Today there are many offshore jurisdictions competing for hedge fund business. The most popular of these are the Cayman Islands and British Virgin Islands (BVI). This reflects the relative ease of incorporation and regulation in these jurisdictions. Bermuda remains a respectable, if more expensive, alternative. Recent developments have centred around Luxembourg, which has followed the example of Ireland in allowing for the establishment of hedge funds in a more heavily regulated environment.

When comparing possible jurisdictions, the client should consider:
- Reputation
-Degree of local regulation
- Taxation
- Costs
- The ability to obtain a stock exchange listing
- Local infrastructure.

It is possible for the fund to be domiciled in one jurisdiction and listed and/or administered in one or more locations. Several jurisdictions popular for hedge funds have created their own stock exchanges. However, it is more common for a hedge fund to apply for a listing on the Irish Stock Exchange (ISE). An ISE listing will afford the fund a certain status and visibility due to the fact that Ireland is a member of the Organisation for Economic Co-operation and Development, as well as the European Union. The Luxembourg Stock Exchange will become more popular for listing hedge funds as Luxembourg develops into a hedge fund jurisdiction. Luxembourg does not permit listing of funds from jurisdictions – such as the British Virgin Islands or the Cayman Islands – which it does not consider to be adequately regulated.

Caribbean states

A Cayman fund may be structured as an exempted company, a unit trust or an exempted limited partnership. Under Cayman law, non-retail open-ended funds must be registered with the Cayman Islands Monetary Authority (Cima). Retail funds must either be licensed or employ a licensed administrator. BVI funds are organised as international business companies, limited partnerships or unit trusts. The BVI's Financial Services Commission (FSC) provides a recognition process for 'private', 'professional' and public open-ended funds.

Both Cayman and BVI funds benefit from a number of advantages in comparison with competing jurisdictions, including:
- Tax exemptions
- Absence of capital adequacy requirement
- Limited availability of bearer shares
- Ability to use corporate directors
- No requirement for local service providers and, most importantly,
- Certainty that the fund will be approved promptly, provided certain minimum requirements are met.

In the Cayman Islands, all fund prospectuses must be filed with Cima. In the BVI, it is only necessary to file retail fund prospectuses with the FSC. However, the memorandum and articles of association of a BVI fund must be open to public inspection. Audited financial statements must be filed by Cayman funds with Cima. However, there are no audit requirements for private and professional funds in the BVI.

The perception among professional investors is that both the Cayman Islands and the BVI offer limited but adequate regulation and reasonable fees. In summary, the Cayman Islands is more expensive (albeit perhaps a marginal $5,000-$10,000 initially and $5,000 per year thereafter), although it does offer better infrastructure and a more developed legal system. As such, the Cayman Islands is the preferred jurisdiction for many European investors, as well as US- or UK-originated hedge funds of a more complex nature. However, given the similarities between the two jurisdictions, the decision to choose one over the other might be based on the client's previous experiences and existing contacts.

Bermuda

Bermuda investment funds may be organised as corporate open-ended mutual funds, corporate closed-ended investment funds, unit trusts or partnerships. Bermuda offers similar ease of incorporation and regulation to the Cayman Islands and the BVI. However, the high annual fee and more onerous ongoing organisational requirements, including holding an AGM and retaining at least two Bermuda resident directors, render this jurisdiction a less popular choice. It could be described as having the flexibility of the Caribbean and a better reputation, but at a greater marginal and ongoing cost.

Anti-money laundering measures

In the past, there have been some concerns as to the sufficiency of the anti-money laundering measures in place in the Caribbean states. Following the publication of a KPMG report in October 2000, the Cayman Islands, the BVI and Bermuda made a commitment to implement a number of measures specified in that report. These objectives have now been achieved and the Cayman Islands has now cleared itself from the OECD 'blacklist'.

Luxembourg

Luxembourg is likely to prove an increasingly popular domicile for hedge funds. Luxembourg (like Ireland) now permits direct hedge funds and funds of hedge funds. While there are various advantages and disadvantages for each jurisdiction, Luxembourg is likely to prove quicker for fund launches, which will be a big attraction in comparison with Dublin.

However, when assessing an application for approval, the Commission de Surveillance du Secteur Financier will consider the reputation, experience and financial standing of the fund and professional qualifications and experience of the investment manager. Given the need for a 'promoter' of financial substance to give comfort to the Luxembourg regulators, it may not prove to be an option for a number of boutique operators.

Other jurisdictions

Hedge funds are also established in a number of other jurisdictions, including Jersey (which has increasingly been attracting this type of business), Guernsey, the Isle of Man and Malta. Italy has also recently introduced an onshore regime for hedge funds and funds of funds. Although the UK Financial Services Authority (FSA) does not currently authorise or regulate hedge funds, a recent FSA discussion paper raised the question of whether this regime should be changed.

Despite developments in other markets, the Caribbean states remain the preferred choice for fund registration. However, with increased competition within the industry, the regulators in these states must continue to review the regime in place to ensure that they retain this superiority. Going forward, Luxembourg is likely to be of increasing importance.

Peter Astleford is the head of Dechert's Financial Services group in London