Malta home to estimated €80 billion in hedge funds

Malta has seemingly begun to win business from more-established fund jurisdictions, benefiting from a growing demand by investors for transparency as well as from fears among hedge funds that the EU was becoming increasingly hostile to firms based outside of it.

According to the Malta Financial Services Authority, over the past year and a half, companies from British Virgin Islands, the Cayman Islands and Luxembourg are switching their legal domicile to Malta. In addition, at least a dozen large UK hedge funds have shifted part of their operations, including accounting and investor relations, to Malta.

These include Clive Capital LLP, which has about US$4 billion under management, Comac Capital LLP, which has US$5.2 billion under management, the US$1.2 billion commodities and energy hedge fund BlueGold Capital Management LLP and the US$2.8 billion fund-of-funds company Liongate Capital Management LLP.

Many of these larger hedge funds, while serviced from Malta, remain legally domiciled elsewhere, so those assets aren't counted in Malta's official tally.

If they were, the total amount of money managed by Malta-based companies would be as high as €80 billion, is the estimate given by James Farrugia, director of investment services at the Maltese law firm Ganado & Associates who spoke to Bloomberg financial news in its recent publication on Malta.

The number of funds located in Malta has in fact grown to more than 700 with €8 billion under management from 165 funds with less than €5 billion, but although it's not much compared with Luxembourg - which has more than €143 billion under management across more than 700 hedge funds and funds of hedge funds - the number of funds in Malta and the amount of their assets are expanding.

Since the end of 2010, the number of funds increased almost 30% and their total assets were up nearly 15% as of early December in 2011. Figures relating to funds expansion in 2012 are set to be announced in the coming weeks.

In his comments to Bloomberg, Prime Minister Lawrence Gonzi says he worries whether Malta has enough accountants and financial analysts to keep up with demand, adding that he wants the island to be a financial centre of the highest reputation possible.

Malta's 'Anglo-Saxon' work ethic is what fund managers consider to be the main asset leading them to decide in transferring their domicile to the island.

"They definitely work more like beer drinkers than wine drinkers," as Andrew Frankish, the director of client relations for IDS Group, a South African fund services company that set up offices in Malta in 2010.

Since the early days of the financial crisis, with investors preferring transparency to secrecy, Malta's regulatory scrutiny and accountability have become selling points.

At the time, some offshore hedge funds instituted rules prohibiting investors - from individuals to pension funds - from withdrawing their money. Because the hedge funds were based in offshore jurisdictions, the aggrieved investors had little recourse as they endured losses in their accounts.

MFSA chairman Joe Bannister says that the island's financial watchdog is approachable, and not pliable.

"We do extensive due diligence," he says, adding also that "no due diligence, gets you no license".

He says the MFSA has turned funds down. It has declined to license funds focused on exotic investments such as racehorses or professional athletes.

In other instances, Bannister says, the MFSA is likely to turn away inexperienced fund operators unless they have a well-known institution as a major shareholder.

The influx of hedge funds to Malta has been a huge turning point. The firms' profits are feeding into the economy, as do the legal and accounting fees the companies generate.

Total income from financial services constituted about 12% of Malta's gross domestic product of €6.2 billion in 2010.

Before its collapse after last Monday's vote in parliament, Lawrence Gonzi's government's goal was for financial services to become a pillar of the economy, accounting for 25% of GDP by 2015.