Gibraltar and Malta and their strengths and futures as a Fund Jurisdiction

When discussing the main strengths of Malta and Gibraltar as fund jurisdictions we can start with both being European onshore jurisdictions and is, as such, very well regulated. In the case of Gibraltar the financial regulator, the FSC, is an independent body that ensures all the international financial standards are adhered to.

In 2005, a new fund regulation was introduced to allow the creation of Experienced Investor Funds (EIFs). This regulation allows new funds to be created quickly, with all the key partners closely supervised by the local regulator (FSC), in accordance with EU and UK Standards. The result is that Gibraltar based funds offer all the flexibility and advantages of typical offshore funds such as Cayman or Bahamas-based offshore funds, but in the form of an onshore European Fund vehicle. Of course both Gibraltar’s and Malta’s strengths as a funds jurisdictions extend to its highly qualified and multi-lingual staff.

The availability of jobs in Gibraltar and jobs in Malta means offshore recruitment remains fairly easy and straightforward. Both are easy accessible by air, land and sea. Finally both Gibraltar and Malta are politically stable and their legal and fiscal systems are based on English common law, ensuring legal and fiscal security.

Both local governments actively support the sustainable growth of the fund industry. The current challenging market posses a number of hurdles for both jurisdictions.

Malta and Gibraltar-based funds can use prime brokerage services in and outside of Gibraltar. Both jurisdictions are exposed to the international financial markets and therefore face the same challenges as elsewhere. There has been a general trend towards de-leveraging and moving into cash by most of the existing funds, with the aim of ensuring that all redemptions can be met.

The reduced number of prime brokerage providers internationally as well the ongoing de-leveraging being carried out by many major investment banks, has further encouraged this trend. Both jurisdiction based funds are not only active in the hedge fund space, but cover a broad range of investments sectors. A significant portion of funds are invested in: Equities, bonds, real estate, private equity, art and renewable energy. This diversification means that not all funds are impacted in the same way by the current market conditions. Evaluating and monitoring operations has become increasingly important in the current financial climate. Some of the main legal challenges and pitfalls for hedge funds in the modern funds environment can be avoided.

For example very close co-operation between all market participants in a jurisdiction (custodians, legal advisor’s, fund directors, fund administrators and investment managers) and the respective regulator is of utmost importance.

This is very much the case in Gibraltar, with the regulator setting the rules for the industry and monitoring their adherence very closely both directly and indirectly via the locally authorised parties of the fund structures. Another key point is transparency. In Gibraltar, the laws and guidance notes issued in relation to funds incorporated in the jurisdiction are very clear, and all the participants understand their implementation. Additionally, these rules are enforced by ensuring that only duly qualified persons are permitted to take decisions, for which they are accountable.

The potential risks brought on by recent events in global markets include the possibility of over-regulation as well as, perhaps, losing sight of the long-term growth objectives of the strong support for this development.

In this changing environment, it will be important for both Gibraltar and Malta to be selective with regards to the type of fund clients granted access to the jurisdiction. During the current economic climate has seen the US and Europe place offshore domiciles under greater scrutiny.

Here we quickly look to see how this effected Gibraltar based funds. Firstly it should be noted the pressure on international offshore finance centres does not apply to Gibraltar as we are not an offshore, but rather an onshore centre. Funds wishing to establish themselves in Gibraltar or wishing to re domicile to Gibraltar, are looking for a sound European jurisdiction with all the EU credentials and a strong international reputation. Gibraltar has evolved from a zero tax to a competitive low-tax jurisdiction.

Our status as a member of the EU with a sound tax and political framework will support the local fund industry going forward. All of the above remains relevant to Malta. Finally a number of lessons can be learnt from the credit crunch. For example initially the subsequent knock-on effects will likely bring more transparency to the hedge fund and fund markets. Market players with clear and transparent strategies are most likely to be successful.

Performance fees will be difficult to implement in the future and new regulation will likely limit the level of permitted leverage and delineate clear parameters for investment managers. In terms of investors, they will be more selective in the way they invest in funds and hedge funds.

A healthy, smaller hedge fund industry should emerge from the crisis and pave the way to sustainable market growth in the fund industry. Malta and Gibraltar will likely be key players in that European offshore fund market.