Bermuda
20 March 2013
Debt is rising at a reported 23 percent a year, but Bermudian financial services are keeping up appearances. AST takes a look
Image: Shutterstock
Far away from the hubbub of London and New York sits an island that promises a little sea and sand with its finance. With the allure of a working day that doesn’t stretch into the night, some semblance of a work/life balance, and a two-hour flight to New York, it is of little surprise that Bermuda has built up its financial services offering to a hefty weight.
Beyond the azure waters, though, there have been significant structural problems with the territory’s economy. Bermuda’s finance minister, Everard Richards, recently said he has “looked under the hood” of the island’s finances, and pronounced that it was clear that the state of government finances is “every bit as bad as we had feared might be when we were on the outside”, adding: “The trajectories of deficits and debt we found are simply not sustainable.”
Although debt is rapidly growing, Richards was adamant that tax increases would not be the answer. He instead plans to borrow further and to raise the debt ceiling.
“The inescapable reality is that Bermuda’s present economy cannot carry the government as it is presently structured and sized without implementing crippling tax increases,” he said.
“Your government does not want to go this route—rather, we will focus our maximum efforts to streamline and deregulate the economy and implement the stimulus measures that we outlined in our Jobs & Economic Turnaround Plan.”
The island is home to many service providers—accounting firms, internationally recognised law firms, insurance, and investment management, to name a few—and the breadth of knowledge means that the financial services industry will continue to be a vital source of wealth.
Ede Conyers, CEO of ISIS Fund Services, says that the territory’s strong and balanced legislative framework provides the jurisdiction with legitimacy and reliability. “The Investment Funds Act outlines the rules for establishing and supervising investment funds and fund administrators in Bermuda, and all fund administrators must be licensed before they can perform services here. The Investment Funds Act clearly outlines the criteria and can grant a fund administrator a licence efficiently if all the required information has been provided to the Bermuda Monetary Authority. This layer of regulatory oversight provides international investors and fund managers with a sense of security.”
Conyers indicates that the island’s regulatory framework, particularly its thorough know your customer rules that focus on risk, provides comfort to fund administrators, other service providers, investment managers and fund investors alike.
“It has never been more important in the history of the investment funds industry to have a fund administrator based in and have an investment fund domiciled in a jurisdiction that has robust anti-money laundering and anti-terrorist financing laws. Bermuda’s Proceeds of Crime Act obligates fund administrators to put in place adequate controls to mitigate the risk of money laundering and terrorist financing business activities. Frequent monitoring and reporting has been implemented to ensure that fund administrators have adequate controls in place and that they are being effectively followed. Additionally, the BMA (Bermuda Monetary Authority) actively ensures that its regulatory standards exceed the international community’s expectations to ensure that Bermuda maintains its excellent reputation as a recognised offshore jurisdiction.”
The Bermuda Stock Exchange (BSX) is also an attractive feature for funds that look to access the international markets, says Conyers. Established in 1971, the BSX was the world’s first fully electronic offshore securities exchange market, and is currently the world’s largest offshore, fully electronic securities market offering a full range of listing and trading opportunities for international and domestic issuers of equity, debt, depository receipts, insurance securitisation and derivative warrants.
It is a full member of the World Federation of Exchanges and is recognised by the US Securities Exchange Commission as a Designated Offshore Securities Exchange and by the UK Financial Services Authority as a Designated Investment Exchange.
“The BSX is one of the world’s leading listing facilities for offshore funds and alternative investment vehicles and supports niche markets for specialized insurance and debt products,” says Conyers. “Having such a highly regarded stock exchange is a great asset for Bermuda fund administrators as it attracts quality fund managers wanting greater recognition from institutional investors and greater access to international markets.”
Off the beaten path
Historically, people have equated administrators with offshore funds, but this has changed over the last several years.
“Without a doubt, both offshore and onshore funds now look to outsource their fund administration to reputable third-party fund administrators,” says Conyers. “Many things over the past 10 years have precipitated this change; however the one factor that brought this change to the forefront was that investors expect independent oversight of their investments. Today, it is extremely uncommon to see an investment fund that does not engage a fund administrator. Investors will think twice before investing in a fund that self administers as they do not have a clear view of how their investment is being managed. Today, investors are seeking greater transparency into their fund investment from not only the fund manager but also the administrator. We expect this trend to continue as the investment funds industry continues to evolve and investors become more sophisticated.”
Investors are not only looking at Bermuda as a potential servicing domicile. The Cayman Islands has similar regulatory set-up costs and time to market, and dominated when it came to new business for almost a decade.However, Bermuda’s commitment to client vetting has helped its reputation among large blue-chip fund players.
“Bermuda and Cayman have developed as centres of excellence for offshore fund administration because they both have sophisticated infrastructures in place which are absolutely essential to support the growing international business sector of each jurisdiction,” adds Conyers.
“Bermuda is particularly known for its insurance and re-insurance industry with aggregate global capital of nearly $90 billion (CY 2011) while Cayman is more known for financial services in general, which is said to be the sixth largest international banking centre. Both jurisdictions have strong legislative and regulatory bodies with progressive laws and tax structures. Fund administrators are licensed and subject to robust anti-money laundering regulations. Now more so than ever, greater emphasis has been placed on having a recognised and balanced legal framework to monitor and enforce the regulations. Other offshore jurisdictions have not had the political stability or infrastructure to put in place and enforce a similar legislative and regulatory framework, making them a riskier location to conduct business.”
Bermuda fund administrators can provide services to a wide array of fund types including hedge funds, fund of hedge funds, private equity funds and insurance linked securities funds. “These funds, in particular hedge funds, employ various investment strategies including long/short equity, fixed income, managed futures, global macro, structured credit, etc, which Bermuda administrators are well equipped to service because of the investment that they have made in technology and in employing experienced staff,” says Conyers.
The past decade has seen a number of high profile moves to the island—Invesco, with $500 billion AuM moved in 2007, thanks to the Bermuda’s reputation and the number of similar types of firms already domiciled there.
The fact that such a broad range of funds are administrated lends itself well to potential crossover with other industries. Conyers says that over the past several years, there has been a convergence between the capital markets and the insurance/reinsurance markets, bringing about a new hedge fund strategy that trades insurance linked securities such as catastrophe bonds, industry loss warrants and other sidecar investments.
“These types of funds require expertise from specialised fund administrators that have the capability of providing traditional hedge fund administration services as well as the ability to verify the valuations for the specific type of securities where a price is not readily available on an exchange. Bermuda administrators in particular are in an advantageous position to provide administration services to funds that invest in insurance linked securities because of the enormous financial services, insurance and reinsurance presence on the island.”
Global versus boutique
The fund administration landscape has changed in Bermuda over the past decade as larger administrators have shifted certain operations to lower cost jurisdictions, says Conyers.
“The island remains home to a good mix of both global administrators and boutique administrators with excellent reputations for providing investment funds with a hands-on, knowledgeable and a first class service offering.”
Some of the island’s top administrators have been acquired by bigger organisations; Bank of Bermuda by HSBC and, and Butterfield Fund Services by Butterfield Fulcrum, for example. Other administrators such as Citco and Citi Hedge Fund Services have reduced their number of staff on the island, and a number of Bermuda firms have set up shop in the US.
A 2012 industry survey found that consolidation is driving managers to change their fund administrators after launching funds in international domiciles.
In addition, international investors are expected to have greater influence on managers’ domiciliation and fund servicing decisions, while offshore centres could prosper and gain market share.
More than a fifth of those surveyed work for managers that have changed their fund administrator. Consolidation was given as the chief reason for this, cost was the second most common reason with poor service being third. However, only 8 percent of the managers surveyed expressed some dissatisfaction with their administrators, but they did not say that this necessarily meant they were about to switch.
On a scale of 1 to 10, fund administrators scored 6.79 for the services that they provide. Guernsey was the jurisdiction that scored highest for fund servicing provision, scoring 3.8 out of 5, Malta and Bermuda shared the next spot at 3.5.
One area that saw a significant increase was investor due diligence on a managers’ service provider since the Madoff scandal and market crisis. Seventy percent of respondents said that the level of investor interest in service providers has increased since 2008, though the remaining 30 percent said that interest was substantial before the market events and scandals.
In practice, investors are asking for more operational details though verification varied from rigorous onsite checks through to just being comfortable with the service provider’s name. Additionally, managers reported that investors wanted more consolidation allied to a general rise in standards and that this will likely be the story for the next three years. Seventy-five percent of respondents expect fund administrators to consolidate.
“There has been a significant increase in fund administration M&A over the past three years,” concludes Conyers. “A number of factors have brought on this change including the increased cost of running a fund administration company in today’s regulatory environment, contraction of fees charged, and fewer fund launches and more fund closures as investors are wary to invest when fund performance is erratic.”
“It is not a secret that the larger administration companies are getting larger. That said, there is still room for specialised, boutique administrators, but just not as many of them. Not all fund managers want to work with a very large administrator because they prefer the personalised service, fewer points of contact, and access to extremely experienced and capable fund administration professionals who are proactive and will add significant value to their funds and investor base.”
Beyond the azure waters, though, there have been significant structural problems with the territory’s economy. Bermuda’s finance minister, Everard Richards, recently said he has “looked under the hood” of the island’s finances, and pronounced that it was clear that the state of government finances is “every bit as bad as we had feared might be when we were on the outside”, adding: “The trajectories of deficits and debt we found are simply not sustainable.”
Although debt is rapidly growing, Richards was adamant that tax increases would not be the answer. He instead plans to borrow further and to raise the debt ceiling.
“The inescapable reality is that Bermuda’s present economy cannot carry the government as it is presently structured and sized without implementing crippling tax increases,” he said.
“Your government does not want to go this route—rather, we will focus our maximum efforts to streamline and deregulate the economy and implement the stimulus measures that we outlined in our Jobs & Economic Turnaround Plan.”
The island is home to many service providers—accounting firms, internationally recognised law firms, insurance, and investment management, to name a few—and the breadth of knowledge means that the financial services industry will continue to be a vital source of wealth.
Ede Conyers, CEO of ISIS Fund Services, says that the territory’s strong and balanced legislative framework provides the jurisdiction with legitimacy and reliability. “The Investment Funds Act outlines the rules for establishing and supervising investment funds and fund administrators in Bermuda, and all fund administrators must be licensed before they can perform services here. The Investment Funds Act clearly outlines the criteria and can grant a fund administrator a licence efficiently if all the required information has been provided to the Bermuda Monetary Authority. This layer of regulatory oversight provides international investors and fund managers with a sense of security.”
Conyers indicates that the island’s regulatory framework, particularly its thorough know your customer rules that focus on risk, provides comfort to fund administrators, other service providers, investment managers and fund investors alike.
“It has never been more important in the history of the investment funds industry to have a fund administrator based in and have an investment fund domiciled in a jurisdiction that has robust anti-money laundering and anti-terrorist financing laws. Bermuda’s Proceeds of Crime Act obligates fund administrators to put in place adequate controls to mitigate the risk of money laundering and terrorist financing business activities. Frequent monitoring and reporting has been implemented to ensure that fund administrators have adequate controls in place and that they are being effectively followed. Additionally, the BMA (Bermuda Monetary Authority) actively ensures that its regulatory standards exceed the international community’s expectations to ensure that Bermuda maintains its excellent reputation as a recognised offshore jurisdiction.”
The Bermuda Stock Exchange (BSX) is also an attractive feature for funds that look to access the international markets, says Conyers. Established in 1971, the BSX was the world’s first fully electronic offshore securities exchange market, and is currently the world’s largest offshore, fully electronic securities market offering a full range of listing and trading opportunities for international and domestic issuers of equity, debt, depository receipts, insurance securitisation and derivative warrants.
It is a full member of the World Federation of Exchanges and is recognised by the US Securities Exchange Commission as a Designated Offshore Securities Exchange and by the UK Financial Services Authority as a Designated Investment Exchange.
“The BSX is one of the world’s leading listing facilities for offshore funds and alternative investment vehicles and supports niche markets for specialized insurance and debt products,” says Conyers. “Having such a highly regarded stock exchange is a great asset for Bermuda fund administrators as it attracts quality fund managers wanting greater recognition from institutional investors and greater access to international markets.”
Off the beaten path
Historically, people have equated administrators with offshore funds, but this has changed over the last several years.
“Without a doubt, both offshore and onshore funds now look to outsource their fund administration to reputable third-party fund administrators,” says Conyers. “Many things over the past 10 years have precipitated this change; however the one factor that brought this change to the forefront was that investors expect independent oversight of their investments. Today, it is extremely uncommon to see an investment fund that does not engage a fund administrator. Investors will think twice before investing in a fund that self administers as they do not have a clear view of how their investment is being managed. Today, investors are seeking greater transparency into their fund investment from not only the fund manager but also the administrator. We expect this trend to continue as the investment funds industry continues to evolve and investors become more sophisticated.”
Investors are not only looking at Bermuda as a potential servicing domicile. The Cayman Islands has similar regulatory set-up costs and time to market, and dominated when it came to new business for almost a decade.However, Bermuda’s commitment to client vetting has helped its reputation among large blue-chip fund players.
“Bermuda and Cayman have developed as centres of excellence for offshore fund administration because they both have sophisticated infrastructures in place which are absolutely essential to support the growing international business sector of each jurisdiction,” adds Conyers.
“Bermuda is particularly known for its insurance and re-insurance industry with aggregate global capital of nearly $90 billion (CY 2011) while Cayman is more known for financial services in general, which is said to be the sixth largest international banking centre. Both jurisdictions have strong legislative and regulatory bodies with progressive laws and tax structures. Fund administrators are licensed and subject to robust anti-money laundering regulations. Now more so than ever, greater emphasis has been placed on having a recognised and balanced legal framework to monitor and enforce the regulations. Other offshore jurisdictions have not had the political stability or infrastructure to put in place and enforce a similar legislative and regulatory framework, making them a riskier location to conduct business.”
Bermuda fund administrators can provide services to a wide array of fund types including hedge funds, fund of hedge funds, private equity funds and insurance linked securities funds. “These funds, in particular hedge funds, employ various investment strategies including long/short equity, fixed income, managed futures, global macro, structured credit, etc, which Bermuda administrators are well equipped to service because of the investment that they have made in technology and in employing experienced staff,” says Conyers.
The past decade has seen a number of high profile moves to the island—Invesco, with $500 billion AuM moved in 2007, thanks to the Bermuda’s reputation and the number of similar types of firms already domiciled there.
The fact that such a broad range of funds are administrated lends itself well to potential crossover with other industries. Conyers says that over the past several years, there has been a convergence between the capital markets and the insurance/reinsurance markets, bringing about a new hedge fund strategy that trades insurance linked securities such as catastrophe bonds, industry loss warrants and other sidecar investments.
“These types of funds require expertise from specialised fund administrators that have the capability of providing traditional hedge fund administration services as well as the ability to verify the valuations for the specific type of securities where a price is not readily available on an exchange. Bermuda administrators in particular are in an advantageous position to provide administration services to funds that invest in insurance linked securities because of the enormous financial services, insurance and reinsurance presence on the island.”
Global versus boutique
The fund administration landscape has changed in Bermuda over the past decade as larger administrators have shifted certain operations to lower cost jurisdictions, says Conyers.
“The island remains home to a good mix of both global administrators and boutique administrators with excellent reputations for providing investment funds with a hands-on, knowledgeable and a first class service offering.”
Some of the island’s top administrators have been acquired by bigger organisations; Bank of Bermuda by HSBC and, and Butterfield Fund Services by Butterfield Fulcrum, for example. Other administrators such as Citco and Citi Hedge Fund Services have reduced their number of staff on the island, and a number of Bermuda firms have set up shop in the US.
A 2012 industry survey found that consolidation is driving managers to change their fund administrators after launching funds in international domiciles.
In addition, international investors are expected to have greater influence on managers’ domiciliation and fund servicing decisions, while offshore centres could prosper and gain market share.
More than a fifth of those surveyed work for managers that have changed their fund administrator. Consolidation was given as the chief reason for this, cost was the second most common reason with poor service being third. However, only 8 percent of the managers surveyed expressed some dissatisfaction with their administrators, but they did not say that this necessarily meant they were about to switch.
On a scale of 1 to 10, fund administrators scored 6.79 for the services that they provide. Guernsey was the jurisdiction that scored highest for fund servicing provision, scoring 3.8 out of 5, Malta and Bermuda shared the next spot at 3.5.
One area that saw a significant increase was investor due diligence on a managers’ service provider since the Madoff scandal and market crisis. Seventy percent of respondents said that the level of investor interest in service providers has increased since 2008, though the remaining 30 percent said that interest was substantial before the market events and scandals.
In practice, investors are asking for more operational details though verification varied from rigorous onsite checks through to just being comfortable with the service provider’s name. Additionally, managers reported that investors wanted more consolidation allied to a general rise in standards and that this will likely be the story for the next three years. Seventy-five percent of respondents expect fund administrators to consolidate.
“There has been a significant increase in fund administration M&A over the past three years,” concludes Conyers. “A number of factors have brought on this change including the increased cost of running a fund administration company in today’s regulatory environment, contraction of fees charged, and fewer fund launches and more fund closures as investors are wary to invest when fund performance is erratic.”
“It is not a secret that the larger administration companies are getting larger. That said, there is still room for specialised, boutique administrators, but just not as many of them. Not all fund managers want to work with a very large administrator because they prefer the personalised service, fewer points of contact, and access to extremely experienced and capable fund administration professionals who are proactive and will add significant value to their funds and investor base.”
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