sub-Saharan
Africa and emerging Eastern
Europe nations — one step beyond
emerging markets,” says Peter
O’Connell, managing director at
Conifer (pictured, next page).
“<strong>The</strong>se are the new emerging
markets.” Some of the <strong>fund</strong>s are
listed on foreign stock exchanges,
such as those in Syria and Ghana,
O’Connell points out. For some,
the prices are obtained from a
THE BVI AND CHINA
private equity in Far East Asia has
been popular, “which reflects the
wealth growth in Asia.”
“Any place you have hot markets
you’ll see <strong>hedge</strong> <strong>fund</strong>s,” he adds,
including investments in precious
metals and natural resources.
HYBRID PRIVATE EQUITY
Hedge <strong>fund</strong>s investing in private
equity is arguably less exotic, but
nevertheless a trend.
“We’re seeing the convergence of
private equity and <strong>hedge</strong> <strong>fund</strong>s,”
says Conyers Dill and Pearman’s
Rob Briant.
“<strong>The</strong>y’re investing in illiquid
assets and sometimes use sidepockets
— if the client wants them
the client gets them. We’re advising
a lot on that.”
Investing in private equity is
the “biggest change” in <strong>hedge</strong>
<strong>fund</strong> investments recently,
according to Heidi de
Vries, a partner
with lawyers
W a l k e r s
( p i c t u r e d ,
below). <strong>The</strong>
side pocket
s t r u c t u re
has become
very popular.
“We set
up <strong>fund</strong>s
with side
regated <strong>fund</strong>s,
pocket structures;
a few
years ago it
was not commonplace,
but
now most <strong>hedge</strong>
qualified domestic
<strong>fund</strong>s investing
institutional investor-related
in private equity
products, discretionary portfolio
are set up with side
management and in the previously
pockets as the structure
non-tradeable share market,” the
continues to reinvent itself,”
report said. (To gauge respond-
says de Vries. She thinks the
ents’ optimism and future product
private equity investing trend
plans for China, see charts on page
will continue for a while yet. “In
S18 of this report.)
the present state of the market
Chiang Hsien, chief executive
<strong>fund</strong>s are often
officer of Guotai Junan Allianz B l o o m b e r g
set up with
Fund Management, concurs with markets terminal. “ T h e r e ’ s a certain
the optimism of the PwC study’s a special list of brokers that threshold
respondents and says China’s <strong>fund</strong> provides some asset classes,” of how
industry has experienced “expo- O’Connell adds. Brazil/Russia/ much of
nential growth in current years, India/China (BRIC) <strong>fund</strong>s are also the <strong>fund</strong>
now with assets under manage- popular, says Briant.
will be
ment of over RMB3trn.”
“<strong>The</strong>re’s been a ‘flavor of the invested
Yet it is not just China in which month’ pattern,” says Ryan Geluk in private
<strong>fund</strong>s and companies that are dom- of BDO Binder.
equity to
iciled in the British Virgin Islands He says that investing in what the
are to be found investing.
Eastern European real estate and comfort level
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THE BVI AND CHINA
is for investors,” de Vries says.
On the topic of private equity,
O’Connell points to one of his clients,
the Grail Co. which runs the
Chalice Fund, a hybrid private
equity <strong>fund</strong>-<strong>hedge</strong> <strong>fund</strong>, which, he
says, “uses a very complex structure,
with no side pockets, using
special purpose vehicle companies
to make its investments.”
Ogier partner Simon Schilder
says his law firm is also seeing
more private equity investments
by <strong>hedge</strong> <strong>fund</strong>s.
“More and more we’re seeing
<strong>fund</strong>s set up with side pockets in
existence at the time of launch for
use where the <strong>fund</strong> makes ‘designated’
– that is, private equity
– investments,” he says.
“A few years ago we were
drafting into the PPM the fact that
the <strong>fund</strong> might in due course use
side pockets, and then creating the
side pocket further down the road
when needed.
“Now for United States managers
the typical structure is for the
<strong>fund</strong> to have three classes of shares
— one class for investors eligible to
participate in new issues; one class
for investors not eligible to participate
in new issues; and one class
for side pocket investments.”
He says that the “mechanics”
were drafted into the <strong>hedge</strong> <strong>fund</strong>’s
PPM and constitutional documents
to allow for the conversion of <strong>hedge</strong>
<strong>fund</strong> shares into side pockets when
the <strong>fund</strong> makes investments that
needed to be put into side pockets.
“‘Convergence’ has become
some what of a buzzword,” says
Kieron O’Rourke, partner at law
firm Harneys.
“We’ve seen some <strong>hedge</strong> <strong>fund</strong>s
invest in more traditional private
equity type investments
and therefore require side pocket
advice,” O’Rourke says, although
he thinks it’s not as big a trend as
some people maintain.
SIDE ISSUES
Conyers Dill & Pearman’s Briant
also says that side letters written
into <strong>hedge</strong> <strong>fund</strong>s have become a
major issue.
Side letters are separate agreements
between <strong>hedge</strong> <strong>fund</strong>s and
their largest investors.
Briant says they started to
appear about 10–15 years ago
between <strong>fund</strong> managers and investors
and involved things such as a
manager reimbursing an investor
for part of his fees.
“<strong>The</strong> envelope has been pushed
further now,” Briant says, with
the grandfathering of investors
so that no adverse change that
affected the <strong>fund</strong> would affect par-
ticular investors. Side letters also
have been written for investors to
include redemption rights for particular
investors and notification
if key people employed in a <strong>hedge</strong>
<strong>fund</strong> firm depart.
<strong>The</strong> issue of side letters is also
slightly contentious, with debate
around whether key-man departure
clauses linked with performance
clauses in side letters could
see some investors redeemed early
as a top manager left, before performance
of the <strong>fund</strong> suffered as
a result. <strong>The</strong> debate then ranges
around whether those investors
left in the <strong>fund</strong> could chase those
early redeemers for having ‘inside
knowledge’, via their side letters.
REDEMPTION RIGHTS
According to Briant, redemption
rights is a key area the US Securities
& Exchange Commission and
the Financial Services Authority
in the United Kingdom have
started focusing on. In the United
Kingdom the Alternative Investment
Management Association
has recommended a disclosure
policy for <strong>hedge</strong> <strong>fund</strong>s and the
Financial Services Authority said
compliance would be beneficial.
Briant says, even with the “most
favored nation” and “grandfathering”
that has been given to
some investors, the grants in side
letters “are not nearly as aggressive
as they were two years ago.
<strong>The</strong>y’re not nearly as egregious as
they were.”
He says, there are “policy statements”
now, that the <strong>fund</strong>s have
made and “managers will be able
to obey them,” he continues.
<strong>The</strong>re are lots of “esoteric” vehicles
that <strong>hedge</strong> <strong>fund</strong>s are invested
in, according to Briant, including
real estate investments and
including a euro class and a yen
class of their <strong>fund</strong>s.
He says there are also private
equity <strong>fund</strong>s, domiciled in the
British Virgin Islands, that invest
in real estate that give investors
limited redemption rights.
Hedge <strong>fund</strong>s are investing in
assets from Russia, China, Europe
and Asia, according to KPMG.
“<strong>The</strong> majority investors are
from the United States, from the
United Kingdom, Hong Kong and
China.
“<strong>The</strong> business acquired by the Special Purpose
Acquisition Company will be dependent on the
management team’s experience and contacts within
a given sector. If a SPAC wants to acquire a business
in China it should have a management team not
only experienced in conducting business in China
but also in the relevant sector of the target.”
Jose Santos, Maples & Calder
“More money is also coming
from Eastern Europe,” he says.
TRUST ME UP!
<strong>The</strong>re’s been an increase in unit
trust structures, according to Harney’s
O’Rourke.
“<strong>The</strong>y’re typically more likely
to be used for the Far East market.
Our clients are able to use unit
trust structures for targeting inves-
tors in Japan,” Harneys’ O’Rourke
says. Unit trusts are established
pursuant to a deed of trust.
A unit trust arrangement is not
a separate legal entity.
It is the trustee who has
legal capacity and who holds
the assets of the <strong>fund</strong> on the
terms of the deed of trust for
the investors in the unit trust
scheme. Under BVI law the
holders of units in a unit trust
scheme are the beneficial owners
of the trust assets.
If the trustee of a British Virgin
Islands unit trust is a company
incorporated in or operating out of
the BVI, then the trustee is likely
to require a trust license under the
BVI Banks and Trust Companies
Act, 1990.
It will also have to apply for recognition
of the unit trust as a <strong>fund</strong>
under the British Virgin Islands’
Mutual Funds Act.
VENTURING FORTH
<strong>The</strong>re are also a lot of venture
capital <strong>fund</strong> arrangements used
by BVI-domiciled companies,
O’Rourke says. Venture capital
<strong>fund</strong>s are not regulated and <strong>fund</strong>s
are increasingly using them.
A Special Purpose Acquisition
Company is another form of
private equity investment vehicle
which is attractive to investors.
Jose Santos, a senior associate in
Maples and Calder, says “they’ve
been growing in popularity over
the last couple of years.
“We’re seeing more and more
Special Purpose Acquisition Companies
(SPACs) being set up in the
offshore jurisdictions.”
A Special Purpose Acquisition
Company is a company that is a
“publicly listed shell company that
has no operating history”, says
Maples & Calder’s Santos.
It uses the proceeds of the
listing to acquire a yet-to-be identified
target business.
A BRIEF HISTORY OF SPACS
“<strong>The</strong> original SPACs were completed
in the mid-1990s by EarlyBirdCapital
as a means for
individual investors to access
acquisition opportunities typically
restricted to private equity <strong>fund</strong>s,”
says Integrated Corporate Relations
in a white paper on SPACs.
While the glut of initial public
offerings in the late 1990s saw
demand for SPACs shrink, after
2003, investors’ interest in them
grew again and as of 2006, 41 of
them had gone public, raising
$2.6bn in the process.
Examples of the successful use
of SPACs thus far, have included in
the merger of International Shipping
with Navios, Services Acquisition’s
merger with Jamba Juice
and Stone Arcade with Kapstone
Paper. Key SPAC players include
Citi, Deutsche Bank Securities and
Maxim Group LLC.
SPACs have a limited life – usually
12 to 24 months – “in which
the management team has to find
a suitable acquisition target,” says
Maples & Calder’s Santos.
One reason why many are now
being set up offshore is because of
the Sarbanes-Oxley law and Securities
& Exchange Commission’s
regulations, which place more
reporting requirements on United
S16 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

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THE BVI AND CHINA
Enter the Chinese dragon – via BVI
States-based companies, says
Santos (pictured below).
“<strong>The</strong> business acquired by the
SPAC will be dependent on the
management team’s experience
and contacts within a given sector.
Smaller companies in emerging
markets are attractive to management
teams because of their
growth potential and low acquisition
costs,” he says.
“If a Special Purpose Acquisition
Company wants to acquire a
business in China, it should have a
management team, not only experienced
in conducting business
in China but also in the relevant
sector of the target,” he explains.
One feature of SPACs that has
helped lure <strong>hedge</strong> <strong>fund</strong> investors,
is that after the public offering, the
net proceeds are put in an interestbearing
trust account with a thirdparty
custodian.
<strong>The</strong> Special Purpose Acquisition
Companies cannot buy a
company unless they get approval
from a majority of investors in the
vehicle — so the <strong>fund</strong>s are earning
interest and the SPAC’s management
can’t invest it in another
company without shareholder
approval, which is important to
investors, according to Santos.
“Investors investing in SPACs
find them attractive because they
provide liquidity,” Maples & Calder’s
Santos says.
“Investments in SPACs feel
their investment is protected as the
net proceeds of the initial public
offering are held in an interestbearing
trust account with such
proceeds only being available to
acquire a target business with the
prior approval of the shareholders.
“Unless the investors vote
favourably to acquire the acquisition
target within the Special
Purpose Acquisition Company’s
limited lifespan, investors are able
to redeem their shares and have
management pay them back.
“<strong>The</strong> end result is the Special
Purpose Acquisition Company is
liquidated if a target is not found
within the given timeframe,”
Santos says.
Maples and Calder was the offshore
counsel involved in setting
up both the China Fortune Acquisition
Corp. and the China Discovery
Acquisition Corp., which
have been set up with a view to
each targeting an operating business
in China.
VANILLA MASTER
But there also more plain vanillatypes
of <strong>fund</strong> structures that are
used for <strong>hedge</strong> <strong>fund</strong>s in the BVI.
“We’re seeing side by side,
master feeder, minimaster,
umbrella <strong>fund</strong>s and all the usual
<strong>fund</strong> structures that are typically
used in offshore jurisdictions,”
says Walkers’ de Vries.
<strong>The</strong> single class <strong>fund</strong>s which are
set up with a single class of shares
giving investors the opportunity
“British Virgin Islands companies are big in China.
It has become the jurisdiction of choice for joint
ventures between Chinese and US companies.”
Robert Briant, Conyers Dill and Pearman
EXPECTED PRODUCT EXPANSION IN THE NEXT THREE YEARS
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to participate in a single investment
portfolio are most common.
Multi-class <strong>fund</strong>s (sometimes
referred to as umbrella <strong>fund</strong>s),
issue equity interests in classes to
enable investors to participate in a
range of investment portfolios.
<strong>The</strong> objective is normally to
achieve cost efficiency but, since
the portfolios are only segregated
for internal accounting purposes,
a conventional company is subject
to the inherent risk of cross-class
liability. To deal with this issue,
multi-class <strong>fund</strong>s can be incorporated
in the British Virgin Islands
as Segregated Portfolio Companies.
(See page S12 for more on
these structures.)
<strong>The</strong> master/feeder <strong>fund</strong>s are
structured to enable subscriptions
made in separate feeder
vehicles to be pooled
into and managed
as a single master
<strong>fund</strong> portfolio.
MASTERFUL
PERFORMANCE
A typical example
of a master/
feeder <strong>fund</strong> would
involve United
States-domiciled
taxable investors
investing directly in an
onshore vehicle (often
a United States
limited partn
e r s h i p )
a n d
United
States
t a x -
exempt or non-United States investors
investing in an offshore vehicle
(normally a British Virgin Islands
company).
Each feeder <strong>fund</strong> then invests all
of its assets in an offshore master
<strong>fund</strong> (normally a British Virgin
Islands company).
<strong>The</strong> principal objective is to
enable investors that are subject
to differing tax or other regulations
or with distinct requirements
to participate together in the
same investment portfolio having
common investment objectives.
<strong>The</strong> structure achieves economies
of scale for portfolio-related
activities. Some firms have also
set up limited partnerships in the
British Virgin Islands, which can
be established under the Partnership
Act, 1996.
A limited partnership is formed
in the British Virgin Islands by a
general partner and at least one
limited partner executing Articles
of Partnership and by submitting
a Memorandum of Partnership to
the British Virgin Islands Financial
Services Commission.
<strong>The</strong> Articles of Partnership do
not have to be filed with the British
Virgin Islands Financial Services
Commission and are the internal
governing document of the partnership
dealing with issues such as
partnership contributions and withdrawals
and the day-to-day running
of the partnership.
A limited partmnership does
not have a separate legal personality
distinct from its partners, so
the general partner is liable for the
debts and obligations relating to
the limited partnership.
BVI law says a limited
partner is
not liable for
the debts and
obligations
of the limited
partnership
(LP) so long
as the limited
partner
does not
participate
in control of
the partnership
business.
S18 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

Notes from the cutting edge
<strong>The</strong> BVI has spread its name as far and as wide as
Asia in its hunt for new business – it is the world’s
second largest investor into China – but as its <strong>hedge</strong>
<strong>fund</strong> practitioners tell Phyllis Feinberg, its efforts at
home include everything from new <strong>fund</strong>s laws to golf
courses being considered…
Financial services providers in
BVI are of the firm opinion that
business on the island in general
and the number of <strong>hedge</strong> <strong>fund</strong>s
that choose it as a domicile in particular,
will increase strongly.
<strong>The</strong> new British Virgin Islands
Securities Investment Bill, which
will change some of the provisions
of the Mutual Funds Act of 1996, is
seen as a positive development and
is expected to balance regulation
with the financial services industry’s
need for flexibility.
“<strong>The</strong> new Act’s regulations and
code are basically just to formalise
modern day procedures,” says Kay
Reddy, managing director of Blenheim
Trust (BVI).
R&R AND THE BVI
<strong>The</strong> BVI also has more pleasures to
offer than its business regulations,
according to Reddy.
She points out that people who
like golf often choose Bermuda as
a domicile because of its beautiful
golf courses. But the BVI could be
about to remedy that. A five-star
resort with a golf course is being
considered on Beef Island, just a
quick ride from the Tortola business
district.
“<strong>The</strong> BVI is trying to position
itself on the cusp of a brand new
dawn,” says Calum McKenzie, a
director of Folio Administrators.
“BVI is becoming more sophisticated
in what it can service. It will
have the new investment law and
it can do anything that any other
place can do.”
According to McKenzie, BVI is
saying, metaphorically, ‘we’re here
and as good as anywhere else.’”
Daniel Cann, marketing director
of Folio, says that “BVI has the
infrastructure, with the expertise
and the personnel, along with a
flexible and entrepreneurial spirit,”
to continue to grow. He adds that
the island also has more capacity,
with some other markets saturated.
Sherri Ortiz, chief operations
officer, BVI International Finance
Centre, says that “some would
say that innovative and progres-
sive legislation combined with the
commercial approach to corporate
governance and regulation have
been the reason for this (the BVI’s)
success, while others would cite
the close collaboration between the
public and private sectors.
“Most would probably agree
that the combination of both has
resulted in a winning formula that
has given rise to this premier offshore
jurisdiction.”
BRAND STRENGTH
She points out that “in Asia particularly,
the BVI brand has become
synonymous with the very concept
of an offshore company. From international
joint ventures looking for
a neutral — but legally secure —
home to smaller businesses eyeing
the benefits of flexible structures
and tax neutrality, the BVI is frequently
the first point of call.
<strong>The</strong> jurisdiction is currently
ranked as the second biggest
investor into China and many
people report that, both there and
in Hong Kong, a reason for not
using a BVI has to be provided
rather than giving a rationale to
use a BVI company. Another factor
that will boost the British Virgin
Islands, according to Ortiz, is that
“it is significantly less expensive
to establish and maintain a <strong>fund</strong>
in the BVI than in its competitor
jurisdictions.
CHEAP BUT NOT NASTY
“Legal fees and organisational
costs to establish equivalent <strong>fund</strong>s
tend to be lower and the current
annual <strong>fund</strong> and corporate registration
fees are considerably less than
the BVI’s main competitors.”
Where cost is a significant factor,
this obviously benefits the BVI and
unquestionably makes it the most
cost effective jurisdiction for small-
to medium-size managers to launch
their <strong>fund</strong>s, she says. “However,
the British Virgin Islands attracts
<strong>hedge</strong> <strong>fund</strong>s of all sizes, because
of the ease of incorporation and
the flexibility of the regulation.”
But Ortiz says that “essential and
sound legislation and prudent regulation
can only go so far.
“It is the on-island professionals
who do the hard work and provide
the necessary expertise on a day to
day basis,” Ortiz says.
LEGAL VIRTUOUS CIRCLE
She points out that the BVI is the
only Caribbean jurisdiction to boast
the presence of all six of the largest
offshore law firms in the region and
the legal profession in the Territory
continues to expand and strengthen
with a steady influx of lawyers,
“In Asia particularly, the BVI brand has become
synonymous with the very concept of an offshore
company.”
Sherri Ortiz, BVI International Finance Centre
barristers and solicitors.
<strong>The</strong> world’s main accounting and
auditing practices are also present
in the BVI and have been for quite
some time. <strong>The</strong>ir professional
service offerings, including not only
the traditional accounting, audit
and risk management practices, but
increasingly specialist areas such
as forensic accounting, corporate
restructuring and insolvency management
services, are being offered
from within the BVI.
In addition there are of course
the many leading international
trust and corporate service providers
who, through their efficient
systems, procedures and people,
have helped build the BVI into
what some dub the world’s corporate
domicile capital, she says.
LEADING EDGE
Ortiz says that all this growth and
success has been supported by the
British Virgin Islands International
Finance Centre which she says has
played a “pivotal role” in the promotion
and marketing of the BVI as a
leading financial <strong>centre</strong>.
<strong>The</strong> British Virgin Islands International
Finance Centre has implemented
a worldwide programme of
roadshows to inform, educate, and
discuss with the international pro-
bvi’s future
fessional and business communities
the opportunities for growth in
financial services in the jurisdiction.
Through this programme, the story
of the British Virgin Islands has
been taken to many of the leading
<strong>centre</strong>s for international business,
including London, New York, Hong
Kong, Singapore, Miami, Geneva,
Zurich and Shanghai, keeping the
image and branding the Territory
in the minds of stakeholders.
Established in 2002, as part of
the government’s commitment
to support the financial services
industry, the aim of the IFC is to
give a voice to all segments of the
finance sector, making sure the Territory
retains the unique balance of
a sound regulatory framework, an
entrepreneurial business community
and innovative legislation.
As such, the International
Finance Centre’s ultimate objective
is to protect and uphold the
integrity, reputation and standing
which the British Virgin Islands
has earned as a place to conduct
international business, according
to Ortiz.
Continuing to spread the positive
and message about the territory’s
competitive advantage is the central
focus of the BVI International
Finance Centre.
Another function of the regulator,
the Financial Services Commission
is to protect the public
interest by providing statements
advising the public against any
dealings with certain persons or
businesses it considers undesirable.
In particular, the Financial Services
Commission may issue statements
for the purposes of protecting
the public, within or outside the
British Virgin Islands, against any
financial loss that may arise from the
dishonesty, incompetence, malpractice
or insolvency of persons that are
engaged in financial services businesses
in the BVI.
It also has as its goal to protect
and enhance the reputation of the
British Virgin Islands as a financial
services center; and reducing crime
and other unlawful activities relating
to the financial services business.
To aid it in this task the Financial
Services Commission welcomes
information from any foreign regulatory
or law enforcement authority in
relation to BVI-regulated entities to
prevent conduct that may hurt the
interests of investors and the public
in general.
<strong>The</strong> source of any such information
will be held in strict confidence,
the authorities note.
www.<strong>hedge</strong><strong>fund</strong>sreview.com October 2007 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | S19

PROFILE: FORTIS
Fortis’ never-ending BVI story
Fortis Prime Fund Solutions has made its mark in
the BVI after buying Hedge Fund Services in 2006,
but, as managing director Clayton Burton tells Phyllis
Feinberg, Fortis’ story in the BVI does not end
there and it has many chapters still to write...
Fortis Prime Fund Solutions, a unit
of the mammoth European financial
services company, Fortis, started
providing <strong>hedge</strong> <strong>fund</strong> administration
and ancillary services in 1969,
to what is now the oldest surviving
<strong>fund</strong> of <strong>hedge</strong> <strong>fund</strong>s (FoHF).
So, it is natural to understand
why Fortis, which already services
offshore <strong>hedge</strong> <strong>fund</strong>s in the Cayman
Islands and Dublin, would want a
piece of the rapidly growing <strong>hedge</strong>
<strong>fund</strong>s business in the British Virgin
Islands (BVI).
In March 2006, Fortis acquired
Hedge Fund Services (BVI) Ltd
in the BVI, a company which
had $4bn in assets under
administration for 70 <strong>fund</strong>
clients, compared to Fortis’
$260bn in assets under
administration for 1600
<strong>fund</strong> clients globally.
“It was really a
strategic acquisition
because Hedge Fund
Services had the kind of clients
we were looking for,” says Clayton
Burton, managing director of
Fortis, including the full range of
<strong>hedge</strong> <strong>fund</strong>s and <strong>fund</strong>s of <strong>hedge</strong>
<strong>fund</strong>s.
“HFS had a high-quality staff
and most <strong>hedge</strong> <strong>fund</strong> administrators
who have opened offices in
the British Virgin Islands have had
good business,” says Burton.
“As our business grows we will
continue to add more staff.” <strong>The</strong>re
are 25 now.
GRAND AMBITIONS
“We felt that we could immediately
become a major market player in the
British Virgin Islands, using Fortis’
successful formula, with a talented
staff of accountants and their support
team,” Burton adds.
Mark Lancaster, director, new
business at Prime Fund Solutions
says that Fortis chose to buy Hedge
Fund Services rather than start its
own operation from the ground up
because “maintenance of capacity
is the key issue in the marketplace.
“In order to be successful you
have to take advantage of all opportunities,”
Lancaster says.
In the case of British Virgin
Islands, Hedge Fund Services was
a strong firm which Fortis could
acquire and grow with.
EXPANSION PLANS
Fortis plans on doubling
the size of its BVI business
within the next
two years
and it is
already constructing a new building
to house its operations. “<strong>The</strong> facility
would allow us to double our staff,”
says Burton.
He also points out that costs
for such things as infrastructure
development, lawyers and auditors
are cheaper in the British Virgin
Islands than they are in the Cayman
Islands and Bermuda.
Fortis’ plan is to “double revenues
and assets under administration,”
according to Burton, in the
next two years.
“Fortis BVI should be very
appealing to someone starting
a <strong>hedge</strong> <strong>fund</strong> or a <strong>fund</strong> of <strong>hedge</strong>
<strong>fund</strong>s,” he says.
Burton says its British Virgin
Islands business should be as
profitable as its Cayman Islands
operations, but not as profitable
as operations in Luxembourg or
Dublin. “Funds in the Western
Hemisphere are more complex,”
Burton says.
“US <strong>hedge</strong> <strong>fund</strong> managers are
very aggressive in the types of
securities they trade and our costs
are somewhat higher in the Americas
region,” he adds.
GLOBAL CONSOLIDATION
Fortis has consolidated the BVI <strong>fund</strong>s
onto its global IT platform. Fortis
does round-the-clock processing of
data in each global region, which
allows efficient reporting for their
clients. It can provide calculation of
net asset value on a daily, weekly,
monthly or custom basis and within
any agreed-upon deadline.
It also maintains full multi-currency
accounting records.
Fortis Prime Fund Solutions provides
more services than basic <strong>fund</strong>
administration. For example, Fortis
can also help <strong>fund</strong>s’ preparation for
the audit process and in the preparing
of
interim and annual financial statements.
It also will collaborate with
a <strong>fund</strong>’s tax advisors for K1 tax
reporting and PFIC reports for
United States investors.
INSTANT ACCESS
To help <strong>fund</strong>s make the right investment
decisions based on easily
accessible information, Prime Fund
Solutions has developed i-Fund
Reporting. This is a web portal and
financial warehouse for high-end
investment <strong>fund</strong> organisations.
i-Fund reporting provides aroundthe-clock,
web-based access to an
overview of investment portfolio
data and e-reports, simplifying the
information retrieval process.
Fortis will soon offer i-Fund
Investor, which gives investors
access to financial reporting online,
so they can get online statements,
according to Lancaster. Fortis has
developed a module through which
an investor can make subscriptions
and redemptions into the <strong>fund</strong>.
Prime Fund Solutions also provides
<strong>fund</strong>s of <strong>hedge</strong> <strong>fund</strong>s with
global custody services including
safekeeping and registration,
clearing and settlement, and income
and corporation action processing.
In 2003, Fortis established a
fully licensed, dedicated bank, Fortis
Prime Fund Solutions Bank (Ireland)
Ltd., focused on its alternative investment
clients, which is incorporated
and regulated in Ireland. <strong>The</strong> bank is
a 100% owned subsidiary of Fortis
Bank and has access to the parent
bank’s AA- rated balance sheet.
<strong>The</strong>refore, as part of its services
to <strong>hedge</strong> <strong>fund</strong>s and <strong>fund</strong>s of <strong>fund</strong>s,
Fortis can provide both groups with
bank accounts.
For FoHFs, it provides money in
the form of a straightforward cash
overdraft facility by using portfolio
holdings as collateral. Fortis also
offers liquidity/bridge financing to
FoFs to cover mismatches in timing of
underlying portfolio redemptions/subscriptions,
so the <strong>fund</strong>s may remain
fully invested, facilitating investor
liquidity.
Prime Fund Solutions was
the largest global administrator
of FoHFs, with 869
<strong>fund</strong>s of <strong>hedge</strong> <strong>fund</strong>s
clients, with $143bn in
assets, according to a
March 2007 tabulation
by HedgeFund.Net. In
breaking down Fortis’
<strong>fund</strong>s of <strong>fund</strong>s business,
55% of the total
assets serviced
came from <strong>fund</strong>s
of <strong>fund</strong>s. <strong>The</strong>
firm has $190bn in assets under custody
and $14bn in outstanding credit
facilities. For its <strong>fund</strong> of <strong>fund</strong>s clients
Fortis provides access to investment
in foreign exchange derivatives.
PROVIDING BEYOND THE CALL
For both <strong>hedge</strong> <strong>fund</strong>s and <strong>fund</strong>s of
<strong>fund</strong>s, Prime Fund Solutions provides
access to equity derivatives
(and equity-linked structured products)
and interest rate derivatives and
other structured products.
<strong>The</strong> structured products give
investors the ability to take advantage
of market opportunities that
come out of their strategic plans.
<strong>The</strong> leverage the firm provides
gives investors the ability to have
enhanced exposure to capitalise on a
bullish view.
<strong>The</strong> total return swaps, either
levered or unlevered, allow investors
to invest on an off-balance sheet
basis, often offering regulatory or
tax advantages. <strong>The</strong> warrants enable
investors to invest on an off-balance
sheet basis like swaps, with overlapping
but different tax and regulatory
characteristics and tax-related
benefits. Its portable alpha product
allows benchmark returns that can
be enhanced by layering on an uncorrelated
“alpha” return.
S20 | BRITISH VIRGIN ISLANDS SUPPLEMENT HEDGE FUNDS REVIEW | October 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

<strong>The</strong> BVI’s hard-nosed flexibility
<strong>The</strong> BVI is the second largest domicile for <strong>hedge</strong> <strong>fund</strong>s,
explains the BVI International Finance Centre’s COO,
Sherri Ortiz. This is no matter of luck, she adds, but careful
planning and appropriate collaboration between the
private and public sectors to make and keep the BVI
popular as a domicile on managers’ radar screens
In the early 1980s, when the
British Virgin Islands (BVI)
launched itself as an offshore
jurisdiction, all involved were
hopeful of success.
However, even the wildest of
optimists among them would have
been hard pressed to envisage the
extraordinary growth the territory
has achieved in this extremely
competitive market.
<strong>The</strong> BVI has long held the
position as the leading offshore
registry for international companies
and within a generation the
economy has risen to the extent
where income per capita is approximately
US$40,000 per annum.
It is the leading offshore domicile
for company registrations,
with around 750,000 companies
registered here since 1984. This is
more than any other jurisdiction
by far, and the figures for this year
are set to match, if not exceed,
those from last year which saw
65,000 new BVI Business Companies
registered.
Some would say that innovative
and progressive legislation
combined with the commercial
approach to corporate governance
and regulation have been
the reason for this success, while
others would cite the close collaboration
between the public and
private sectors.
Success also relies on being
able to react quickly to changing
circumstances. As such, several
pieces of legislation in the BVI
have been revisited to ensure that
they are relevant, effective and
attractive to investors.
A good example of this evolution
in company legislation took
place on 1 January 2006, when the
Business Companies Act 2004,
(BVI BC Act) replaced the longestablished
International Business
Companies (IBC) Act, the latter of
which lay at the heart of the BVI’s
development as a leading offshore
jurisdiction.
This new legislation has created
a flexible, forward-looking, and
in many ways, radical framework
within which highly sophisticated
companies can operate effectively.
It maintains all of the benefits
of the IBC Act, but removes some
of the more old-fashioned provisions,
while introducing a handful
of additional provisions to make
the BVI Business Company a more
effective transactional vehicle.
It encourages flexibility for
directors and shareholders of BVI-
registered companies while still
retaining safeguards for creditors
and minority shareholders.
In Asia particularly, the BVI
brand has become synonymous
with the very concept of an offshore
company.
From international joint-ventures
looking for a neutral – but
legally secure –- home to smaller
businesses eyeing the benefits of
flexible structures and tax neutrality,
the BVI is frequently the
first point of call.
<strong>The</strong> jurisdiction is currently
ranked as the second biggest
investor into China and many
people report that, both there and
in Hong Kong, rather than giving
a rationale to use a BVI company,
a rationale for not using a BVI
company has to be provided.
While this success in the Asian
market has predominantly been as
a result of its attractive products
and services, the BVI has also been
quick to recognise and seize opportunities.
For example, it quickly
recognised concern among investors
brought about by the implications
of Hong Kong’s transfer from
Britain back to China in 1997 and
having persuaded these investors
to move their assets to the jurisdiction,
the BVI Government ensured
they stayed by enacting sound legislation
and regulation.
This talent for seizing and
making the most of opportunities
by providing the right supporting
environment has not only
proved successful in ensuring the
BVI remain the dominant force in
company registration, but has also
brought about success in other sectors
such as investment business,
trusts and captive insurance.
MUTUAL/HEDGE FUNDS
<strong>The</strong> British Virgin Islands have
developed a reputation as an
“Where cost is a significant factor this obviously
benefits the BVI and unquestionably makes it the
most cost-effective jurisdiction for small-to-medium
size managers to launch their <strong>fund</strong>s. However
the BVI attracts <strong>hedge</strong> <strong>fund</strong>s of all sizes because of
the ease of incorporation and the flexibility of the
regulation.”
Sherri Ortiz, BVI IFC
attractive and established jurisdiction
in which to domicile offshore
<strong>fund</strong>s. With 2500 <strong>fund</strong>s now
operating in or from within the
jurisdiction, the BVI is the second
largest domicile of <strong>hedge</strong> <strong>fund</strong>s,
with approximately 10% of the
global market share.
<strong>The</strong> <strong>hedge</strong> <strong>fund</strong> industry has
grown substantially since the
introduction of the Mutual Funds
Act 1996, which is the primary
legislation governing the <strong>fund</strong>s
industry in the BVI. <strong>The</strong> sector can
draw upon the support of more
than 500 managers and administrators
licensed in the Territory to
provide <strong>fund</strong> support services to
both mutual and <strong>hedge</strong> <strong>fund</strong>s.
<strong>The</strong> legislation provides for
three categories of regulated <strong>fund</strong>s
and it is this distinction between
public, private and professional
industry commentary
<strong>fund</strong>s that is a core strength of the
BVI and something which other
jurisdictions have adopted, or
intend to adopt.
It allows a different approach to
regulation, wherein a relevant level
of regulation is applied to respective
categories of <strong>fund</strong>s.
As a result, the BVI have been
able to achieve efficiency in regulation
which facilitates the commercial
reality of having a <strong>hedge</strong> <strong>fund</strong>
up and running in a timely manner.
In fact, the distinction has permitted
an average turnaround time, for the
recognition of a private or professional
<strong>fund</strong>, of 48 hours, assuming
the application is in order.
In addition, a professional <strong>fund</strong> is
permitted to commence business up
to 14 days in advance of recognition
being granted, thereby facilitating
the launch of such a <strong>hedge</strong> <strong>fund</strong>
immediately after incorporation.
In the BVI it is also significantly
less expensive to establish and
maintain a <strong>fund</strong> in the BVI than in
its competitor jurisdictions. Legal
fees and organisational costs to
establish equivalent <strong>fund</strong>s tend to
be lower and the current annual
<strong>fund</strong> and corporate registration fees
are considerably less than the BVI’s
main competitors.
Where cost is a significant factor,
this obviously benefits the BVI and
unquestionably makes it the most
cost-effective jurisdiction for smallto-medium
size managers to launch
their <strong>fund</strong>s.
However, the BVI attracts <strong>hedge</strong>
<strong>fund</strong>s of all sizes, because of the
ease of incorporation and the flexibility
of the regulation.
As a result, the BVI has attracted
some of the biggest names in the
sector, further endorsing the maturity
and attraction of the domicile
on the world stage.
Last year, Fortis Prime Fund
Solutions, one of the world’s foremost
<strong>hedge</strong> <strong>fund</strong> administrators,
made a firm commitment to the
British Virgin Islands through the
acquisition of Hedge Funds Services
(HFS), one of the principal
administrators operating in the
Territory with approximately $2bn
in assets under administration.
<strong>The</strong>n, in October, Jersey-based
law firm Ogier, one of the largest
offshore law firms in the world,
announced their entry into the BVI
through a merger with WSmiths,
a BVI firm whose practice area
focuses on investment <strong>fund</strong>s and
www.<strong>hedge</strong><strong>fund</strong>sreview.com October 2007 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | S21

industry commentary
<strong>The</strong> BVI’s hard-nosed flexibility
related securities business, particularly
in Asia and Latin America.
<strong>The</strong> new BVI BC Act has also
had an impact on the <strong>fund</strong>s sector
with one of its principal aims
being to provide increased choice
in the range of corporate vehicles
available, thereby adding the
advantages of establishing an
investment <strong>fund</strong> in the BVI.
It has built on the old IBC Act
by providing managers with more
flexibility, including the ability
to utilise Segregated Portfolio
Companies and no stated par
value shares as standard with no
requirements to account for share
capital.
Other tangible and real improvements
relate to the solvency tests
for distributions and redemptions,
which are now more flexible and
straightforward under the BVI
Business Companies Act.
BVI AND IOSCO
In April this year, the British
Virgin Islands Financial Services
Commission (FSC) was welcomed
as an ordinary member of the
International Organisation of
Securities Commissions (IOSCO).
IOSCO’s membership regulates
more than 90% of the world’s
securities markets in more than
100 jurisdictions.
This was widely seen as recognition
of the British Virgin Islands’
robust international cooperation
framework and its long-standing
commitment to comply fully with
the standards and requirements as
outlined by IOSCO’s Multilateral
Memorandum of Understanding
concerning Consultation and
Cooperation and the Exchange of
Information (IOSCO MMOU).
In fact, the British Virgin
Islands became the first country to
be admitted to ordinary membership
of IOSCO based on changes
made to its legislation, reaffirming
its position as one of the most
effectively regulated offshore
jurisdictions in the world.
A MATTER OF TRUSTS
Private Trust Companies (PTCs)
have become increasingly popular
in OFCs in recent times and the
BVI enacted special provisions for
PTCs earlier this year to further
strengthen its trusts and estate
planning offer.
<strong>The</strong> coming into force of the
Virgin Islands Special Trusts
Act 2003 (VISTA) and the British
Virgin Islands’ Trustee Act 2003
(the Amendment Act), on 1 March
2004 were momentous occasions
for the sector and jurisdiction
alike. Both are highly innovative
and well thought out statutes
dealing with a number of important
areas of trust law in which
reform was long overdue and as
such, the last few years have seen
considerable use made of the new
statutory provisions.
To make it easier for trustees to
deal with third parties, the British
Virgin Islands has also adopted
many of the recommendations of
the English Trust Law Committee,
thus making the British Virgin
Islands the jurisdiction of choice
when setting up trusts to use in
commercial transactions.
More significantly still, the
VISTA Act created an alternative
trust regime which enables special
trusts, known as VISTA trusts, to
be established. Over the last few
years, this VISTA legislation has
generated an immense amount of
positive international interest and
a significant number of VISTA
trusts have already been set up.
Both VISTA and the Trustee
Amendment Acts were based on
proposals which were made to
the British Virgin Islands government
by the British Virgin Islands
branch of the Society of Trust and
Estate Practitioners (STEP).
This demonstrates the close collaboration
between government
and the private sector in terms
of working together to meet the
needs of the jurisdiction’s international
client base.
STEP BVI is now working on
further proposals for trust law
reform, so watch this space!
In addition to this, the Segregated
Portfolio Companies legislation
has undoubtedly attracted
more captive business to the
British Virgin Islands. It provides
an alternative for organisations
with similar businesses and risks
to form joint ventures while segregating
their respective risks,
assets and liabilities.
During 2006, a total of 10 SPCs
were licensed with 50 segregated
portfolios between them.
<strong>The</strong> unrestrictive nature of
the BVI’s business environment
has been another attraction. For
example, the BVI do not insist upon
the appointment of local directors;
annual general meetings do not
need to be held in the jurisdiction;
and it is not obligatory for the captive
to establish on-island bank
accounts. All this has combined to
make the BVI mature enough as a
domicile to have attained credibility
with the regulatory bodies around
the world, yet young enough to
embrace new ideas and solutions.
“<strong>The</strong> BVI International Finance Centre has implemented
a worldwide programme of roadshows to
inform, educate and discuss with the international
professional and business communities the opportunities
for growth in financial services on offer in
the BVI. Through this global programme the story
of the BVI has been taken to many of the leading
<strong>centre</strong>s for international business.”
Sherri Ortiz, BVI IFS
PUBLIC/PRIVATE PARTNERS
Essential and sound legislation
and prudent regulation can only
go so far. It is the on-island professionals
who do the hard work and
provide the necessary expertise on
a day-to-day basis.
<strong>The</strong> British Virgin Islands is
the only Caribbean jurisdiction to
boast the presence of all six of the
largest offshore law firms in the
region. <strong>The</strong> legal profession in the
Territory continues to expand and
strengthen with a steady influx of
lawyers, barristers and solicitors.
<strong>The</strong> world’s top accounting and
auditing practices are also present
in the British Virgin Islands and
have been for quite some time.
<strong>The</strong>ir professional service offerings
include not only the traditional
accounting, audit and risk
management practices. <strong>The</strong>y
include increasingly specialist
areas such as forensic accounting,
corporate restructuring and insolvency
management services, all
offered from within the British
Virgin Islands.
In addition there are, of course,
the many leading international
trust and corporate service providers
who, through their efficient
systems, procedures and people,
have helped build the British
Virgin Islands into the world’s corporate
domicile capital.
All this growth and success
has been supported by the British
Virgin Islands International
Finance Centre (BVI IFC), which
has played a pivotal role in the
promotion and marketing of the
British Virgin Islands as a leading
financial <strong>centre</strong>.
<strong>The</strong> British Virgin Islands International
Finance Centre has implemented
a worldwide programme
of road shows to inform, educate,
and discuss with the international
professional and business communities
the opportunities for growth
in financial services on offer in the
British Virgin Islands.
Through this global programme,
the story of the British
Virgin Islands has been taken to
many of the leading <strong>centre</strong>s for
international business.
<strong>The</strong>se include London, New
York, Hong Kong, Singapore,
Miami, Geneva, Zurich and
Shanghai, keeping the image and
branding of the Territory foremost
in the minds of its stakeholders.
Established in 2002, as part of
the Government’s commitment
to support the financial services
industry in the BVI, the aim of the
International Finance Centre is to
give a voice to all segments of the
finance sector while making sure
the Territory retains the unique
balance of a sound regulatory
framework, an entrepreneurial
business community and innovative
legislation.
As such, the International
Finance Centre’s ultimate objective
is to protect and uphold the
integrity, the reputation and the
standing which the British Virgin
Islands has earned as a worldclass
jurisdiction for the conduct
of international business.
Continuing to spread the positive
and powerful message about
the territory’s competitive advantage
is the central focus of the
British Virgin Islands International
Finance Centre.
S22 | british virgin islands supplement <strong>hedge</strong> <strong>fund</strong>s review | ctober 2007 www.<strong>hedge</strong><strong>fund</strong>sreview.com

<strong>The</strong> BVI in the blink of an eye
POPULATION
Approximately 26,000
THE FLAG
CAPITAL
Road Town, Tortola
TIME ZONE
Greenwich mean time (GMT) minus 4 hours
GEOGRAPHY
<strong>The</strong> British Virgin Islands are absolutely georgeous
(Ed). <strong>The</strong>y are a series of 60 Caribbean islands, cays
and rocks, at 18 degrees latitude and 64 degrees
longitude, covering 59.3 square miles, about
100 miles east of Puerto Rico in the Caribbean.
Its climate is sub-tropical and it does have the
hurricane season as do its Caribbean neighbours.
Since at least the seventeenth century, the BVI has
been a Crown colony of the UK.
<strong>The</strong> BVI refused to join the West Indian Federation
and left the colony of the Leeward Islands on 1
July 1956, according to the British Virgin Islands
Development Planning Unit (DPU).
<strong>The</strong> DPU’s website continues: “<strong>The</strong> islands of
the BVI form almost an oval around Tortola, the
largest island. Throughout our history, until the
1960’s, the BVI had been virtually subsistent in
food production and produced enough for export
to neighbouring United States of America Virgin
Islands.”
POPULATION
Approx 26,000
LANGUAGE
English.
CURRENCY
US dollar
GDP
$972m (2005), forecast to surpass $1bn by 2009.
2005 figure equates to ca. $38,000 per head
GOVERNMENT
<strong>The</strong> government of the British Virgin Islands
is legally a constitutional democracy with the
Executive Authority vested in Her Majesty, Queen
Elizabeth II because of the colonial relationship
with the United Kingdom. <strong>The</strong> British Overseas
Territory’s democracy operates through
parliamentary and ministerial systems. <strong>The</strong>
ministerial government has 13 representatives
elected for a maximum of four years via a mixed
system of nine districts and four country-wide
members. <strong>The</strong> government has three branches: the
executive council, the judiciary and the legislative
council. <strong>The</strong> Governor, as the representative of
Her Majesty the Queen in Britain, has special
responsibility for the courts, the public service,
the police and foreign affairs in the BVI. <strong>The</strong>
civil service is divided into six ministries and a
quasi-ministry consisting of the subject portfolios
under the Governor. <strong>The</strong>re are approximately
44 departments spread across the full range of
government services.
<strong>The</strong> Constitution in the British Virgin Islands
became effective in 1977 and a constitutional
review took place in 2006.
THE LAW
<strong>The</strong> BVI’s legal system is based on English Common
Law and the UK Privy Council is the final court of
appeal.
CORPORATE VEHICLES
BVI business companies, limited partnerships,
segregated portfolio companies, restricted purpose
companies, companies limited by shares and/or
guarantee
INCORPORATION TIMESCALE
24 hours for BVI business companies and LPs,
VISAS
None are required for US and EU citizens for stays
of less than 60 days. Work permits are required for
trips that include employment while in the British
Virgin Islands. To contact the customs department
email vicustoms@caribsurf.com.
To contact the Immigration Department see
immigration@bvigovernment.org.
For passport and visa services email passport@
bvigovernment.org.
For reasons why the BVI is a delightful place to
spend a holiday, email david.walker@incisivemedia.
com.
INCORPORATION FEES
Government Business Companies $350–
$1100 (dependent on share capital structure)
Limited partnerships $500
Other – varies with registered agent/service
provider
ANNUAL FEES
Government Business Companies $350–
$1350 (dependent on shares capital structure and
site of certificates issued
Limited partnerships $500
Other – varies with registered agent/service
provider
DIRECTORSHIPS
Resident directors not required, but at least one
director is required in general
TAX REGULATIONS
Directors’ meetings not required.
Income tax – resident 0%, non-resident 0%
Corporate tax – resident payroll tax 10% or 14%
900BC – Amerindians discover the Virgin Islands.
1493 – Christopher Columbus discovers the
islands on second voyage to the New World.
Mid-1600s – First European settlers arive.
1625 – Charles I issues letters of patent and a grant
of ownership of the islands to the Earl of Carlisle,
no UK colonising occurred.
1666 – Britain annexes the BVI to the government
of the Leeward Islands.
End of 1700s – sugar and rum are BVI’s main
exports.
1715–1718 – Blackbeard (Aaaaaarrrrgh!) make
Soper’s Hill on Tortola the pirates’ base of
operations.
1802 – Tortola declared a freeport.
1950 – Legislative Council restored, only British
males over 21 could vote, islands still part of
Leeward Islands Federation.
OTHER BUSINESS ISSUES
Beneficial ownership disclosure No
Estate duty No
Shareholder disclosure No
Min number of shareholders One
Bearer shares allowed Yes
Withholding tax No
Audit required No
CLIMATE
<strong>The</strong> British Virgin Islands is a sub-tropical nation,
and has a hurricane season from June to November.
On average, the temperature between January and
June is 69.52F and from July to December 85.39F.
<strong>The</strong> wettest months are from September to
December, while February to April are the driest.
REGULATION
For collective investment schemes, the British
Virgin Islands Financial Services Commission (FSC)
is responsible.
It was formed in December 2001 with the
enactment of the Financial Services Commission
Act 2001.
It is an autonomous regulatory authority. <strong>The</strong>
Financial Services Commission handles the
regulatory responsibilities previously overseen by
the Financial Services Department.
<strong>The</strong> FSC has divisions for registry of corporate
affairs; insurance; investment business; banking
and fiduciary services; legal and enforcement;
policy research and statistics; shipping registry and
administration and support services.
Key dates in the development of the local finance
industry included; the 6 June 1996 approval of
the Mutual Funds Act; the 27 November 1997
approval of the Mutual Funds (Amendment) Act;
the 20 April 2005 approval of the BVI Mutual Funds
(Restricted Public Fund) Regulations, 2005; and the
1 January 2006 approval of the Segregated Portfolio
Companies Regulations, 2005.
ECONOMY
797 are employed in “financial intermediation,”
according to the BVI Development Planning Unit.
<strong>The</strong> BVI’s employment rate is about 96%.
TIMELINE OF THE BRITISH VIRGIN ISLANDS’ HISTORY
bvi at a glance
1954 – New Constitution brought into effect, giving
universal suffrage to all British subjects over 21
without property or literacy qualifications.
1956 – Federation of the Leeward Islands abolished
1958 – BVI declines membership of the Federation
of the West Indies
1960 – BVI is separate colony directly responsible
to Her (UK) Majesty’s Secretary of State
1979 – Constitutional reform, voting age now 18
1981 – British Nationality Act (1981) makes BVI
citizens of British Dependent Territory
1984 – With passing of International Business
Companies Act, offshore business begins
1991 – Census shows population of 16,115
1996 – Mutual Funds Act (1996) requires all mutual
<strong>fund</strong>s be registered (public <strong>fund</strong>) or recognised
(non-public <strong>fund</strong>) and any person providing
management or admin services must be licensed.
www.<strong>hedge</strong><strong>fund</strong>sreview.com October 2007 | british virgin islands / <strong>hedge</strong> <strong>fund</strong>s review | S23

1 TerriTory
3 LeTTers
30 isLands
1,000,000 Business opporTuniTies
<strong>The</strong> real beauty of the British Virgin Islands is its proven leadership in meeting the needs of international business.
A strong partnership between the public and private sectors has been a core factor in the sustained growth of its <strong>hedge</strong>
and mutual <strong>fund</strong> business.
<strong>The</strong> jurisdiction is the world’s second largest domicile of mutual <strong>fund</strong>s, with over 2,500 <strong>fund</strong>s operating in or from within
the BVI, supported by more than 500 licensed managers and administrators.
Investment businesses in the BVI benefit from:
- A fast-track, cost-effective registration and licensing system
- A Code of Practice which sets down best practice corporate governance guidelines
- Legislation which distinguishes public, private and professional <strong>fund</strong>s and enables the establishment of Segregated
Portfolio Companies
For more information, contact:
Sherri Ortiz, Chief Operations Officer
BVI International Finance Centre,
Road Town,Tortola,
British Virgin Islands.
Telephone: (+1-284) 494-1509
Facsimile: (+1-284) 494-1260
E-mail: info@bviifc.vg
www.bviifc.vg