In today’s environment of high-profile hacks and cyber security breaches, it’s not a huge surprise to me that the majority of my fund manager clients who trade digital-assets have a distrust of institutions that claim that they can safeguard their assets. In addition, despite the exponential growth of managers trading digital-assets over the past few years, there is still a dearth of service providers willing and able to service the industry (custodians included) which means the prices that institutional custodians currently charge are not yet at levels that can be tolerated by emerging managers. Finally, there’s the question of frequency of trading; by placing their digital-assets with a third party, many managers feel that this will slow down their ability to react to market volatility and take advantage of arbitrage opportunities between different exchanges.
The combination of these factors (perceived security risks, high costs and a reduced speed of trading) means that the majority of my fund manager clients trading digital-assets prefer to safeguard their own assets through the use of cold storage e.g. by sharding their private keys, putting them on individual thumb drives and, sometimes, even placing them in different safety deposit boxes in various locations. The number one question I get asked by my clients at the beginning of any engagement is can they self-custody their assets and, if so, should they do this? With this mind, I thought it would be helpful to set out the regulatory requirements (from a BVI and Cayman law perspective) together with what we see as current market practice.
There’s an audible buzz in our funds team at the moment. Not the usual, hum-drum whir of the air-conditioning, but a genuine feeling of excitement that we’re involved in something cutting-edge, something creative and something potentially so disruptive that it could change the way we do business entirely. Continue reading
I recently had the great pleasure of being interviewed by James Williams, Managing Editor of HedgeWeek, for the 2017 BVI Special Report. We discussed at length the positive regulatory developments in the pipeline for the BVI, some of which I thought I’d share:
During a recent visit to our London office, I had the privilege of attending AIMA’s Spotlight and Cocktail reception in London, the highlight of which for me was a keynote speech by Robert Peston. For those of you who were not in the UK in 2008 and 2009, Robert was one of the most prevalent economic commentators at the time (and, personally, a bit of a hero of mine).
The theme of Robert’s presentation was uncertainty and the question he asked us all to consider was whether, if 2007 was the age of absolute certainty (albeit, certainty that we were all about to suffer a painful and prolonged recessionary period), 2016 is the age of absolute uncertainty, politically and economically?
In this guest post, my friend Scott Rosenthal discusses the role of an Outsource CFO and the reasons why fund managers might like to engage one. Do feel free to get in contact with Scott or myself if you would like to discuss any of this further.
There is a growing segment of the hedge fund and private equity fund service provider population called the Outsource CFO. Outsourcing has become very popular in recent years, in regards to back office, middle office, compliance (including outsourcing the investment advisers CCO), trading, and most other areas that a hedge fund needs to operate. What could be considered the final frontier of the service provider population is the Outsource CFO. The Outsource CFO model assists the start-up or smaller fund manager, who may not have the budget or the need for a full time CFO. So, instead of hiring someone who may not have the appropriate experience in order just meet the budgetary restrictions, fund managers can now opt to hire an Outsource CFO.
So why use an Outsource CFO?
Last week I had the privilege of representing BVI Finance, the voice of the British Virgin Islands’ financial services industry, by being a panellist at the Hedge Fund Emerging & Startup Manager Forum in New York. I joined some leading industry experts on a panel focused on how to structure your fund as an emerging manager. As we’ve previously mentioned on this blog, emerging managers form a core part of our BVI funds practice, and this was an excellent opportunity to give some practical advice to those emerging managers in the audience.
Whilst the day was full of fascinating insights, a key take-away for me was the difficulty that emerging managers are facing when looking for seed investment. The message was loud and clear; unless you have a minimum AUM of US$100m, you won’t even get past first base when it comes to the majority of professional seeders. This begs the question how you get to US$100m in the first place – classic chicken and egg/catch-22 territory. There’s no easy solution, I’m afraid; the key is to start with friends’ and family money, and build a track-record over a period of at least two to three years that simply cannot be ignored by professional seeders. Only then can you begin to approach the bigger ticket investors with a degree of certainty that you won’t have the door slammed in your face.
In light of this, it was no surprise that I was inundated with questions about our new funds product in the BVI; the incubator fund. As we’ve previously mentioned, this product was designed with an absolute focus on the emerging manager who is looking for a cost-effective, light-touch regulated fund with which to use friends’ and family money to test their strategy. In an age of generally increasing regulatory red-tape and costs, the emerging managers I spoke with that day were able to breathe a (small) sigh of relief that the BVI is looking out for them.
I had the pleasure of being interviewed by Hedgeweek recently regarding the success of the BVI’s two new funds products focused at the start-up manager; the incubator and approved funds.
As the article makes clear, the BVI now has the complete package for emerging managers, and is, understandably, now being given very serious consideration by new players to the market.
You can read the article in full here.
As always, do let us know if you have any thoughts.
Harneys advises on first EU-approved, Iran-oriented alternative investment fund
It’s not every day that you get the chance to announce that you’ve set-up the first hedge fund, but, for the second time running (the first being the establishment of the first BVI hedge fund*), Harneys have done it, with the establishment of the very first Cypriot hedge fund, Turquoise Variable Capital Investment Fund Plc. But wait – this time, it’s a double first – as Turquoise is also the first EU-approved Iran-oriented alternative investment fund. Taa daaaaaa!
In an interesting turn of events, the Financial Stability Board has recently announced a change of direction in its post-crisis regulatory approach by confirming that it will no longer single out the world’s biggest fund managers as having the potential to pose a systemic risk to the global financial system.
Whilst this doesn’t create the opportunity that smaller managers thought it might — there were those who were hoping to take advantage of a more level playing field caused by bigger managers being tied-up with additional red tape — it is certainly good news for the fund management industry as a whole, providing the industry with a little breathing space whilst global regulators go back to their respective drawing boards in their pursuit to mitigate the greatest dangers to global economic stability.
The wider question is whether or not the investment fund industry as a whole poses a systemic threat to the world economy: a question that has divided both academics and commentators alike. A chief concern is that the fund management industry might amplify market disturbances, in the event that investors attempt to withdraw their capital at the same time. In my opinion, such a run on accounts would be highly unlikely to occur again; I would expect the majority of sophisticated managers to have already amended their funds’ offering documents to allow them to implement gates and broad suspension rights at such times of stress. Of course, this is only one piece of the regulator’s puzzle, but it serves to highlight a potential disconnect between theoretical implications based on an outmoded understanding of the fund management industry and reality.
As always, we’d be delighted to hear your thoughts.
Last weekend, I read an interesting article in the Wall Street Journal entitled A Global Economy Needs an Offshore Industry.
The article focuses on the important (but commonly overlooked) role that the industry plays in enabling global economic development. As the article states:
“If you believe globalization is a driving force behind economic growth, then it’s worth understanding how this system is enabled. Offshore structures and services perform crucial functions, including reducing cross-border “friction-costs” and facilitating the flow of capital. To put it simply, the offshore industry serves as the wiring of our modern, integrated economies.”
This is clearly not the easiest of messages for our politicians to deliver. However, in an era of stalling economies and politicians seeking ideas for renewed growth, it would perhaps be reckless to dismiss the benefits that the industry can deliver.
As always, please do let us know what you think.
Lewis and I poolside in Las Vegas last week.
The cabana village which we co-hosted with other leading firms in the investment funds industry.
Lewis and I have just returned from networking around SALT, a premier thought leadership forum in the global investment management industry, held in Las Vegas. It was a fantastic opportunity to catch up with many of our contacts and also to make some great new connections. Even living in the BVI, it’s not often we get to spend our working day around a pool. Here’s a picture of the cabana village that we co-hosted with some other leading firms in the alternative investment funds industry. As you can see, the dress code ranged all the way from bikini to business suit. You’ll be pleased to know Lewis and I played it safe with office casual.
More seriously, we heard a number of people talking about Assistant US Attorney General John Carlin’s presentation on the danger of fund managers not preparing for cyber attacks. His remarks have also been reported by a number of mainstream press, including USA Today. With ever increasing third party costs and red tape, this is likely to be something that smaller managers can do without right now. However, given the potential damage to managers and their funds from such cyber-attacks, both financially and from a reputational standpoint, we believe that this is something that should be towards the top of every manager’s agenda.