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Welcome to the Matthew Feargrieve blog

Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience of advising managers of investment funds operating in the leading jurisdictions of the United Kingdom,  Luxembourg, Ireland and the Cayman Islands. He is qualified as a financial services lawyer in the UK, and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. His extensive experience of advising fund managers makes Matthew a valued member of the boards of investment funds in various jurisdictions, on which he acts in a non-executive capacity. 

Before becoming an independent financial services consultant, Matthew worked for leading law firms in the UK and in Switzerland.  Learn more about Matthew Feargrieve tax news here.

MATTHEW FEARGRIEVE: Hygiene Issues: FCA & Neil Woodford

Hygiene issues: FCA headquarters

Readers of this blog will have seen this week the report by portfolio-adviser.com (@PortfAdviser) that the FCA has dismissed claims that it was too slow to act to the Woodford and M&G fund blow-ups:

https://portfolio-adviser.com/fca-dismisses-claims-it-is-too-slow-to-act/

In fairness to the FCA (bear with me), their perceived omissions and its basic failure to accord WEIF investors with some kind of “protection” are symptomatic of the historical attitude of European financial regulators to the UCITs model. The genesis of UCITs was as a liquid investment product, highly regulated and regarded as “safe” for investment by small, retail investors. But for more than a decade the UCITs envelope has been pushed by EU states and regulators to allow managers more and more able to replicate, sometimes in a synthetic way, riskier investment techniques traditionally available only to managers of hedge funds. Under UCITs rules, Illiquid investments have a very circumscribed place in the fund’s portfolio, but increasingly financial regulators in Luxembourg have permitted the shoehorning of illiquid assets into UCITS and UCITs wrappers. The FCA, doubtless under pressure to maintain London’s competitiveness with Luxembourg and Ireland, has simply followed suit.

Neil Woodford

One positive outcome of the Woodford saga would be a revision by the FCA of UCITs rules and an attendant evaluation of the risk analysis that ought to be applied to a series of model UCITs portfolios and investment strategies within the parameters and constraints of the current UCITs rules. The current regime allows some managers, if they are so inclined, to materially shift the risk profile of their UCITS fund, after taking investors’ money. This cannot be permitted to continue unchecked.

Now, all this will be of small consolation to the thousands of Woodford investors whose only current recourse, they are told, is potentially against an outfit with whom many of them had only a tangental relationship (commercially speaking, at least): Hargreaves Lansdown. We all agree that Woodford’s investors have been ill-used, and the ambulance-chasing law firms that are solicitous of their confidence would do well to moderate some of the representations that they are making about the susceptibility of Hargreaves Lansdown to legal recourse: https://matthewfeargrieve.blogspot.com/

As for Mr. Woodford? In China, as a prelude to flogging a new fund, apparently. Meanwhile, in other news: coronavirus …

Matthew Feargrieve is an investment funds consultant. You can read more of his blogs here: https://matthewfeargrieve.blogspot.com/

UK Retail Funds Market, 2020: Only the Fittest will Survive

Matthew Feargrieve

11 February 2020

Readers of this blog will be all-too familiar with the implosion of the Neil Woodford UCITS funds and the ramifications thereof for Mr Woodford himself (none, so far, at least, for that worthy individual), for the de facto promoter of his funds (Hargreaves Lansdown, for whom trouble surely is a-comin’) and for the benighted Woodford investors (for whom help is on the way, as the ambulance-chasing law firms, circling vulture-like, would have them – and us – believe).

The ramifications of Woodford’s maxima culpa are in all probability mid- to long- term, and have yet to manifest themselves. But what of the immediately-apparent ripples that radiate from his mismanagement of £5bn of other people’s money?

On the same day that Nick Train is reported as defending his unchanged investment strategy (illiquid holdings small; within UCITS rules; and nowhere near as extensive as Woodford’s), @FETrustnet reports BlackRock’s views on how retail sentiment – and cynicism – is driving inflows into investment trusts: https://www.trustnet.com/news/7461736/how-retail-investors-are-changing-the-investment-trust-space

Enter the young, “savvy” investor

According to BlackRock’s Melissa Gallagher, retail investors these days are doing their research and placing less reliance on investment advisers. The march of technology is a strong tailwind for this trend, with the advent of apps that enable customers to make an investment in a financial product almost as easily as placing a bet on a horse.

The advance of the apps is to be welcomed, not because they offer absolute salvation from the overpaid, overindulged and deeply conflicted investment “advisory” industry, but because they now provide healthy competition to the Vauxhall motorcar- driving reps of the aforementioned industry, which purports to be advisory in nature but which in reality is all about commission-based sales of financial products, irrespective of customer suitability.

Vauxhall Man at Work (probably for Hargreaves Lansdown)

Voting units: Good or Bad?

BlackRock’s Gallagher mentions votability of units in investment trusts as being overall a positive trend amongst “savvy” younger investors, but which can cause problems come AGM time. A feature of which is worthy of consideration by industry players, legislators and our (so-called) regulator. We are all in favour of investors being able to vote with their feet by redeeming their investments when it suits them (gates imposed by the manager are another thing, which we will consider separately; suffice to say that we consider them sometimes to be a necessary evil), but giving investors a right to turn up annually and mouth off? Don’t think so. Investment trusts would be more attractive to managers and passive (no pun intended) investors alike if the units were non-voting, like shares in UCITS (one of the few remaining attractive features of that tired and much-abused European model).

True liquidity (UK style)

Another attraction of investment trusts is the secondary liquidity that they afford to investors. We have all looked agape at how the much-touted “daily liquidity”of UCITS funds turns into so much hot air when the fund’s portfolio investments are fundamentally incompatible with real-time market valuation and disposability (Woodford, anyone?) – the listed nature of UK investment trusts provides a reassuring glow for small investors wary of manager impropriety and worried about the overbearing propensity of larger, institutional investors to barge their way to the exit when the redemption shutters are coming down (Woodford, anyone?).

Neil Woodford explains

The continuing appeal of investment trusts is to be welcomed. And is particularly germane for BlackRock to be promoting right now, given the failure of the (so-called) actively-managed fund, the fallout of the Woodford saga and the corresponding rise of the passive fund. And, not least for BlackRock, the unrelenting advance of Vanguard into the UK retail investment space.

Matthew Feargrieve is an investment funds consultant. You can read more of his blogs here: https://matthewfeargrieve.blogspot.com/

And see his YouTube channel here: https://www.youtube.com/channel/UCTgBcrcxZGxzzcGj3OnMq_A

Vanguard: Private Equity for the Masses?

Matthew Feargrieve

10 February 2020

Readers of this blog will be aware that Vanguard, the USD5trillion-plus mutual fund operator, announced last week its JV with HarbourVest, the USD45billion private equity house. Both partners in this mega-venture are behemoths of the asset management industry, and the tie-up seems to herald a new era of innovation and disruption in the mutual fund sector, not just the closed-ended space hitherto occupied by traditional private equity funds.

We have been told that the joint offering will initially be made available to institutional investors, notably pension funds. But the real allure of the proposition being tabled by HarbourVest and Vanguard lies in the latter’s status not simply as the senior partner in the JV but as a mainstay of the passive investment world. So when @CityWire reports Vanguard’s CEO Tim Buckley as saying things like “private equity will complement our leading index and actively-managed funds, as we seek to broaden access to this asset class [for] individual investors“, we naturally sit up and listen.

https://citywire.co.uk/wealth-manager/news/vanguard-strikes-private-equity-partnership-deal/a1321246

It can be no coincidence that this venture comes at a time of record underperformance (should that “continuing” underperformance? Or “record continuing” underperformance?) for so-called “active” mutual funds. You know, the kind of funds that charge a minimum of 1%, excluding broker fees and transactional costs, ostensibly to outperform the market but that in reality are confined to using long-only techniques and are legally prohibited from using true leverage, and so ultimately track the index or, very often, under-perform it.

In this climate of diminishing returns for investors seeking alpha (or even just reasonable returns) in actively-managed, long-only funds, a great amount of pressure has come to bear on the managers of this type of retail product. Take Neil Woodford, who overcame the inhibitive effect of UCITS liquidity rules simply by ignoring them, making significant allocations to small-cap and unlisted companies that were well outside the received universe of stocks available to the conventional active manager, only to come to grief when two things came to pass: (1) institutional investors invoking the daily liquidity afforded (or supposed to be afforded) by UCITS funds, and (2) the wisdom of his unlisted investments proving to be fundamentally lacking, many of them turning out to be (at worse) a shot-to-nothing or (at best) a long-term bet that was hopelessly – and ruinously, for his investors – incompatible with the supposed daily liquidity of the UCITS regime.

And yet at the heart of the collapse of Woodford’s funds was arguably (very arguably, perhaps) his need to source investments outside the much-plundered universe routinely accessed by his peer group, a need driven and, who knows, encouraged by his institutional investors. True alpha has for some time been impossible to find in the long-only space, particularly during a sustained US bull market. Institutional and retail investors alike are questioning the sanity of paying upwards of 1% per year (excluding costs) to a so-called “active” manager who does nothing but place long-only bets in rising markets on mid- to large- cap stocks. Are investors in active, long-only funds getting enough bang for their buck?

Since the financial crisis of 2008, buy-and-hold has been a central part in the strategy of many hedge funds. Many were found to be invested in hopelessly illiquid positions, which had to be sidepocketed and managed as discrete investments requiring discrete investment strategies. The expertise of hedge fund managers in managing private equity-style investments has accordingly been built up for more than a decade. The “alternative” investment space of yesteryear has embraced buy-and-hold and has made a success of it.

Investors these days have in essence three investment choices: true alternative (hedge); private equity; and long-only (retail/mutual). Given its historic underperformance and the fees it charges, the “active” retail space is in sore need of disruption. This is the need that Vanguard has very successfully satisfied with its index funds. Now it seeks to expand its value proposition by moving into buy-and-hold mode.

In the aftermath of the closure of the Woodford funds, some commentators have asked whether the daily liquidity required by the UCITS model should be subjected to some sort of qualification. Our view is that a viable alternative to the inhibitions of the UCITS model and, looking ahead, the model of choice for Vanguard’s “retail private equity” offering may be found in the UK in the non-UCITS (NURs) regime. These illiquid or semi-liquid investment funds have traditionally mainly been used for real estate portfolios, but the regulatory framework is capable of revision and expansion to accommodate investors with the appetite and risk tolerance for some  – deliberate – illiquidity in a fund’s portfolio, and who understands the liquidity profile of his shares, which may be redeemable monthly or quarterly, as opposed to daily.

Had the NURs model been sufficiently evolved in this regard from the version that was available to Neil Woodford at the time when he had his illiquid investments in mind, the fund product duly structured and sold to investors would have been a lot better suited to his investment style and strategy. In this sense, then, the UK’s investment fund regime, and its legal and regulatory parameters, have failed both Woodford and his investors.

It will be interesting to see when Vanguard rolls out its private equity products to retail investors, first (presumably) in the US and then here in the UK, and what legal form those funds will take in the UK. A greater source of fascination will be the competitive effect that the availability of such products, enjoying as they will the whole support and promotion of the vast Vanguard machine, will have on the universe of active funds structured as UCITS and currently available to retail investors.

Matthew Feargrieve is an investment funds consultant and blogger.

Wealth Management in Switzerland

AN EVOLVING LANDSCAPE

By Matthew Feargrieve

11 February 2020

Introduction

In addition to its primary characteristic as the jurisdiction of choice for private banking, Switzerland is growing in significance as a centre of fund management. The country boasts around 15% of global assets under management, making it the third largest global centre of asset management after North America and the United Kingdom. In this light it is perhaps not surprising that there is a growing fusion between the traditionally separate spheres of bank-led wealth management and professional fund management. This blog examines the growing development of private investment funds (aka “private label funds”) by banks and family offices in Switzerland as alternative tools of wealth management that are increasingly complementary to the more conventional techniques of wealth management that revolve around trust structures.

https://www.pwc.ch/en/events/sustainable-finance-conference.html

Background

Trusts and their manifold structural variations are the established tools of wealth planning, preservation and consolidation. The trust provides the means of retaining control over asset management, ensures confidentiality of ownership, permits family advisers a degree of oversight and management of the assets, ring-fences assets from other asset classes and (perhaps most importantly) enables a bespoke, self-managed investment product delivering better value than arm’s length products offered by professional managers.

There is a downside, however. The trust is effectively an Anglo-Saxon product, not widely or truly understood in non-English speaking, civil law jurisdictions. A trust can be a highly complex creature that is not widely intelligible to the client or its professional advisers. The notion of surrendering control of assets to third party is anathema to some clients. A trust entails the maintenance of salaried trustees, many of which lack the legal and professional ability to carry out or oversee active management (as distinct from passive holding) of assets. And a trust is quintessentially a very private creature, not capable of wider funding or investment.

Private Investment Fund Solutions

Enter the private investment fund. The realization has dawned on banks, family offices and professional managers in Switzerland that the primary benefits conferred by the trust can be replicated, often at lower cost and without compromising autonomy, confidentiality or tax integrity, by using a vanilla investment fund.

The fund will be structured as private company limited by redeemable, participating shares that will be held by the client, or nominated family members. A special purpose management company, owned by the family office and staffed with trusted advisers, will frequently retain corporate control of the fund through a holding of voting, non-participating shares. Assets are monetized or otherwise housed in the fund, thereby becoming “portfolio assets” which are then actively managed. As the value of the portfolio assets fluctuates, so does the value of the participating shares, which will have a net asset value (assuming the portfolio assets are capable of a marked-to-market valuation) or other book value. The management company, whether run by the family’s advisers or independent managers, may be paid a fee based on asset values and/or increments thereof. The product is typically indistinguishable, to the outside eye, from a professionally investment fund.

The use by private clients of a private investment fund solution is influenced by the following, additional drivers:

• Facilitates the client’s overall control of investment strategy

• Reserves to client the power to remove and replace a non-performing investment managers and control their fees

• Avoids liquidity management and insolvency risks associated with arm’s length investment products

• Enables pooling of discrete classes of family assets, and their division amongst family members

• Provides the means of opening the fund to outside investment, in order to grow assets and charge third party investors commercial fees.

Banks and professional managers in Switzerland are increasingly being asked to implement this type of product for private clients, either in addition or alternative to the conventional suite of trust solutions. From the bank’s perspective, the structure is effectively a white labeled product, being effectively owned and controlled by the family investors, bearing a name of their choice and serviced on an arm’s length basis by the bank custody and administration units. The “private label fund” thereby opens up for banks revenue streams not typically available to them under traditional trust structures.

Investment funds of this type are established predominantly in the Cayman Islands, as well as the British Virgin Islands and Bermuda, thanks largely to the tax neutrality and the breadth of seasoned professionals (lawyers, auditors, administrators) afforded by those jurisdictions. EU domiciles such as Luxembourg are increasing in popularity with European clients, but are generally less flexible and more costly than the traditional “offshore” jurisdictions.

Financial and legal professional advisers in Switzerland anticipate that the use of the private investment fund as a central tool of wealth management will continue to grow in popularity.

Matthew Feargrieve is a financial services consultant with twenty years’ experience of advising managers of investment funds.

British Virgin Islands: Investment Funds

By Matthew Feargrieve

10 February 2020

1. BVI Investment Funds: Overview

Investment funds domiciled in the British Virgin Islands (often referred to simply as “the BVI”) are regulated by the Investment Business Division of the Financial Services Commission (the “FSC”). The Investment Business Division is responsible for the regulation and supervision of securities and investment business and collective investment schemes, that carry on business in and from within the Territory. The Division ensures compliance with relevant BVI laws, as well as with the territory’s international standards of regulation and supervision.

As at 31 March 2013, there were 2,303 open-ended investment funds recognised by or registered with the FSC, of which 1,538 were established as professional funds, 574 as private funds and 146 as public funds. It is not possible to state with any accuracy how many of those 2,303 open-ended investment funds can be classified as “hedge funds”, but the proportion is generally considered to be something in the order of 75%, making the BVI the world’s second largest offshore centre of alternative management after the Cayman Islands.

Closed-ended funds have no obligation to be filed with the FSC and so it is not possible accurately to estimate the number of closed-ended funds domiciled in the BVI. It may be assumed that closed-ended and other types of unregulated fund comprise a substantial proportion of the one million or so companies and limited partnerships registered in the BVI as at 31 March 2013.

As at 31 March 2013 there were additionally 530 licensed providers of investment business services (the majority of which were management companies appointed by BVI registered investment funds) and 5 management companies utilising the new “Approved Manager” regime that was introduced in 2012, and which is considered below.

2. Regulatory Regime

The FSC was established in 2001 as the autonomous financial services regulatory authority in the BVI. In addition to the regulation of financial services, the FSC is responsible for the Registry of Corporate Affairs at which all publicly available documents pertaining to companies and limited partnerships registered in the BVI are maintained.

The Investment Business Division of the FSC administers and enforces the Securities and Investment Business Act, 2010 (“SIBA”) (which replaced the Mutual Funds Act 1996), the Mutual Fund Regulations, 2010 and the Regulatory Code, 2009. This is the primary legislation that governs investment funds in the BVI, the centerpiece of which is SIBA.

The 2,303 investment funds recognized by or registered with the FSC as at 31 March 2013 derive their regulatory status in the BVI by virtue of being considered “mutual funds”. This definition is unique to the BVI, bears no resemblance to that term as it is commonly understood in North America, and is defined in SIBA as a company, partnership or unit trust that:

2.1 collects and pools investor funds for the purpose of collective investment; and

2.2 issues fund interests that entitle the holder to receive on demand or within a specified period after demand an amount computed by reference to the value of a proportionate interest in the whole or in a part of the net assets of the fund, and includes:

(a) an umbrella fund whose shares are split into a number of different class funds or sub- funds; and

(b) a fund which has a single investor which is a fund not registered or recognised under SIBA.

Three points of note flow from this definition:

(1) the reference to single investor funds brings such funds within the definition of “mutual fund” in order to ensure that master funds (which may have only one investor) are brought with the ambit of SIBA;

(2) the definition in SIBA of “fund interests” expressly excludes debt interests, and so funds issuing debt interests are excluded from the licensing and other requirements of SIBA; and

(3) closed-ended funds are not brought within the ambit of SIBA.

The following types of mutual fund fall within the SIBA licensing regime:

(1) mutual funds established as BVI entities (companies, limited partnerships and unit trusts);

(2) mutual funds established outside the BVI but which carry on business in the BVI through a branch operation or representative office; and

(3) mutual funds established outside the BVI which promote themselves to persons who are BVI citizens or residents, or who are physically present in the BVI.

https://www.pwc.ch/en/events/sustainable-finance-conference.html

SIBA also regulates:

(1) mutual fund administrators, managers and custodians established as BVI entities; and

(2) mutual fund management or administrative entities established outside the BVI but which carry on their business in the BVI.

3. Categories of Mutual Fund

For regulatory purposes, there are three principal types of mutual fund under SIBA: private funds, professional funds and pubic funds.

Private Funds

SIBA defines a private fund as a mutual fund which by its constitutional documents:

3.1 has restricted the maximum number of its investors to fifty; or

3.2 has specified that all invitations to subscribe for interests in the fund shall be made on a private basis.

On application, a proposed private fund will be expected to demonstrate the “private basis” of offering its shares to prospective investors. SIBA provides that a private invitation to subscribe fund interests will include an invitation:

3.3 to specified persons and which is not calculated to result in fund interests becoming available to other persons or to a large number of persons; or

3.4 by reason of a private or business connection between the fund and the subscriber.

There is an FSC policy guideline that amplifies what may be considered “private” by stating that “the making of invitations to as many as 300 persons might be considered an offering on a “private basis” if it can be demonstrated that the person made the invitations to specified persons and had no deliberate intention of making invitations to other persons. The making of invitations to a significantly greater number of persons than 300 would cast doubt upon compliance with the spirit of “private basis” which is embodied in SIBA, on the grounds that a large number of persons is not consistent with what is commonly understood to be “private”.” In any case, the private fund will be limited to having at most 50 investors of record.

Professional Funds

SIBA defines a professional fund as a mutual fund whose interests are made available only to professional investors, each of whom (unless considered an “exempted investor”) must invest at least US$100,000 (or currency equivalent) by way of initial subscription.

A “professional investor” is any person satisfying one of two possible criteria:

3.5 a person whose ordinary business involves investment business similar to the kind the fund is undertaking;

3.6 a person whose net worth (either individually or jointly with a spouse) exceeds US$1,000,000 (or currency equivalent).

In simple terms, therefore, a “professional investor” is (in theory at least) a person who knows what he is doing when investing in the fund, who understands the risks of an investment and can absorb the potential losses arising therefrom. It is for this reason that 1,538 of the 2,303 mutual funds filing with the FSC as at 31 March 2013, amongst which there will be a high proportion of hedge funds, are established as professional funds. It follows that the majority of mutual funds domiciled in the BVI and operating as hedge funds will take the form of professional funds.

An “exempted investor” (to which the US$100,000 minimum initial subscription requirement does not apply) is (a) the fund’s manager, administrator, promoter or underwriter, or (b) any employee of the fund’s manager.

Unlike a private fund, which must be recognised by the FSC before it commences business (broadly understood to mean publishing a placement memorandum), a professional fund may carry on its business or manage or administer its affairs for a period of up to 21 days without being recognised under SIBA. This ability is subject to some qualification, however: (a) the fund must satisfy the criteria for a professional fund, and (b) the fund must comply with and be managed and administered in compliance with SIBA.

Public Funds

A public fund is one that is neither a private fund nor a professional fund. A public fund offers interests to the general public. Essentially a retail product, this type of mutual fund is accorded the highest degree of regulation.

A public funds must be registered with the FSC before engaging in any business activity in or from within the BVI. In addition, SIBA requires that its prospectus shall provide “full and accurate disclosure of all such information as investors would reasonably require and expect to find for the

purpose of making an informed investment decision”. The prospectus is also required to contain a summary statement of investors´ rights, and must be approved and signed by (or on behalf of) the fund’s directors, who take responsibility for the content thereof.

Because of the retail nature of pubic funds, this article will focus primarily on private and professional funds.

4. Regulatory Application Process

The application to obtain private, professional or public status is made by the fund to the FSC using a prescribed form of application form and supported by a number of documents, including:

4.1 the fund’s constitutional documents and certificates of incorporation or registration

4.2 offering document (or explanation as to why no offering document is being issued)

4.3 a prescribed investment warning in the offering document (or if no offering document is being issued, the investment warning must be provided separately to investors)

4.4 subscription documents

4.5 consent letter signed by the fund’s BVI legal counsel

4.6 relevant service provider appointment exemptions (if claimed): auditor, custodian and manager must be appointed by the fund unless an exemption is available and is claimed (see the section entitled “Fund Service Providers”, below).

4.7 US$700 application fee.

The application process for a private or professional fund typically takes one week from the submission to the FSC of the supporting documents to issue of the FSC’s certificate of registration or recognition (as applicable).

5. Fund Service Providers

SIBA requires that BVI mutual funds (private, professional, public) must appoint:

5.1 an authorised representative

5.2 a manager

5.3 a custodian

5.4 an administrator

5.5 an auditor

5.6 two directors (minimum).

A private or professional fund must give the FSC at least seven days’ prior notice of a functionary’s appointment (or retirement or removal).

The FSC has the ability to take enforcement action against a fund if its functionaries do not meet the “fit and proper” requirements of the FSC. For these purposes, the FSC has a list of jurisdictions that it officially recognises in order to provide some certainty in relation to those of the BVI fund’s overseas service providers that it will deem as acceptable.

Authorised Representative

Every mutual fund must have an authorised representative in the BVI, the functions of which are to act as an intermediary between the fund and the FSC.

Manager

A mutual fund is required at all times to have a manager. A private or professional fund may apply for an exemption from this requirement. In addition, management entities will be subject to the licensing requirements of SIBA. These are considered below under “Management Companies”. A local manager is not required under BVI law.

Custodian & Administrator

A mutual fund is required at all times to have a custodian and an administrator. A fund may apply for an exemption from the requirement to appoint a custodian. No exemption from the requirement to appoint an administrator is available under BVI law. A local custodian or administrator is not required under BVI law.

Auditor

Private and professional funds are required to appoint an auditor and file with the FSC annual financial Statements, unless the fund is exempted from the audit requirement by the FSC. There is no local auditor sign-off requirement, not does the auditor have to be approved by the FSC.

Directors

Every mutual fund must have at least two directors, one of whom must be an individual. The directors must satisfy the FSC’s “fit and proper” requirements, and a private or professional fund must give the FSC at least fourteen days’ prior notice of a director’s appointment, retirement or removal. There is no residency requirement for the directors.

The directors of private and professional funds are generally expected to be individuals (as opposed to corporate entities). With respect to funds established as limited partnerships, there is

no requirement that the general partner of the limited partnership be a BVI company or the general partner be resident in the BVI.

6. Private and Professional Funds: Ongoing Obligations

In order to enable provide the FSC with sufficient information to enable it to monitor the BVI funds industry and plan its development, SIBA requires private and professional funds are subject to certain reporting obligations to the FSC, primarily relating to:

6.1 the cessation or termination of a functionary’s appointment

6.2 any amendment of its constitutional documents

6.3 any change of its place of business, whether in or outside the BVI

6.4 the issuance of any offering document not previously provided to the FSC

6.5 the amendment of any offering document previously provided to the FSC

6.6 financial information for the relevant reporting period, including start- and end- NAVs, total subscriptions, total redemptions, net income/loss, dividends/ distributions and year end gross assets.

This information, in respect of the previous calendar year, is contained and sent to the FSC in an annual prudential or statistical return that the fund must lodge with the FSC no later than 30 June in the current calendar year.

Unless exempted, private and professional funds must prepare annual audited accounts and file the same with the FSC within six months of year end or any extended period permitted by the FSC and not exceeding 15 months in total.

The FSC has the ability to require funds to provide such additional information that it considers necessary to remedy any inaccurate, incomplete or unverified information already provided.

7. Investment restrictions on Mutual Funds

There are no requirements or restrictions under BVI law relevant to a fund’s investments, investment strategy, liquidity profile and use of leverage or derivative instruments.

8. Offering & Subscription Document Content

A BVI mutual fund must issue and offering document, or furnish the FSC with an explanation as to why it seeks to dispense with an offering document and the means by which it is proposed that investors are provided with all relevant information.

BVI law makes very few demands on the content of a fund’s offering document, other than the requirement under SIBA that investors in private or professional funds must be provided with an investment warning, prominently located in the offering document, to the effect that:

8.1 the fund has been established as a private or professional fund, as the case may be;

8.2 in the case of a private fund, the fund is suitable for private investors only and that the fund is limited to 50 investors or any invitation to subscribe for interests in the fund may be made on a “private basis” only;

8.3 in the case of a professional fund, the fund is suitable for professional investors, and with respect to each investor, a minimum initial investment of US$100,000 (or such larger sum as may apply with respect to the fund) is required;

8.4 the fund is not subject to supervision by the FSC or by a regulator outside the BVI and that the requirements considered necessary for the protection of investors that apply to public funds do not apply to private or professional funds;

8.5 an investor in a private or professional fund is solely responsible for determining whether the fund is suitable for his investment needs; and

8.6 investment in a private or professional fund may present a greater risk to an investor than investment in a public fund.

Where a private or professional fund does not issue an offering document, this investment warning must be provided to each investor in a separate document.

SIBA additionally requires that applicants for fund interests may only be accepted by the private or professional fund if that applicant has provided a written acknowledgement that it has received, understood and accepted the prescribed investment warning. In practice this acknowledgement is contained as a representation in the fund’s subscription documents.

9. Management Companies

A private, professional and public fund in the BVI is required to appoint a manager. The conduct of investment business in or from within the BVI is subject to the licensing requirements of SIBA.

SIBA licensing Regime

The term “in or from within the BVI” means that the licensing requirements will be applicable to BVI entities conducting ‘investment business’ outside the BVI, as well as BVI and non-BVI entities conducting ‘investment business’ within the BVI (unless those activities constitute an excluded activity or are conducted by excluded persons, as considered below) and any person who solicits a person in the BVI in order to offer investment services.

“Investment business” is broadly defined to include (i) dealing in investments, (ii) arranging deals in investments, (iii) managing investments, (iv) providing investment advice, and (v) providing custodial or administration services with respect to investments. “Investments” is defined to include shares, interests in a partnership or fund, debentures, bonds, other debt instruments and derivatives and other interests relating to such investments.

Licensees are required to comply on an ongoing basis with a number of requirements under the SIBA and the Regulatory Code 2009 including requirements relating to capital resources, the appointment and removal of directors, changes to ownership structures, insurance, corporate governance, segregation of client assets, advertising and such other requirements to be included in a dedicated part of the Regulatory Code 2009.

Exclusions from SIBA licensing regime

SIBA provides for the exclusion of certain types of investment activities and certain types of persons from the abovementioned prohibition.

The excluded activities include, inter alia:

9.1 accepting, transferring or becoming party to (other than as debtor or surety) an instrument creating or acknowledging indebtedness in respect of any loan or credit guarantee;

9.2 the issuance, redemption or repurchase by a company of its own shares or debentures, fund interests by a unit trust or partnership interests by a partnership;

9.3 a sale of goods or services where the supplier does not hold himself out as generally as engaging in the business of buying investments with a view to selling them or regularly solicit members of the public to buy, sell subscribe for or underwrite investments;

9.4 particular transactions that are primarily carried out for risk management purposes;

9.5 providing investment advice in the course of a profession or non-investment business;

9.6 transactions relating to employee share schemes;

9.7 dealing as a bare trustee, or providing advice as a trustee to co-trustees or trust beneficiaries; and

9.8 giving investment advice as a director of a company to another director of the company, provided that the director does not otherwise carry on investment advice or investment management business.

There are no excluded activities in connection with custodial or administration services.

In addition to these excluded activities, SIBA excludes from its licensing requirements persons (a) who do not otherwise carry on (or hold themselves out as carrying on) investment business and does not receive remuneration separately for activities that constitute investment business, and (b) who are:

(a) directors, partners, trustees or participants in joint ventures who provide investment business services to their respective company, partnership, trust or joint venture; or

(b) are companies that undertake an activity that constitutes investment business exclusively with, or for, a company within the same group.

Public, private or professional funds or recognised foreign funds are also excluded when undertaking an activity that constitutes carrying on business as a mutual fund in or from within the BVI.

10. Management licensing process

The licence application process will take around 6 weeks to complete. The application will entail the preparation and filing with the FSC of several documents, including (a) a detailed business plan, and (b) documents evidencing the fulfilment of the FSC’s “fit and proper” requirements in relation to the applicant’s directors, senior officers and significant shareholders.

Under the SIBA regime each in, the person seeking a licence must satisfy the FSC’s. References, police reports and declarations on each such person must be provided to the FSC. A detailed business plan must also accompany the application.

11. Ongoing obligations of licensees

Once licensed to carry on an ‘investment business’, SIBA sets out various ongoing obligations on the licensee regarding corporate governance, capital resources, the appointment of directors, a compliance officer and MLRO, preparation of audited accounts, changes of ownership, insurance, advertising, segregation of client assets, an approved persons regime, conduct of business rules and other administrative requirements.

The Neil Woodford Saga: Enter the Ambulance Chasers

Matthew Feargrieve

8 February 2020

Neil Woodford’s flagship UCITS fund, Woodford Equity Income Fund (“WEIF“), was placed into liquidation in October 2019. This followed the suspension of redemptions that was authorised in June 2019 by the fund’s ACD, Link Fund Solutions (“Link“). Readers of this blog will recall that we were pessimistic about the prospects of substantial value recovery for Woodford’s investors. It turns out we were right to be.

Link indicated in late January 2020 that just over 70% of the aggregate value of what remains of WEIF’s portfolio value has been raised from the sale of more liquid investments, mainly consisting of large- and mid- cap equities.

https://www.theguardian.com/business/2020/jan/28/neil-woodford-investors-loss-payouts

The ambulance chasers circling Woodford’s benighted investors, namely law firms Slater & Gordon and Leigh Day, cry piously and loudly about how Link’s apparent inability to dispose of the remaining portfolio assets is evidence of the extent to which Woodford exceeded the maximum illiquid allowance of 10% permitted by UCITS rules.

One notable characteristic of said law firms, aside from the celerity with which they mobilise after various ambulances, is the conspicuous absence of any legal talent that can reasonably be said to have more than a passing acquaintance with the laws and regulations pertaining to UCITS investment funds or, indeed, the asset management industry in general. Have a look at the “Team” pages on their websites and have a go at finding any lawyers who profess “investment fund” or “financial services” expertise. 

The truth behind the apparent illiquidity of the remnants of the WEIF portfolio is that it is a dog. Not just a dog, but a dog that is on fire. No one wants this unlisted rubbish, particularly not at any kind of price. Link would do well to realise what value it can from as expeditious sale as is possible, and put the 2,500 Woodford investors out of their misery.

Neil Woodford in better days

Adding to their continuing misery, one suspects, are the calls they will be receiving from Leigh Day and Slater & Gordon about how they may sue the chief superannuated peddler of Neil Woodford’s bullshit, Hargreaves Lansdown. What the ambulance chasers lack in legal talent, they more than make up for in their ability to isolate and reach for the lowest hanging fruit. Slater & Gordon says that it is examining whether Hargreaves was aware of the problems at WEIF while it continued to push the fund on its now infamous “best buy” list of superstar managers.  

Hargreaves removed WEIF off its Wealth 50 buy list only after it suspended investors’ redemption requests in June 2019. Other law firms are said to be  looking at how Link Asset Services (the fund’s administrator) monitored the liquidity profile of the portfolio and Woodford’s management of it. 

https://www.proactiveinvestors.co.uk/companies/news/912241/law-firms-probe-hargreaves-lansdown-as-part-of-woodford-challenge-912241.html

A spokesman for Leigh Day has said: “if there is some wrongdoing the aim would be to try and get investors back to zero. So if they’ve put £10 in and got £6 back we’d look to get the other £4 back.” So WEIF could prove to be an investment fund in which investors’ capital was not at risk. Not at any risk at all, in fact. Readers of this blog could be forgiven for thinking that this breathless claim will come back to haunt Leigh Day, and it is to be hoped that the expectations of the long-suffering Woodford investors are not being hiked on such a rash representation. For it overlooks the fact that capital is rightly at risk in any pooled investment vehicle; that the majority of WEIF’s portfolio assets were not improperly illiquid; that the remaining assets are distressed and accordingly harder to sell; that Hargreaves Lansdown were neither the fund’s manager, nor its ACD nor its administrator, having in fact no functionality or capacity whatsoever with WEIF or its management; and that the only contract that Woodford investors can sue on is the one they have with WEIF, by virtue of being shareholders in it, not any ancillary customer agreement they may have had with Hargreaves Lansdown. 

True it is that the ambulance chasers are offering much-needed solace to Neil Woodford’s investors, which is more than the man himself is prepared to do. And we won’t waste any time here on the FCA’s inability to do anything for them. But they would be well advised not to hope too highly for any meaningful kind of recompense.       

Matthew Feargrieve is a financial services consultant with more than twenty years’ experience of advising managers of investment funds.

Matthew Feargrieve: Financial Terms Glossary

Welcome to the Matthew Feargrieve blog. Matthew Feargrieve is a qualified financial services lawyer in the UK. Here’s a financial terms glossary to help you learn and master some of the key finance terms.

BINARY OPTIONS: Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.” Binary options have an expiry date and/or time.

TIME VALUE OF MONEY: Over time your money actually makes money. This is the key to understanding the time value of money.

BANKRUPCY: When your bills become to much for a person to handle. When your expenses exceed your income, you may be forced to declare bankruptcy.

CREDIT SCORE: A credit score is a three digit number that is derived from a variety of factors on a credit report. Credit scores range from 300 to 850: the higher the score, the lower the perceived risk. Anything over 700 usually suggests good credit management. Credit scores often play an integral role when banks decide whether or not you will be approved for a loan. The scores will also affect your interest rate. Usually the lower the credit score, the higher the interest.

Depreciation – An asset’s value may go down over a period of time due to wear and tear, known as depreciation.

MARKET CAP: Market Cap, or market capitalization, gives investors an idea how big a company is. It is calculated by multiplying outstanding shares by the current market price.

Fixed Expenses – Some payments do not change from month to month, making them fixed expenses. An example of a fixed expense might be a car payment.

Lien – A lender may place a lien on property in connection with a debt, giving the lender legal right to the property if the borrower defaults on the loan.

Overdraw – Attempting to withdraw money from an account, exceeding the account balance, is overdrawing the account.

Variable Expenses – Some expenses change from month to month, making them variable expenses. Examples of variable expenses include groceries or utility bills.

Check back for more!

Matthew Feargrieve is a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies. Get to know more about Matthew Feargrieve here. Alternatively, you can also follow Matthew Feargrieve‘s Pinterest page here for more financial tips and tricks. You can also read the Matthew Feargrieve news here.

Watch Matthew Feargrieve video here

Matthew Feargrieve: Mutual Funds

Welcome to the Matthew Feargrieve blog. Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience. In today’s blog we talk about when are mutual funds considered a bad investment?

It’s easy to see why mutual funds are so attractive: they’re easy to buy, they’re easy to sell and they offer instant diversification. There are a variety of funds covering different industries and different asset classes available. Some of the advantages of this kind of investment include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

High Annual Expense Ratios
Excessive annual fees can make mutual funds unattractive investment, as investors can generate better returns by simply investing in broad market securities.

Load Charges
Many mutual funds have different classes of shares that come along with front- or back-end loads, which represent charges imposed on investors at the time of buying or selling shares of a fund. Load fees can range from 2 to 4%, and they can also eat into returns generated by mutual funds, making them unattractive for investors who wish to trade their shares often.

Lack of Control
Because mutual funds do all the picking and investing work, they may be inappropriate for investors who want to have complete control over their portfolios and be able to rebalance their holdings on a regular basis.

Returns Dilution
Mutual funds are heavily regulated and are not allowed to hold concentrated holdings exceeding 25% of their overall portfolio. Because of this, mutual funds tend to generate diluted returns, as they cannot concentrate their portfolios on one best-performing holding.

Check back for more!

Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience of advising managers of investment funds operating in the leading jurisdictions of the United Kingdom,  Luxembourg, Ireland and the Cayman Islands.  Learn more about Matthew Feargrieve here. Alternatively, you can also follow Matthew Feargrieve on Facebook here for the latest hedge funds breaking news. You can also watch Matthew Feargrieve video here

Matthew Feargrieve: The pros and cons of the investment product.

Welcome to the Matthew Feargrieve blog. Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience of advising managers of investment funds operating in the leading jurisdictions of the United Kingdom, Luxembourg, Ireland and the Cayman Islands.

Regulators and political bodies in the European Union and US are responding to the post-2008 financial world with legislation that will circumscribe the freedoms previously enjoyed by banks and fund managers. The ALTERNATIVE Investment Fund Managers (AIFM) Directive in the EU, and the Hiring Incentives to restore Employment (HIRE) Act and Frank Dodd Bill in the US, all unprecedented pieces of wide financial reform, have serious implications for financial institutions on both sides of the Atlantic.

Enter the Undertakings for Collective Investment in Transferable Securities (UCITS). The EU regime has been around for years, but UCITS is suddenly what everyone talks about over dinner. UCITS has been transformed from a boring retail brand to the vehicle of choice for managers pursuing the most alternative of investment strategies. True that UCITS is a brand that has attracted billions in investment. True that some hedge or alternative strategies can be replicated in UCITS. But the drawbacks of UCITS must be weighed with the merits.

Matthew Feargrieve

Ucits upsides

From Matthew Feargrieve , amanager’s viewpoint, this can be summarised in a word: distribution. Being an EU-regulated investment product, UCITS can be sold throughout the EU to both institutional and retail investors. This automatic passporting is particularly attractive given the barriers to EU entry erected under the draft AIFM Directive. More importantly, UCITS facilitate capital raising by hedge fund managers in te EU, by opening up a previously bervoten client base: retail investors. From an investor’s viewpoint the benefit of UCITS is found in the built-in protections that are normally associated with investments sold to widows and orphans. So a manager of a UCITS product must observe strict rules about liquidity and portfolio diversification.

Direct borrowing is not permitted, only synthetic leverage achieved with derivatives. Similarly physical short selling is not permitted; is not permitted; instead, the manager must use derivatives to replicate short exposure.

UCITS downsides

Leverage, shortings, derivatives – these are some of the key tools at the disposal of a hedge fund manager like Matthew Feargrieve in the pursuit of alpha. Restrictions and prohibitions on them brings us to the first serious downside of UCITS: lower investment returns. Achieving returns not correlated to any index is harder in a regime intended for long-only retail products.

The second drawback of UCITS: lower fees. While good news for investors, a manager who is not achieving the kind of returns possible in a non-UCITS model will not be able to command the same level of fees. So while the traditional ‘two and 20’ fee structure is theoretically possible in a UCITS, the reality is that a manger will be charging significantly lower fees.  The problem of lower returns and lower fees is compounded for investors and managers alike by the higher organisational costs involved. A UCITS with a vanilla equity long/short strategy can cost up to €100,000 (£87,282)to set up.

A complex strategy, with the additional regulatory burden involved, can boosts costs to €200,000 (£174,564). The same strategy could be launched using the traditional offshore model (in the Cayman Islands, for example) at significantly lower costs. Time to market becomes an issue for the manager keen to exploit market opportunity. A UCITS product conservatively takes two to six months to launch.

The risks

Ultimately, of course, UCITS is just one product in a universe of investment products. If investors and managers have an appetite for relatively lower returns fees and higher costs, then so be it. But what is worrying is that these drawbacks are accepted as the price of better regulations. The higher level of regulatory oversight is considered by many investors as a guarantee of the safety of a UCITS investment. Paradoxically, the UCITS regime is in a fact a relatively untested model for hedge or alternative investment strategies.

While core alternative strategies like equity long/short, market neutral and absolute return are being replicated (at higher cost) in the UCITS framework, some core alternative strategies – those focused on commodities, managed futures, distressed and fixed income arbitrage, for example – are difficult, if not impossible, to replicate.

This stems partly from the prohibition on investing on commodities or commodity derivatives that are that are not sufficiently liquid to satisfy the UCITS requirements or that contravene he exclusion of physical assets. Alternative, risky and potentially illiquid strategies are being forced into the UCITS models. This is a far cry from the retail, long-only product that UCITS was originally intended to be.

UCITS is not a tried-and-tested regime. There is a growing feeling that a UCITS failure is likely, and such a failure could trigger the exodus of billions from the brand. Here we make our final and most serious health warning. The regulators in the main UCITS jurisdictions, Ireland and Luxembourg are relatively inexperienced in matters pertaining to hedge funds. A UCITS blow up any size will severely test their ability to respond.

And with 77 pieces of Mandoff-related litigation eating up court time in Luxembourg, the capacity of the judicial system there to deal with a large fund failure is questionable. Contrast the Cayman Islands, with 30 years of regulatory experience and a legal system underpinned by the courts in England. Ultimately investors and managers will need to decide in which legal system they wish to place their trust.

AIFM changes

Fund managers will be all too familiar with spectre over regulation and freeze-out from lucrative EU markets threatened since early 2009 by EU’s AIFM Directive. For months controversy has raged over the extent to which non-EU funds, should have access to the EU.

At a meeting of the EU Council in Luxembourg on 19 October, a compromise on the most controversial aspect of the AIFM Directive-the so-called ‘third country’ provisions was – agreed. The Council text will ensure that the existing national private placement regimes remain the primary means of access to EU markets in the first two years following the implementation of the Directive.

Then, around 2015, a ‘passport’ can be introduced by the Commission based on European Securities and Markets Authority advice. Thereafter, the two regimes – private placement and passport – will run in tandem until around 2018, at which point the private placement regimes can be effectively switched off. At the time of writing, the council deal on the AIFM Directive still needed to be accepted by the EU Parliament, but it is unlikely to be rejected.

A formal vote will take place in either of the November plenary sessions. Brussels has clearly woken up to the importance of non-EU fund products to EU investors. It now looks as though managers of non-EU funds will have a tripartite choice: continue to market the fund on a private placement basis (together with the new regulatory requirements imposed by the Directive); adopt full compliance with the Directive and obtain a passport; or got to the UCITS route, either in alternative or addition to the traditional offshored model.

Given the serious cost implications of UCITS, it may be that those managers big enough to be able to absorb the higher costs of UCITS will use the model in addition to their existing offshore products, at least until the economic cycle improves and raising retail monies becomes less important.

The majority of managers will dip their toe in the in the UCITS waters by using distribution platforms. But for the vast majority of hedge funds managers, UCITS will continue to be too expensive and too restrictive. We see this forging a divergence between managers of vanilla equity long/short strategies, who will seek to use UCITS, and managers of more complex, more truly alternative strategies, who will use offshore funds in the Cayman Islands and other leading offshore domiciles.

Matthew Feargrieve  is a qualified financial services lawyer in the UK, and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Learn more about the work of Matthew Feargrieve here. Alternatively, you can keep up-to-date with the Matthew Feargrieve Facebook page here. You can also read the latest Matthew Feargrieve news here.

Watch the Matthew Feargrieve video here

Matthew Feargrieve: Steps to a Career in Hedge Funds

Welcome to the Matthew Feargrieve blog. Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience. Hedge funds are mentioned hundreds of times daily in the media and employ some of the most well-paid business professionals anywhere. Landing your first job in the industry is no cakewalk; building a hedge fund career takes a lot of determination and networking stamina, and the competition for jobs is fierce. Whether you are looking for an entry-level position or a mid-career shift to work as a hedge fund manager, this step planS will help you get off to a strong start.

Should You Work for a Hedge Fund?
The surer you are about working for a hedge fund and not being an accountant or working at a mutual fund, ETF or private equity fund, the easier it will be to navigate these steps and land your job. If you really want to work for a hedge fund, it will show in your self-discipline, networking, knowledge of the industry, passion, and actions. You can change your mind later, but if you want to try to work in this industry, go all in and learn as much as you can. Make the decision to change focus like Matthew Feargrieve, commit to it for three to five years, and see what comes of it.

Study the Hedge Fund Industry
If working for a hedge fund is your goal, then create daily habits that work toward that goal. Subscribe to free hedge fund newsletters, read books or articles on hedge funds each day, or join a local hedge fund association or club. Learn the basics – what the major terms/definitions are, who the major players are, what differentiates the companies and what strategies managers employ.

Identify Hedge Fund Career Mentors

Early on in your exploration within the world of hedge funds, try to identify a couple of potential mentors with whom you could begin to develop a relationship. It takes time to develop mentoring relationships, but many successful people are happy to help others out if they are able to. To impress a mentor, you will need to show commitment, patience, humility and a hunger for learning.

Complete One or More Internships
Once you have become more knowledgeable about hedge funds and identified a potential mentor, you should start looking for internships. Even if you are working full time in another position, conducting research for a hedge fund for 5-10 hours a week can be enough to expose you to how that hedge fund creates trading ideas or operates as a business. Try to work on-site if possible, but don’t pass up a great learning opportunity if the only way to gain a hedge fund internship is by working remotely.

Develop Your Unique Value Proposition

Now that you have read articles, books and newsletters on hedge funds completed a few internships, and are developing mentoring relationships, it is time to figure out where you fit into the industry. Define a niche and hone in on that area.

The Bottom Line. Most hedge funds want individuals who are hungry, humble and smart. If you keep this in mind while moving through the 10-step plan above, you should have a great chance of getting your first hedge fund job and beginning a successful hedge fund career.

Matthew Feargrieve is a qualified financial services lawyer in the UK and as a commercial lawyer in the Cayman Islands and the Eastern Caribbean. He is also familiar with the regulation of investment funds and management companies based in Luxembourg and Ireland. Learn more about Matthew Feargrieve on his website here. Read this recent news article about Matthew Feargrieve here

Watch the Matthew Feargrieve video here

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