Welcome To Hedge Fund Island

London - Most people can't find Jersey on a map. Situated far closer to France than Britain in the English Channel, tourists know it for docile, sad-eyed cows and the clotted cream they produce. Financiers know it for rich, sweet products of another kind.

A lax tax climate and modestly regulated investment policies for the wealthy fuel the island's financial-services industry, accounting for half the economy. Net assets of funds under management jumped 31.8%, to a record 210 billion pounds ($432 billion) in the year ended June 2007. The island's 100,000 residents enjoy gross domestic product per capita around $57,000 (compared with $44,000 in the U.S.).

Now Jersey plans to let in the riff-raff, financially speaking, inviting a showdown with other offshore financial hubs like neighboring Guernsey, the Cayman Islands (which has traditionally been more lax in its hedge fund regulation), Bermuda and Luxembourg. In January 2008, the 45-square-mile island--about as big as San Francisco--launches what it calls an Unregulated Funds Regime to encourage funds to locate themselves there. Despite fears that in many quarters, the recent global credit crunch means more regulation of the world's financial markets, on Jersey, the mantra seems to be "less is more."

"This is a very good move for Jersey," said Angela Hayes, a partner at business law firm LG in London. "It's jostling for position with lots of other potential offshore jurisdictions, like the British Virgin Islands or the Cayman Islands, which could also be chosen by these funds."

Some 33,000 companies have already incorporated themselves in Jersey because of the low rate of tax and relatively light-touch regulation, the latter being especially valued by hedge funds. Under the new plan, funds falling into the right category, or at least those with large enough investments, won't need to seek regulatory approval to set up shop--they'll only need to let the Jersey Financial Services Commission know they've done so.

"There is the appearance of regulation," says Richard Murphy, director of Tax Research, a consultancy. "There is lots of paperwork, and lots of people sitting on regulatory boards. They're moving all the real activity into things that no one as yet has thought of regulating."

Vernon Breese, who has helped Jersey tweak its hedge fund regulation in the past, disagrees. "When people are investing a million-plus, they are big enough and ugly enough to regulate themselves."

And Helen Hatton of the Financial Services Commission denies that Jersey's regulatory standards are slipping. "I think it would be naïve for anyone to claim that anything was watertight," she said. "But the exemption only applies to funds that are attracting exceedingly sophisticated investors."

There seems to be many "sophisticated" hedge funds looking for a tax-friendly home. At the end of 2004, about two-thirds of assets owned by the world's hedge funds were located offshore, according to International Financial Services, a London-based research organization. Jersey wants to attract more so it can catch up with rival Cayman, the market leader by about five to one, with more than half of the world's hedge funds housed there.

Hedge-fund managers, private-equity firms and legal intermediaries need speed, simplicity and certainty, says Robert Kirkby, technical director of the trade body Jersey Finance. The less red tape there is, the quicker funds like special-purpose vehicles can issue asset-backed bonds and other securities, and the quicker hedge funds can buy them. "The removal of regulation in Jersey is about recognizing their needs and desires," he says.

Soon fund managers will be able to eschew outside audits and certain public filings, and be able to list on several exchanges. Also, the funds won't be required to keep administrative teams on the island. That suits most operations, which typically keep their decision-makers in London or New York.

Murphy of Tax Research warns that Jersey's plans amount to "regulation abuse." "They give this veneer of respectability, and they do everything they can to get rid of all the information they can, as fast as possible," he says, noting many of the collateralized-debt obligations built out of questionable U.S. subprime mortgages that spooked the financial markets over the summer were created offshore. Beleaguered British mortgage lender Northern Rock, for example, issued nearly 40 billion pounds ($82.05 billion) in asset-backed securities through a special-purpose vehicle domiciled in Jersey.

"It's not regulation per se they're seeking to avoid," says Murphy. "It's information disclosure."

"It's not regulation per se they're seeking to avoid," says Murphy. "It's information disclosure."

Fools and their money are soon parted, but imagine all of the nefarious "gray money" laundered through such places. People willing to put millions in such risky investment operations do so for the same reason shady characters throw around large amounts of cash in casinos - they don't care how much money they lose as long as they can trade it for a reasonable fraction of that amount in clean cash not easily traced back to their original source.

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