Bermuda's well-established reputation for political and economic stability, and a balanced approach to regulation, are the main drivers of a burgeoning hedge fund industry that has grown by nearly 900 per cent in the last seven years.

There is now some $72 billion under administration on the Island, up from $8.13 billion in 1997. Bermuda funds have been accepted for listing on a number of prominent stock exchanges, including Hong Kong, Ireland and Luxembourg. Worldwide, the United States Securities and Exchange Commission has estimated that there are currently 6,000 to 8,000 hedge funds and overall hedge funds investment could reach $1 trillion by the end of this year, a three-fold growth since the end of the bull market.

The Bermuda Monetary Authority ("the Authority") regulates all pooled funds under management for investment purposes. The Authority's general philosophy is to ensure that those parties affiliated with a Bermuda fund are fit and proper persons having the requisite experience and expertise to carry on the fund's business. Under Bermuda law there is no differentiation between a mutual fund and hedge fund, which may take the form of open-ended or closed-ended companies. The mutual funds are referred to as collective investment schemes and are subject to supervision, regulation and inspection by the Authority to ensure investor protection.

The Authority reviews the reputation and quality of those incorporating the companies, forming the limited partnerships and establishing the unit trusts in addition to any proposed directors, auditors, administrators and other service providers for fitness and integrity. Investment managers' regulatory status, track record, experience and skills are reviewed. Prospectuses are scrutinised and any material changes going forward need approval. In light of the recent market timing and late trading scandals, Bermuda's regulatory regime, by requiring transparency and disclosure, may increasingly be regarded as an attraction rather than a hindrance for hedge fund vehicles.

According to the Authority's Collective Investment Schemes Classification Regulations 1998 ("the Regulations"), the Authority may classify open-ended funds as Institutional, Standard or Recognised Schemes (the "Schemes"). The most common classification is the Institutional Scheme, which is intended for institutional investors. Standard Schemes are subject to a lower level of scrutiny and are intended for retail investors. Recognised Schemes (recognised for the purposes of marketing into the United Kingdom) are rare.

New legislation, currently at the drafting stage, will require fund administrators in Bermuda to be licensed. Administrators are already licensed in the Cayman Islands, although not in the British Virgin Islands (although in any case there are very few administrators with a physical presence in BVI). A recurrent theme of the offshore jurisdictions is the emphasis on a physical presence. For example, Cayman requires the auditor of a fund to be resident while Bermuda generally requires either a custodian or administrator to be resident.

In addition to changes in the Regulations, the Authority, in conjunction with Bermuda's Ministry of Finance (the "Ministry"), is addressing other issues including the time sensitivity of fund incorporations and the time frame involved in the vetting process. A Guidance Note has been released, effectively reducing the time involved in fund incorporation. Rather than submit both applications for incorporation and classification concurrently pursuant to the Regulations, a fund company may be incorporated prior to classification as one of the aforementioned Schemes. Once incorporated the company may be organised, for example, by the opening of bank accounts and finalising of agreements with service providers. Thereafter the application for the relevant Scheme classification pursuant to the Regulations may be made to the Authority.

Similar to Cayman and the Channel Islands, but not yet available for British Virgin Islands funds, is the ability of a Bermuda fund company to be registered as a segregated account company upon the consent of the Ministry. This enables it to create different share classes each representing a segregated portfolio of assets. Accordingly where a multi-class structure is desired with a separation of liability between classes, it is no longer necessary to incorporate multiple companies in an umbrella form.

Instead, a single segregated accounts company may be incorporated with segregated accounts representing each share class. Such accounts enjoy a statutory division of liability, effectively ring fencing each segregated account from the general liabilities of the company, and from other segregated accounts.

Such legislation illustrates that notwithstanding the moves to greater regulation, Bermuda will continue to remain in the vanguard of developments in the industry.

Julia Saltus is an Attorney in the Corporate Law Department of Appleby Spurling Hunter. A copy of Ms Saltus' column can be found on the Appleby Spurling Hunter website at www.applebyglobal.com

This column should not be used as a substitute for professional legal advice. Before proceeding with any matters described herein, persons are advised to consult with a lawyer.