practical uses of bermuda structures/alternative investment
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Practical Uses of Bermuda Structures/Alternative Investment
Vehicles
Bermuda:The Future of Offshore, Today
London, January 22, 2001
London, January 22, 2001
Practical Uses of Bermuda Structures /Alternative Investment Vehicles
Moderator: The Hon. C. Eugene Cox, JP, MPDeputy Premier and Minister of Finance
Greg Haycock
Martin Lane
Fergus Healy
Johann Wong
Greg HaycockPartner
KPMG Bermuda
THE SEGREGATED ACCOUNTS COMPANIES ACT 2000
andANTI-MONEY LAUNDERING
AND THE PROCEEDS OF CRIME ACT
Overview
The new public registration system for creating protected client “cells” in any industry: quickly inexpensively
Advantages
Less Expensive More Manageable Establishes substantive law
Substance of Relationships
Nature of a trust Created by way of mandated agreement
Benefits
International recognition and enforceability Enhances Bermuda’s reputation Establishes a system of registration Sets prescribed standards Improves Bermuda’s competitiveness
Business Opportunities
Applies to non-insurance as well as insurance uses Promotes tailor-made solutions
Non-Insurance Uses
Mutual fund structures Property development companies E-commerce companies Ship and aircraft companies Securitisation and derivative transactions Trust company arrangements
Summary of the Act
Establishes system of public voluntary registration Creates statutory regime governing record keeping Incorporates principles of U.S. business trust
legislation
Requirements
Available to companies governed by the Companies Act No restrictions on insurance company applications Other companies must seek approval of Minister Company name must include “(SAC)”
Crucial Aspects
Attributes portions of an asset/liability Allows for amalgamation or consolidation Any type of securities Sets conditions for dividends or distributions
Competitive Fees
Annual fee of $250 per segregated account Maximum annual fee of $1,000
Determining Solvency of SAC
Cells or Segregated Accounts
General Account
Cells or Segregated Accounts
Separate accounts for each cell Each with assets and liabilities Subject to any abatement provisions
General Account
One set of accounts Assets and Liabilities
Illustration of SAC, General Account and Segregated Account Cells
Conclusion
Bermuda at the forefront International recognition Responsible legislation Suited to a wide range of business uses Assists development of offshore sector
Anti-Money Laundering and the Proceeds of Crime Act
Historical Perspective
1940 Defense Finance Regulations 1972 Exchange Control Act 1997 Proceeds of Crime Act 1999 Proceeds of Crime Amendment Act
“Know your Customer” Initiative
1988 Vienna Convention
1991 BMA issues Anti-Money Laundering Code
1995 UK officially declares to UN Vienna Convention applies to
Bermuda Code of Conduct updated and reissued formerly adopted by all financial institutions, other than CIS
Proceeds of Crime Act, 1997
Crimilized the laundering of proceeds of criminal conduct including; concealing or transferring proceeds assisting another to retain proceeds acquisition, possession or use of proceeds failure to disclose knowledge or suspicion tipping off third parties under investigation
Criminal Conduct
Schedule of “relevant offences” includes offences which; result in significant monetary gain
corruption, fraud, counter-fitting, stealing and/or forgery
“dual criminality” an act or omission which would constitute drug trafficking or a
relevant offence had it occurred in Bermuda.
Proceeds of Crime Money Laundering Regulations, 1998 Provides that banks, trusts, deposit companies and other
categories are regulated institutions and must observe the rules
Regulated institutions required to establish & maintain procedures concerning; client identification record keeping internal reporting training appointment of compliance officer
Proceeds of Crime Amendment Act, 1998
Changes definition of relevant offences under ‘criminal conduct’ to mean all indictable offences.
Criminal Tax Evasion - only indictable tax offence in Bermuda
“any willful act by a person with intent to defraud and where (a) the person knows a substantial amount of tax would otherwise be due (b) the conduct involved constitutes a systematic effort or pattern of activity designed to falsify material records
Martin LaneManaging Director
Conyers Dill & PearmanLondon
The Legislative Framework forCollective Investment Schemes
in Bermuda
Current Legislative Framework
The Companies Act 1981 The Bermuda Monetary Authority
Collective Investment Scheme Classification Regulations 1998
The Companies Act 1981
Allows Redemption Prospectus Requirements
BMA (CIS) Regs
Bermuda Standard Scheme Bermuda Institutional Scheme Bermuda Recognised Scheme
Bermuda Standard Scheme
Local (Bermuda) bank custodian - usually Local (Bermuda) registrar BMA approval of other functionaries
Bermuda Institutional Scheme
No requirement for Bermuda custodian minimum subscription $100,000 initial offering size $50m
Bermuda Institutional Scheme
Administrator must have a physical presence in Bermuda be independent of the scheme and other functionaries
Warning language - regulated to a lesser degree
Establishing a Mutual Fund
Incorporation by registration application to BMA
BMA to approve offering materials Prospectus filed if public offering
Officers or Representatives
Two Resident Directors One Resident Director and a Resident Secretary Resident Representative and a Resident Secretary
Declaration filed annually with fees
Monthly statistical report
Prospectus - refiling on material changes
On-going ReportingRequirements
Minimum capital lowered
No annual prospectus refiling
Recent Changes
Future Proposals?
Fergus HealyVice President
Bank of Bermuda
Substance to Investment FundBusiness In Bermuda
Bermuda is in an almost unique position in the offshore world as many facets of the investment management industry have a substantial presence on the island.
Leading jurisdiction for the incorporation, management and administration of investment funds of all types and the provision of custody services.
1,339 open ended funds constituted in Bermuda with nearly $40 billion in assets as at 30th June 2000.
Very Good Infrastructure
Excellent telecommunication network E-commerce hub Regular flights to the US, London and Canada Safe, stable economic and political environment Excellent accounting, legal and technical professional
support services
Strong but Flexible Regulation
Bermuda Monetary Authority (“BMA”) has a sound track record for prudent regulation
Excellent working relationship/partnership between government and industry
Bermuda is not on the FATF or OECD “blacklists” due to strong “Know your Customer “requirements.
KPMG recognized Bermuda’s strong regulatory environment in its Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda for the UK Government.
Pending Licensing of Fund Administrators
Experience with DifferentFund Structures Hedge Funds
Equalization Series Accounting Hot Issues Electronic links to Brokers Huge growth in European based sponsors
Fund of Funds Very popular in 2000 Allow investors to be exposed to a number of hedge funds Seeing a trend for lower minimums Many large custodian do not want the custody side of the buisness
Experience with DifferentFund Structures Private Equity Funds
A large number of Private Equity Funds have been set up in the last three years in Bermuda by European Managers
Very unique accounting requirements Bermuda has built up an expertise in the administration and auditing of
Private
Equity Funds Emerging Market Funds Seeing a revival after September ‘98
Structured Trusts Can be very effectively used for some commercial transactions
Expertise in Administration
Many well respected administrators in Bermuda Ability to service funds from many jurisdictions State of the art systems Exposure to developments in many jurisdictions And most importantly . . . . .
. . . . for the fund sponsor
A Great Place forBoard Meetings!
“QI” Status
Bermuda recognized as an approved jurisdiction Benefit the custody business but also the unit trust
business QI’s who are non-US Custodians and Trustees - No
disclosure of client details to IRS
Removal of “Ten Commandments” Has not had the drastic impact some thought Expertise, cost effectiveness and flexibility Many investors still look to a 3rd party administrator for
comfort Provided opportunity for many of Bermuda’s
administrators to move some of their operations on-shore Opens up new market - domestic U.S. Hedge fund
market
Summary Bermuda has a substantial multi-faceted investment
management industry. Fund administration is major component of the investment
management industry. Bermuda’s Administrators are among the leading off-shore
fund administrators in the world. The BMA enforces a strong but flexible regulatory regime. Bermuda’s continues to take steps to protect its good
reputation.
Bank of Bermuda Contacts
Fergus HealyVice President & Legal CounselBusiness DevelopmentThe Bank of Bermuda Limited6 Front StreetHamilton HM 11Bermuda
Phone (441) 299-6174Fax (441) 299-6565Email [email protected]
Anthony RikerVice President BusinessDevelopment ManagerThe Bank of Bermuda Limited6 Front StreetHamilton HM 11Bermuda
Phone (441) 299-5117Fax (441) 299-6565Email [email protected]
Drew A. DouglasVice PresidentBusiness Development ManagerBank of Bermuda (New York) Limited100 Wall StreetNew York, NY 10005
Phone (212) 715-6454Fax (212) 715-9300Email [email protected]
Johann WongPresident & Founder
HedgeWorld Ltd.
Alternative InvestmentsAlternative Investments
E-CommerceE-Commerce
Risk TransferRisk Transfer
“All Good Things Converge In Bermuda”Bermuda is the premium offshore jurisdiction where alternative investments, risk transfer and electronic commerce converge to offer a seamless solution for
businesses
Bermuda:The Convergence Island
Bermuda: The New New Thing Innovative building blocks, include:
Seamless Solution - accounting, administration, banking, capital markets, custody, insurance, Internet infrastructure, legal...
Rule of Law - Electronic Transaction Act, 2000 and Investment Business Act, 1998 and respective Code of Conducts...
Estimated $10 billion + in reporting hedge funds domiciled and/or custodied in Bermuda (TASS+)…
PlusMarkets joint-venture with the BSX and Plusfunds.com HedgeWorld.com, HedgeTrust Exchange and the BSX... Annual MAR/Hedge industry conference… Estimated $84 billion in total assets and $23.4 billion in capital in insurance
companies (Deloitte & Touche 12/31/99), 1,500 insurance companies XL Capital, MaxRe, Imagine, Tremont Insurance...
www.bermudaconvergence.com
Regulatory Overview & Links
Bermuda International Business Association Bermuda Monetary Authority Bermuda Stock Exchange - FIBV, IOSCO Member Insurance Advisory committee IRS Qualified Intermediary - Bermuda is Qualified KPMG Report - Recognized jurisdiction OECD - FATF - Not on any black lists U.S. Treasury Advisory - Not on black lists
Fact Sheets
The Convergence Island Why Bermuda Mean Business Financial Services Hedge Funds Mutual Funds Insurance Industry E-Commerce Legislation E-Business Solution
Case Studies DotRisk.com - insurance site HedgeWorld.com - hedge fund B2B infrastructure solution Imagine Re - reinsurance wrapped around hedge funds Invesdex - online alternative investments index Max Re - reinsurance wrapped around hedge funds PlusMarkets - online trading of hedge funds with BSX Principal Guaranteed: ACE, XL, Zurich - insurance-based principal
guarantee of hedge funds products Tremont International Insurance Ltd. - insurance and annuities
wrapped around hedge funds
Widely Held Moore Capital
Fixed Income
AlternativeAssetsPortfolio, Managed by Moore Capital
Life and P&CReinsurance
(Low Volatility)
$500 million
MAX RE
* First class insurance management team* Class 4 licence
$350 million $150 million
60% 40%
TOTAL ASSETS
NOTES:
Not a PFIC or CFC
Tax Free Income Roll-Up
Leverage Using Premium Flow
IPO Likely-Multiple
“Hedge Fund” Insurance Companies
INVESTORSTRUSTEE
ASSETSCUSTODIAN/
TRUSTEE
COLLECTIVEINVESTMENT
SCHEME
NOTES:
- Wider Investor Pool
- Effective use of Capital
- Insurer looks for:
• liquidity
• track record
• transparency
• ability to understand risks
• control
- Costs
INSURER
MANAGER
GUARANTEE
PRINCIPAL RETURN AT MATURITY
CAPITAL
REPORTS TO
MANAGEMENT
CONTRACT
HELD BY
CUSTODY
AGREEMENT
Principal ReturnGuarantee
Global Hedge Fund Industry
Where is the opportunity?
Estimated 3,000 to 5,000 hedge funds, U.S./non-U.S. Estimate US$300-500 billion in assets, U.S./non-U.S. Estimated 25%+ growth rate, new assets received Estimated to grow to trillion U.S. dollars in 5 years Institutions and their consultants High net worth investors and financial service providers Growth in hedge funds under US$100M Transparency and risk management
Hedge Fund Industry Trends Traditional to alternative manager brain drain Inherent supply side constraints increasing Emergence of a “elite” class of hedge funds Fee discounts on unproven managers Demand for hedge fund transparency increasing Demand for hedge fund increasing with knowledge Financial institutions outsourcing to hedge funds Hedge funds are moving down market to affluent investors
Hedge Fund Industry Trends (cont.)
Capacity will increase with institutionalization Liquidity is decreasing Structured products are increasing Lenders consolidating credit and trading risk Managers want stickier funds Regulatory reform focusing on creditors Managers becoming more marketing-orientated
Great Performance...
Year
S&P500 w/div.
Median, of all equity
mutual funds
Top 25%, of all equity
mutual fundsMedian, all
hedge fundsTop 25%, all
hedge funds
1989 31.63 25.39 31.22 20.95 32.04
1990 (3.15) (5.09) (1.18) 6.86 19.11
1991 30.41 33.90 45.26 25.95 42.09
1992 7.61 8.87 13.73 15.82 24.42
1993 10.03 12.79 18.18 23.75 35.36
1994 1.12 (0.99) 1.22 4.38 11.06
1995 37.58 31.98 36.21 20.94 34.15
1996 22.97 19.89 23.01 19.13 28.77
1997 33.36 25.85 30.54 18.22 28.22
1998 28.58 14.31 24.81 7.53 18.25
CAGR 19.17 15.73 17.81 16.48 21.32
Source: Tremont Advisers, Inc.
Superior Rewards vs. Risk (1986-1995)
Cottier, Philip, Hedge Funds and Managed Futures, University of St. Gallen, Verlag Paul Haupt, Bern, 1997
50
190
450525
645760
900
1060
1220
1380
1540
1700
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1990 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Assets
(b
illio
ns $
)
E E E E E E E E E
Creates StrongHedge Fund Growth
Tremont Advisers, HedgeWorld.com, Dr. Rama Rao and Jerry J. Szilagyi,
The Coming Evolution of the Hedge Fund Industry, RR Capital Management, 1998
U.S. Offshore Fund 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Total Funds Listed 78 108 142 176 265 313 400 459 550 593
Hedge Funds Listed 123 197 248 308 375 445 375Fund of Funds Listed 53 68 65 92 86 105 218
New Listings 30 51 56 106 93 145 135 147 146Net New Funds 19 23 45 35 68 116 115 118
U.S. Offshore Fund 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 CAGRTotal Funds Listed 0 38.46% 31.48% 23.94% 50.57% 18.11% 27.80% 14.75% 19.83% 7.82% 25.28%
Hedge Funds Listed 60.16% 25.89% 24.19% 21.75% 18.67% -15.73% 20.42%Fund of Funds Listed 28.30% -4.41% 41.54% -6.52% 22.09% 107.62% 26.58%
New Listings 70.00% 9.80% 89.29% -12.26% 55.91% -6.90% 8.89% -0.68% 21.87%Net New Funds 21.05% 95.65% -22.22% 94.29% 70.59% -0.86% 2.61% 29.81%
Source: U.S. Offshore Funds Directory
Stronger Growth Offshore...
17002400 2800 3200
3800
57286254
66847314
7791
0
2000
4000
6000
8000
10000
12000
14000
1995 1996 1997 1998 1999
Mutual Funds
Hedge Funds
Investment Company Institute & TASS Investment Research
E EE
# of Mutual Fundsvs. Hedge Funds
$ billions. Investment Company Institute & TASS Investment Research
$2,812$3,526
$4,468
$5,525
$6,843
190 210 280 450 525$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
1995 1996 1997 1998 1999
Mutual Fund
Hedge Fund
E E E
Assets of Mutual vs.Hedge Funds
60% -75%
40% - 25%
TASS Research Investment Research
Hedge Fund Investor Profile
High-net-worth families Swiss private banks U.S. endowments/foundations Institutional Structured notes Insurance companies
Allocations to Hedge FundsEstimated Hedge EstimatedFund Investment Allocation Rates
(billions)High Net Worth $140.0 1.60%Pension Funds $8.5 0.08%
Insurance Companies $1.7 0.03%Non-Profit Organizations $13.6 1.17%
Others $6.8 0.14%RRCM & KPMG, 1998
N = 267, emerging wealth investors ($100,000 or more)High-Net-Worth Psychology: Finding, Winning and Keeping Affluent Investors, Prince & Associates
Hedge Fund Opportunities for Investors 68.9% - Will be more available to less wealthy
investors 68.2% - Only the rich get to invest 64.8% - Best investment managers run hedge funds 63.7% - Everyone should be able to invest 62.2% - Would invest if opportunity arose 57.3% - Good way to create a diversified portfolio
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Public Private Endowment Total
Assets
(%
) D
oll
ar
Weig
hte
d A
vera
ge
1996
1999 E
Greenwich Associates
Pension Plans Alternative Investments
U.S. Institutional Investors DemandHedge FundsNow Would TotalUse Consider Demand
1997 1998 1997 1998 1997 1998Corporate Funds 5% 4% 5% 7% 9% 11%Over $5 billion 17% 15% 8% 23% 25% 38%$1,001-5,000 million 7% 5% 9% 11% 16% 16%$501-1,000 million 5% 5% 4% 9% 8% 14%$251-500 million 2% 2% 4% 3% 6% 5%$100-250 million 2% 2% 2% 3% 4% 6%Public Funds 3% 2% 4% 5% 7% 8%State 3% 2% 5% 6% 8% 7%Municipal 3% 3% 4% 5% 7% 8%Over $5 billion 5% 2% 9% 7% 14% 8%$1,001-5,000 million 7% 3% 1% 6% 8% 9%$251-1,000 million 0% 3% 2% 5% 2% 8%$100-250 million 1% 1% 6% 4% 8% 5%Endow ments 33% 32% 15% 39% 47% 71%Over $1 billion 38% 42% 19% 48% 57% 90%$251-1,000 million 39% 31% 14% 38% 53% 68%$100-250 million 23% 29% 13% 36% 36% 64%Total Funds 9% 9% 6% 13% 16% 22%
Greenwich Associates
All Good Things Converge In Bermuda
Bermuda:The Convergence Island
Seamless Solution - Alternative Investments, Risk Transfer and E-Commerce Business friendly environment and stable economy Accounting, Administration, Banking, Custody, Financial Services,
Insurance, Internet, Legal Rule of Law - Electronic Transaction Act US$10 billion from over 120 hedge funds US$30 billion from over 1,000 mutual funds US$100 billion assets from over 1,500 + insurance companies Proven case studies - ACE, DotRisk.com, Hedgeworld.com, Imagine,
Invesdex, MaxRe, PlusMarkets, Tremont International Insurance Ltd., XL, Zurich
The Convergence Island
All Good Things Converge In Bermuda