What Is a Hedge Fund?
Before learning more about the British Virgin Islands Hedge Fund and its regulations, it is important to first take a step back and understand what hedge funds are.
A hedge fund is essentially a collection of money that is contributed by a strict and limited number of partners or investors. The money is used for a very specific goal and operated by a professional manager. The goal of the manager is to maximize the returns of this pool of cash for his investors while also being aware of any risks and ensuring they are minimized.
Feature of Hedge Fund
The nature of the hedge fund is such that usually only the very rich are allowed to invest, though it may not always be that exclusive. If you are an investor with good connections with the manager of a hedge fund you may find a way in. Occasionally, you may also find managers themselves investing.
There are different types of hedge funds and therefore, each has different goals, some are only interested in private equity, while others concern themselves with only buying common stock. However, despite their differences, a common goal with most hedge funds is being able to make money despite any fluctuations in the market, also known as Market Direction Neutrality.
How Does a Hedge Fund Work?
The basic structure of a hedge fund typically includes an investment of a certain amount of money by an investor which is then used by a fund manager to invest in various securities and equities to match the goals set for the fund. These managers with the lure in investors are based on a specific strategy and are then, therefore, expected to stick to it.
The biggest distinguishing factor about a hedge fund is that they are almost always available to only certain types of investors, that is, investors that can put in a certain amount of capital.
What Is British Virgin Islands Hedge Funds?
The British Virgin Islands (BVI), officially referred to as the Virgin Islands, is prominently known for its hedge funding opportunities as well as for being an offshore jurisdiction for investment funds in general. The BVI is a leading and largely beneficial dominion for offshore hedge funding, due to its ability to offer substitute regulatory propositions, which are usually lucrative for small to medium-sized hedge fund groups.
The British Virgin Islands is known for having the second to largest jurisdiction for offshore hedge funds around the world. It is a renowned and highly active jurisdiction when it comes to establishing investment funds. The British Virgin Islands are quite flexible when it comes to offering regimes for regulating hedge funds that are mid to small-sized.
Types of Hedge Fund
Hedge funds in the Virgin Islands are bifurcated into open-ended and close-ended funds. The hedge funds in the BVI are predominantly open-ended and are regulated by different regulations depending on the type of fund. The Financial Services Commission regulates and categorizes open-ended hedge funds into five categories.
- Private funds
- Professional funds
- Public funds
- Approved funds
- Incubator funds
There are several major characteristics of a private fund.
- The fund has limited a ceiling of 50 investors.
- Purchase/ subscription to the funds can only be done so on a private basis, i.e. through means of an invitation by existing fund holders.
Professional fund interest can specifically only be subscribed to or by professional investors. A professional investor refers to a person who has certain features.
- Whose ordinary business involves the acquisition or disposal of a fund property, in its entirety or a significant portion of the fund property, be it on the investor’s own account or on behalf of others.
- One who has declared a net worth over USD 1 million (or its equivalent in terms of a foreign currency), either individually or jointly with their spouse, and consents to thereby be categorized as a professional investor.
The first investment in a professional fund for all investors (excluding exempt investors) must exceed USD 0.1 million (or its foreign currency equivalent). In this case, an exempt investor refers to the manager/administrator of the fund, along with any employees of the aforesaid personnel.
This fund is designed and predominantly utilized by hedge fund managers aiming to make retail offers and is therefore exposed to stricter regulations.
A BVI-approved fund is a vehicle that is low-cost. It allows the manager to pull in a small group of investors. The fund is economical and created in such a way as to avoid regulatory burdens when establishing the fund. BVI approved fund requirements have certain features.
- Has to have a maximum total of 20 investors
- No minimum investment
- A maximum net asset value of USD 100 million
There are certain primary characteristics of incubator funds.
- Having a maximum of 20 investors
- All investors must deposit an initial investment of USD 20,000 or more (or the foreign currency equivalent).
- A net asset value of USD 20 million, at most
- A two-year lifetime (with an option to extend for an additional year) after which, the fund must either be converted into an open-ended fund (other than a public fund) or be liquidated, in its entirety.
The BVI Securities and Investment Business Act 2010 and Mutual Funds Regulation 2010 governs open-ended hedge funds, while approved and incubator funds are governed by the Securities and Investment Business Regulations 2015.
How Are Hedge Funds Regulated to Ensure Compliance With International Standards?
All funds that are regulated are required to submit their financial statements to the Financial Services Commission (FSC). This must be done within six months of the year-end of the fund.
Private, Public, and Professional funds at all times need an appointed manager and administrator who meets the criteria set by FSC. Additionally, however, there is no need for the manager or administrator of the fund to be present at the British Virgin Islands.
An investment manager or administrator meets the FSC’s criteria if both of them have certain features.
- Does business within a recognized jurisdiction. The FSC issues a list of jurisdictions that are considered recognizable by them. These comprise 41 widely used financial service centers.
- They must also meet local requirements of being able to carry on the business. This includes any place applicable and them holding any license. However, in places where there is no local requirement to hold a license, it does not stop the manager or administrator from being able to fit the FSC’s criteria.
The BVI has the second-largest jurisdiction for hedge funds internationally. There are several advantages to BVI investment funds which include proper corporate governance and a corporate statute that is flexible as per the BVI Business Companies Act. It also allows private equity and capital managers to join with a regulatory regime that is slightly more lenient.
They target smaller fund managers using the approved Manager Regime. Additionally, they also have a strong commercial court and provide competitive incorporation fees.