VALLETTA, Malta (HedgeWorld.com)–Say “Malta” and most people will think of a sleepy Mediterranean island where they might perhaps spend their holidays sometime when they are closer to retirement. Those who are indeed at retirement age may be reminded of an old Humphrey Bogart film about a bird figurine. Few would think of a would-be financial center, and even among people in the financial industry, few might know that at present, more hedge fund assets are registered in Malta than in Germany.

But over the last year or two, asset managers have begun to see the island in a new light. And with a new regulatory authority modeled on the U.K.’s Financial Services Authority, the island now sees a chance to grab a chunk of the $1.3 trillion hedge fund industry. Hedge funds want the legitimacy of being registered onshore on what is seen to be a well-regulated market. Additionally, Malta offers the flexibility of an exchange looking to attract clients with a broad range of needs.

Assets for a total of around $5.5 billion are now managed out of Malta. Hedge fund assets account for more than $3.3 billion, or around 60%, of that. True, a good part of that belongs to one Canadian fund of funds long since convinced of the advantage of having its money invested from Malta. But a number of other funds and fund families also have found it easy and quick to set up base there. At present 66 hedge funds are currently licensed as “Professional Investor Funds” (PIFs).

Preparing for MiFID

In coming to the Global Alternative Investment Management Forum in Cannes to present their case in July, the Maltese may be seen, to some extent, to have removed the gloves in what, to date, has been a low-key drive in its development as a hedge fund domicile of choice. To date the contest among offshore locations has been dominated by the Cayman Islands while, in spite of the controversy over the now defunct registration requirements, the United States is the most popular onshore location.

But the contest is heating up in both Europe and toward the Eastern hemisphere. Asian funds are most inclined towards Hong Kong, Singapore or Australia, and Dubai is now also attempting to emerge as a regional force. But in a European context, tiny Malta may have an advantage. The country is one of very few European Union jurisdictions so far to have introduced a number of interesting legal features that make it a versatile jurisdiction for hedge fund business. It also has big advantages in availability of well-educated human resources, competitive cost structures and an English-speaking population. The Maltese regulator is always on the lookout for developments in the hedge fund business and is currently also very much involved in the run-up to the implementation of the E.U. Markets in Financial Instruments Directive (MiFID).

In a further attempt to develop home grown asset management skills, the MFSA is now in contact with bodies including the U.K.’s Securities and Investment Institute in order to develop a set of recognized qualifications which can be offered to budding local investment professionals. “The availability of local staff with recognized qualifications in investment management and administration will bolster confidence in Malta as a fund location of choice,” said Michael Xuereb, director of business development at the Malta FSA.

So how did it happen? Malta was an offshore regime in 1988, but in 1994 it reorientated to become a fully integrated E.U. regime. The fund management industry began to grow up on the back of local market and retail funds, with impetus added by the creation of Valletta Fund Management, a joint venture between Bank of Valletta Group and Rothschild Asset Management. HSBC also showed interest in developing its presence as a fund manager, with the 1998 takeover of the local Mid-Med Bank. While HSBC was certainly not put off by the prospect of absorbing Mid-Med’s representative offices in Dubai, it was certainly as interested in the bank’s asset managing subsidiary, Tri-Med.

While in the following period many European mutual funds began promoting their products among Malta’s retail investors, the focus began shifting to professional investors and hedge funds in the early part of the new millennium. 2004 was a pivotal year, with Malta’s joining of the European Union. The country has been a member of the World Trade Organization since its inception in 1995.

The Malta Financial Services Authority, established in October 2002, decided to take the lead from the U.K.’s FSA, ensuring an acceptable level of oversight for registered funds while not overburdening funds wishing to register in Malta with undue bureaucracy. “While there is as yet no harmonized framework for hedge funds within the EU, our regulators are very accessible to prospective license holders,” said Mr. Xuereb. He said he believes that if funds are used to preparing documentation, they can complete Malta’s registration process within a week.

Mr. Xuereb also noted that there are no investment or leverage restrictions on a fund itself provided it is open only to “qualifying investors,” being investors with a minimum investment of US$100,000 in the fund. The authority requires these details to be contained in the offering prospectus.

Rules of Engagement

The steps for a hedge fund applying for a license in Malta are as follows:

?? 1/2 The hedge fund must agree on the proposed structure of the PIF with the MFSA;

?? 1/2 The hedge fund must also submit a draft application, including draft instruments of incorporation and a draft Offering Document;

?? 1/2 MFSA will review and provide feedback within seven days. At this point the MFSA due diligence process is triggered;

?? 1/2 Final submission of application documents;

?? 1/2 Issue of license

When re-domiciling a company/fund to Malta, funds are required to:

?? 1/2 Obtain approval to leave the home jurisdiction (a fund can only re-domicile from an approved jurisdiction having equivalent laws);

?? 1/2 Submit a request to re-domicile the fund to the Malta Registry of Companies (at MFSA), together with a certified copy of the instruments of incorporation in the home jurisdiction and a board resolution to re-domicile the fund;

?? 1/2 Follow steps for applying for a hedge fund license in Malta;

?? 1/2 Obtain approval to continue in Malta under the original instrument of incorporation and issue of fund license.

The framework for funds is the Investment Services Act of 1994, which was amended in 2002. Professional Investor Funds are subject to minimal regulation provided their only activity is to operate as a PIF. This means the PIF has to appoint independent “functionaries,” including the manager, administrator, custodian, prime broker and/or investment adviser. The system is based on open architecture: Functionaries may be based outside Malta, in which case they are obliged to be regulated to what the MFSA deems to be an acceptable standard.

PIFs are normally expected to have a custodian or prime broker, although in the case of funds promoted to “qualifying investors” this is not obligatory. HSBC and Bank of Valletta are the main Malta-based custodians. Although no prime brokerage services are yet available on the island, funds needing prime brokerage services have found no difficulty working with an overseas provider.

Mr. Xuereb observed too that Malta is one of a few European jurisdictions to allow funds to switch their domicile there, provided they arrive from a recognized jurisdiction, have a track record of at least one year and are prepared to undergo what he calls a “fit and proper” test.

However, the process of attracting funds to Malta is by no means over and some work remains to be done on infrastructure. Mr. Xuereb noted that while the big four accounting firms all have a presence there, the arrival of more international hedge fund providers on Malta’s shores would give the island’s development as a hedge fund center a further boost.

MdeSaPinto@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.