InvestmentsJul 1 2022

Five factors to consider when choosing a fund domicile

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Five factors to consider when choosing a fund domicile

What should fund managers consider when deciding where to domicile a fund?

While reputation and market access have become two of the most important considerations, careful consideration needs to be given to balancing factors such as tax neutrality, increasing regulations and meeting ESG investor expectations, all while keeping an eye on expenses to protect the investment return as much as possible. 

 A shifting global tax landscape

In 2016, the European Commission first published a list to help determine if a country is following “fair taxation” principles. 

Since then, different jurisdictions have been added to the authority’s grey and blacklists, while others have been removed. 

Tax neutrality has come under increasing scrutiny and a territory’s inclusion on these lists is well worth considering when picking a fund domicile from the perspective of reputational management and investor expectations.  

Market access 

Legal flexibility and expertise in the chosen jurisdiction, as well as the ability to access targeted investors are important considerations for fund domicile.  

The Alternative Investment Fund Managers Directive introduced in 2013 led to the creation of “passporting”, where funds registered and domiciled in the EU are able to access investors in the region.  

EU domiciles are popular for fund managers looking to market in Europe. However, for managers running sophisticated strategies such as private equity or hedge funds, accessing investors through the passport might not be the most cost-effective strategy. 

In addition, since Brexit, while UK-domiciled funds can still market across EU member countries, doing so involves significant red tape, including measures such as applying to individual EU member states for marketing rights. 

Regulation and product choice 

Oversight and scrutiny in the global investment space has gained increasing attention from global standard setters over the past few years. This is a positive progression, offering additional protection for investors across the board.  

Concurrently, investment strategies have become increasingly complex. These more complex structures and increased scrutiny are putting additional pressure on financial regulators, who need to be proportionate and flexible.  

The need for a simple, easy-to-understand regulatory framework that avoids unnecessary bureaucracy is clear.  

Investment managers want a domicile jurisdiction where regulation is risk-based and trusted to have an adequate degree of investor protection; a good reputation is critical to investor confidence.  

Trusted financial centres are those that adhere to the highest standards of international tax, regulation and transparency around fund operations. 

Equally, fund managers need practical solutions and a good choice of structures to choose from. Increasingly, that also means “green” fund products to meet the growing market demand for sustainable investment opportunities. 

Reputation matters 

With greater awareness of good governance practices, increasing geopolitical risk and a growing social consciousness, investors are becoming much more hands-on with the management of their money, and that extends to the fund domicile.  

More and more, investors want to know that their money is based in a jurisdiction that is well known, and has a positive or neutral relationship to the country in which they live.  

Equally, people want to know the fund in which they are invested is in a politically, fiscally and legally stable country. They may also want to know whether the jurisdiction’s ESG principles and practices are aligned with their own. 

Cost of doing business 

Finally, as well as increasing concerns around risk and transparency in the global funds industry, an ever-growing degree of scrutiny is being placed on costs. 

To ensure genuine substance, fund managers will usually have to consider the cost of ensuring they have a presence in their proposed domicile location.  

This is a major requirement for regulators in many fund domiciles and can lead to expensive relocation-related expenses. 

This presence may increase costs, but the critical thing for fund managers to consider is whether the benefits of a particular fund domicile – either financially or reputationally – outweigh the additional costs of doing business there and how this might impact the underlying investment return. 

However, some of these costs can be reduced by picking a fund domicile with a well-established financial industry, and fund managers will want to work with professional and respected service providers, such as administrators, auditors and custodians. 

Rupert Pleasant is chief executive at We Are Guernsey