Malta 'challenges' established hedge fund jurisdictions

Malta as a hedge fund jurisdiction is in an advantageous position following the financial crisis, and is gearing up to challenge the established hedge fund jurisdictions in Europe, according to a Hedge Funds Review supplement on Malta.

Hedge Funds Review is the leading magazine for information about global hedge funds. Over 10,000 hedge fund managers, investors and service providers all rely on it each month for its analysis of the market and its databases.

"Ireland annoyed its eurozone partners by declaring a bank bailout without consultation and is still dealing with the fallout from a near-collapsed banking sector that is still far from healthy. The Celtic Tiger may have roared its last for some time.

"Luxembourg's reputation is somewhat tarnished after a series of what look like bad decisions by banks based there over the Madoff scandal. Its perceived lax regulation and cavalier attitude to taxation and oversight is now being reined in.

"Both fund domiciles are going through a bad patch while Malta surges ahead, albeit from a low base. Its slow and methodical approach to building a hedge fund jurisdiction has paid off.

"All big four accounting firms are present with substantial practices. They too are showing growth in the financial, services side of their business and particularly in hedge-fund-related work. Local lawyers have quickly gained a reputation for thoroughness and high professional standards, but at a fraction of the cost in Malta. Dublin, which many believe was pricing itself out of the market before the financial crisis hit, is still at least double the cost of Malta. Luxembourg, too, is considerably more expensive than the island state," the report says.

"As an onshore EU jurisdiction, with favourable tax rates, a balmy Mediterranean climate and a population known for its hard work, fast learning and high moral standards, the combination looks set to win Malta even more business in the future," it says.

According to Hedge Funds Review, the MFSA has gained a reputation for flexibility coupled with meticulous attention to detail. It quotes Petr Posker, investment director of Atlantik Asset Management which has domiciled its funds in Malta, as saying how pleasantly surprised he was to find the MFSA so knowledgeable about hedge fund strategies.

"Because the regulator is very flexible in Malta and also knowledgeable - something that is not usual - we choose Malta," Mr Posker said, pointing out that flexibility was lacking in Luxembourg and Ireland.

Malta's size is another advantage. "Malta is not crowded. People there have time to talk to you. The jurisdiction also offers the potential for people to be more creative and active than in the other jurisdictions. Malta's like one big family; everyone knows each other," said Mr Posker.

Mr Posker also said the relationship Atlantik had built with HSBC in the Czech Republic, where the management company is based, worked to its advantage in Malta. It was able to use HSBC in Malta as custodian and administrator.

"We felt HSBC offered good protection for our assets," he said.

MFSA chairman Joseph Bannister is quoted as saying that investors like to be in Europe and managers are selecting a jurisdiction based on the quality of the regulation. "The fact is, investors want a European label," he said.

Prof. Bannister also said that the MFSA has witnessed a tremendous increase in enquires about UCITS funds - funds which can be marketed within all EU member states, provided the funds and fund managers are registered within the domestic country. There has also been some re-domiciling of these funds away from Luxembourg and Dublin as fund managers seek a regulated but cost-efficient jurisdiction.

Prof. Bannister said that an increase in UCITS funds should be matched with an increase in the number of banks offering custodial services. He said he would like to see more choice as well as more big name banks moving into the jurisdiction to offer custody services locally. In fact, one large European bank is already considering converting its existing licence to offer more services in Malta, including fund administration and custody.

The MFSA chairman explained that Malta has strong contacts with other major jurisdictions and has signed memoranda of understanding with Guernsey and Jersey, the Cayman Islands, Bermuda, South Africa and China. He added that while the MFSA exchanges information with many jurisdictions and there is no problem with authorisation, "obviously we would like to see more regulation from the Caribbean".

Prime Minister Lawrence Gonzi told Hedge Funds Review that Malta has witnessed a tremendous shift from labour-intensive manufacturing into the services area. "We intend to continue this shift," he said.

Dr Gonzi said Malta is keen on developing as an Islamic financial centre and that the country is preparing legislation that will allow Shariah-compliant banking and other financial services to be offered.

"The advantage Malta has is that we are comfortable with the Arab world and the Arab world trusts and engages with Malta," Dr Gonzi said.

The Prime Minister says Malta's membership of the Commonwealth is an advantage for Malta and will help Malta's ambitious plans to expand the reach of its financial services industry globally.

"The concept is to grow exponentially. The potential is there. When the time comes we will target other regions and states, but first we are seeking to develop our relationships with the Middle East," Dr Gonzi said.

Finance Minister Tonio Fenech pointed out that hedge funds represent 60 per cent of the total net asset value of funds actually administered by Maltese companies.

"This is a significant amount for us in terms of the growth we've seen and in terms of net assets, about €6.4 billion," he says.

Mr Fenech says he is not overly worried about any legislation that will come out of Brussels affecting the sector. He believes tighter regulation is "very much in line with our vision of what we want to be as a financial centre. We want to be a reputable one.

"Therefore proper regulation for us is essential and the fact that we were already exercising proper regulation will help us grow in the future."