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With alternative investors pivoting away from collective investment pools towards SPVs and funds-of-one as digitalization trends disrupt the asset management industry, Jersey Finance is taking an increasingly proactive approach to the rapidly evolving landscape.
The organization, which advocates for the financial services sector on the British crown dependency island, has seen the number of pooled collective investment funds — traditionally the hedge fund industry’s structure of choice — fall by half over the past five years. Yet when the number of Jersey Private Fund (JPF) structures are added to the mix, the jurisdiction has seen a net year-on-year increase, according to Elliot Refson, head of funds at Jersey Finance.
“Apart from the slowdown that we saw in the first half of 2023, we have also seen the doubling in the numbers of limited partnerships created year-on-year,” Refson told Alternatives Watch.
The numbers point to a fundamental rebalancing away from traditional collective investment vehicles towards SPVs and funds-of-one, driven by a convergence of trends including economic and operational efficiency, strategic flexibility, and market trends and investment preferences — with an ever-more strident allocator class at its core.
Greater control
“It’s a different world now,” added Philip Pirecki, Jersey Finance’s lead in the Americas, adding that what investors ultimately want is the expertise of asset managers, but with governance structures which provide greater control, transparency and reporting.
“There’s a greater sophistication among allocators,” said Pirecki, who oversees the organization’s business development efforts in the Americas. “If they have the mandate and the ability to not be forced into a pooled vehicle, you’re now seeing a preference to not being in that pooled vehicle.”
SPVs’ lower setup and ongoing costs offer economic and operational efficiency to both managers and investors, in turn allowing a greater amount of capital to be allocated directly to the investment portfolio. From a Jersey-specific perspective, this is further boosted by Jersey’s tax neutral approach, where there is a 0% tax on asset management. “That enhances the returns for the smaller groups of investors, which obviously makes SPVs attractive,” noted Refson.
In addition, bespoke SPVs and funds-of-one also allow for tailored investment strategies that can more effectively tap into individual or specific projects and asset classes, with emerging and start-up managers also utilizing these structures to build track records in niche specialisms. This customization offers managers greater control over investment decisions, Refson observed, as well as the ability to respond more quickly than pooled investment funds, which often have broader mandates. On the investor side, meanwhile, SPVs allow investors to isolate risks associated with individual investments, he added.
Fee focus
Pirecki also highlighted how the shift has impacted the manager-allocator dynamic when it comes to the often-thorny issues of fees.
“Previously, allocators went into the pooled vehicles — that was how you allocated to alternatives. They wanted the returns, and they were happy to pay for those returns. But now, with greater transparency and control, people can see where their fees go,” Pirecki said.
While most investors are content with performance fees, the real issue arises on the management fee side, he said.
“When you go from very high net worth, ultra-high net worth, to family office, to institutional and now industrial-scale industry, there was always likely to be this level of change in the way fees and the businesses operate,” Pirecki observed. “But this is what happens in a mature industry – the people, meaning the allocators, understand what drives these returns better than they’ve ever done. That investment expertise and decision making that they wanted to avail themselves of, they’re now able to do that in ways that are demonstrably more efficient than they’ve ever been, and in a democratized fashion.”
And as for the investors, Pirecki added, “They are willing to pay for the things that they’re willing to pay for and are increasingly unwilling to pay for things they don’t want to pay for.”
The digital challenge
With Jersey home to a large assortment of hedge funds, private equity, real estate and other alternative investment funds, as well as fund administration and other service providers, Jersey Finance continues to be at the forefront of the key trends reshaping the industry.
Last year, the organization expanded its range of private fund vehicles with the launch of a new Jersey LLC fund structure, aimed at strengthening the territory’s profile as an attractive domicile for U.S. alternative managers, as other rival domiciles were caught up in the EU’s anti-money laundering blacklist.
As Jersey’s funds industry in relation to the U.S. market continues to expand, the organization is now turning its attention to the growing challenge of digitalization and tokenization, which Refson and Pirecki said will herald seismic changes for the global asset management sector and fund domiciles alike.
“It’s very clear that jurisdictions are just like any other business — they must compete, and jurisdictions that don’t stay relevant fall by the wayside,” Refson said, pointing to the organization’s various projects over the years spanning hedge funds, securitization, and the ongoing shift from collective investment funds to corporate vehicles. “It’s our role to stay ahead of trends, to keep up with trends, and then to see the trends coming through.”
With the Jersey Financial Services Commission, the island’s financial regulator, set to release guidance on the tokenization of real assets, the pair underline how the territory — known for its reputation as a stable and reputable jurisdiction with a well-established legal framework with a pool of service providers who can facilitate complex investment structures — is rapidly adapting to the evolving digitalization challenge.
“We’re on the cusp of seeing a fundamental shift in the way investment is going to work, specifically to a jurisdiction like Jersey, which is very much a real assets jurisdiction,” said Refson, noting how some 90% real asset-focused funds and pools are in the alternatives space.
With the tokenization of real assets, and this will include hedge funds, it takes the manager away from the institutional market to the high net worth retail market. The high net worth retail market is probably 50% of the $295 trillion of global assets under management, and only 60% of that is in alternatives, according to Refson.
“So the manager gets access to this new market, which is less demanding on fees, who are probably less demanding on returns. That market, in return, gets access to asset classes that they didn’t have before,” Refson added. “As a promotional body for the finance industry, a lot of what we pick up on fairly early is because of the statistics that we get, and we try and educate accordingly. Digitalization is the biggest change that we’ll see in Jersey this year — and we have products to facilitate it.”
Pirecki said: “[Digitalization] is a completely different infrastructure. If you think of this new infrastructure as a base, a platform, a commodity, a utility, what you layer on top of that — increasing sophisticated technologies and software — then the way business models have operated previously are going to go through a radical reimagining. This is something that will happen quite quickly, even with the inertia of vested interests.”
An active process
Elaborating further, Pirecki explained that the days of jurisdictions being places simply for structuring and administration are “long gone”, adding that Jersey Finance’s proactive approach will prove critical in an increasingly febrile environment for fund management.
“If the jurisdiction is not wrestling with the issues actively, then it is going to be left out of best practices, procedures, processes and rules-setting, and it will not be engaged in the development of solutions to these technologies,” Pirecki said. “It sounds straightforward — you get the industry, the government and the regulator together, and you find solutions for trends that are happening. But the fact is there aren’t many jurisdictions that have the capability, capacity and expertise to do the work.”
He added, “We’re in a place now of rapid reimagining how this industry works. Not just alternatives – financial services, legal services, accounting services, investing, all of these are going through a massive reimagining, driven by changes in technology. It will have a significant impact on margins – a huge compression on them over time. We’re in a massive state of disruption — if you’re a manager looking for a place to structure in an increasingly complicated world, you should be looking to structure in a place that has that capability.”
He noted how Jersey Finance continues to work with all stakeholders within the jurisdiction to brief them on the changes and strive towards solutions. “As things get more complicated, it has to be an active process — you need more specialists to do the work. That’s where you need to be as a jurisdiction going forward,” Pirecki said.