The mutual fund industry on the Isle of Man took a body-blow at the end of October 1999 when GAM with...
The value of the mutual fund on the Isle of Man dropped from around $7bn to $2bn overnight and it looked as if the industry could take years just to regain its previous stature, let alone grow.
This pessimistic outlook now looks set to change because of the runaway success of the newly-launched Experienced Investor Fund (EIF) structure, which has had enough subscribers in the space of a few weeks to make up a quarter of the ground lost last year.
The EIF was announced in October 1999 and a team from the Isle of Man went on a marketing crusade, consulting with law firms and proselytising fund management groups.
Steven Beevers, business development manager for the Isle of Man government, said: "We have not been seen as a strong centre in the mutual fund arena so there has been some inertia to overcome in establishing relationships with other parties."
After the expected period of rumination, there has been an impressive number of takers. By 21 January there were initial approaches for 18 EIFs worth $740m, by 25 January it came to $770m and by mid-February there were 25 funds in the offing, with assets worth more than £1bn.
The recent efforts of the Isle of Man coincide with a general pick-up in the industry. In September, the industry was worth around £6.9bn. This dropped to £1.9bn when GAM pulled out. However, by December it was up once again to £3.5bn. If the EIF continues at its current rate of take-up, the industry will have reached its pre-GAM pull-out size by the end of next year.
Singer & Friedlander was one of the first companies to set up a fund under the new scheme - a technology Oeic, launched on 17 December.
David Poole, Singer's director of investment management, said: "What can hold up fund launches is the bureaucracy and regulations surrounding them. The Isle of Man has introduced legislation to facilitate the prompt and efficient establishment of funds, with all the benefits of offshore investment management."
Most investors in the fund are from the UK, but of course investors are not allowed to be targeted directly. The marketing channels allowed include getting in touch with lawyers and accountants, contacting suitably experienced high net worth clients and word of mouth.
Despite its limitations, the lack of marketability is appropriate for the fund for two reasons- firstly because it is a high volatility fund not suitable for the retail investor and secondly because a public fund might become big and unwieldy.
"This is a major issue in the technology sector where absurd growth rates tend only to be available from new issues and it would be difficult to find enough quality small cap exposure if the fund were £100m.
Poole said: "One of the key points about the EIF is that we cannot promote it directly to UK clients but only to experienced investors.
"It is not a retail fund. The EIF is designed for people who understand the risks of investment. We have to do a great deal of due diligence, checking asset adequacy and so on."
The minimum investment for the EIF is $15,000. This contrasts with the capital requirements for the Professional Investor Fund (PIF), the EIF's closest relative, which has a $100,000 minimum investment and clients must have a total net worth of at least $1m.
Interest in PIFs is, in fact, beginning to pick up and the number of funds has risen from three to five over the last few months. That said, the PIF has been largely forgotten as a structure.
The EIF, along with the PIF, is referred to as an 'unregulated' fund. This term is used by the Isle of Man to indicate that they are not responsible for the quality of the investments made because there are no investment restrictions.
An EIF can invest in real estate, derivatives or gold bullion. The only limitations are those imposed by the manager in the fund's offering document.
One reason for the high speed at which these schemes can be set up is that it does not need to be approved by the Government until after the fact.
After incorporation (or its trust equivalent) a company has 14 days to send the appropriate documents and forms to the regulator who determines whether the fund follows regulations.
An administrator of the fund must be Isle of Man-based and licensed before it can run an EIF. Also, if the EIF is an Oeic, it needs to go through the usual stages of company registration.
So there is still a great deal of regulation, but the emphasis has shifted from the funds to the the services providers who contribute to the running of a fund. The main regulation of the fund comes from the FSC yearly look at the accounts.
June O'Neill, an associate at Simcocks, the Isle of Man commercial barristers, said: "There is no pre-determined format for the offering document, but it must contain sufficient information to enable informed investment decisions.
"However, the Isle of Man does not regulate the document, so the onus is on the administrator to prevent non-experienced investors from investing in the fund."
The EIF is positioned at the cutting edge of the island's stable of investment vehicles. It is a sub-category of the Isle of Man's international collective investment schemes classification and was launched to take advantage of the growing hedge fund industry.
The old international class has severe restrictions. For example, offering documents have to be pre-vetted and asset classes like property and derivatives are forbidden. The EIF is expected to grow at the expense of the international class.
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