Practical Uses of Bermuda StructuresAlternative Investment Vehicles

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BermudaThe Future of Offshore Today

• Practical Uses of Bermuda Structures/Alternative
  Investment Vehicles

London January 22 2001
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Practical Uses of Bermuda Structures
/Alternative Investment Vehicles

• Moderator The Hon. C. Eugene Cox JP MP
• Deputy Premier and Minister of Finance
• Greg Haycock
• Martin Lane
• Fergus Healy
• Johann Wong

London January 22 2001
3
Greg HaycockPartnerKPMG Bermuda
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THE SEGREGATED ACCOUNTS COMPANIES ACT 2000
andANTI-MONEY LAUNDERING AND THE PROCEEDS OF
CRIME ACT
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Overview

• The new public registration system for creating
  protected client cells in any industry
  
• quickly
• inexpensively

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Advantages

• Less Expensive
• More Manageable
• Establishes substantive law

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Substance of Relationships

• Nature of a trust
• Created by way of mandated agreement

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Benefits

• International recognition and enforceability
• Enhances Bermudas reputation
• Establishes a system of registration
• Sets prescribed standards
• Improves Bermudas competitiveness

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Business Opportunities

• Applies to non-insurance as well as insurance
  uses
  
• Promotes tailor-made solutions

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Non-Insurance Uses

• Mutual fund structures
• Property development companies
• E-commerce companies
• Ship and aircraft companies
• Securitisation and derivative transactions
• Trust company arrangements

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Summary of the Act

• Establishes system of public voluntary
  registration
  
• Creates statutory regime governing record
  keeping
  
• Incorporates principles of U.S. business trust
  legislation
  

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Requirements

• Available to companies governed by the Companies
  Act
  
• No restrictions on insurance company
  applications
  
• Other companies must seek approval of Minister
• Company name must include (SAC)

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Crucial Aspects

• Attributes portions of an asset/liability
• Allows for amalgamation or consolidation
• Any type of securities
• Sets conditions for dividends or distributions

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Competitive Fees

• Annual fee of 250 per segregated account
• Maximum annual fee of 1000

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Determining Solvency of SAC

• Cells or Segregated Accounts
• General Account

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Cells or Segregated Accounts

• Separate accounts for each cell
• Each with assets and liabilities
• Subject to any abatement provisions

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General Account

• One set of accounts
• Assets and Liabilities

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Illustration of SAC General Account and
Segregated Account Cells
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Conclusion

• Bermuda at the forefront International
  recognition
  
• Responsible legislation
• Suited to a wide range of business uses
• Assists development of offshore sector

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Anti-Money Laundering and the Proceeds of Crime
Act
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Historical Perspective

• 1940 Defense Finance Regulations
• 1972 Exchange Control Act
• 1997 Proceeds of Crime Act
• 1999 Proceeds of Crime Amendment Act

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Know your Customer Initiative

• 1988
• Vienna Convention
• 1991
• BMA issues Anti-Money Laundering Code
• 1995
• UK officially declares to UN Vienna Convention
  applies to Bermuda
  
• Code of Conduct updated and reissued
• formerly adopted by all financial institutions
  other than CIS
  

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Proceeds of Crime Act 1997

• Crimilized the laundering of proceeds of
  criminal conduct including
  
• concealing or transferring proceeds
• assisting another to retain proceeds
• acquisition possession or use of proceeds
• failure to disclose knowledge or suspicion
• tipping off third parties under investigation

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Criminal Conduct

• Schedule of relevant offences includes offences
  which
  
• result in significant monetary gain
• corruption fraud counter-fitting stealing
  and/or forgery
  
• dual criminality
• an act or omission which would constitute drug
  trafficking or a relevant offence had it occurred
  in Bermuda.

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Proceeds of Crime Money Laundering Regulations
1998

• Provides that banks trusts deposit companies
  and other categories are regulated institutions
  and must observe the rules
  
• Regulated institutions required to establish
  maintain procedures concerning
  
• client identification
• record keeping
• internal reporting
• training
• appointment of compliance officer

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Proceeds of Crime Amendment Act 1998

• Changes definition of relevant offences under
  criminal conduct to mean all indictable
  offences.
  
• Criminal Tax Evasion - only indictable tax
  offence in Bermuda
  
• any willful act by a person with intent to
  defraud and where (a) the person knows a
  substantial amount of tax would otherwise be due
  (b) the conduct involved constitutes a systematic
  effort or pattern of activity designed to falsify
  material records

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• Martin Lane
• Managing Director
• Conyers Dill Pearman
• London

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The Legislative Framework forCollective
Investment Schemesin Bermuda
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Current Legislative Framework

• The Companies Act 1981
• The Bermuda Monetary Authority
• Collective Investment Scheme Classification
  Regulations 1998

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The Companies Act 1981

• Allows Redemption
• Prospectus Requirements

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BMA (CIS) Regs

• Bermuda Standard Scheme
• Bermuda Institutional Scheme
• Bermuda Recognised Scheme

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Bermuda Standard Scheme

• Local (Bermuda) bank custodian - usually
• Local (Bermuda) registrar
• BMA approval of other functionaries

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Bermuda Institutional Scheme

• No requirement for Bermuda custodian
• minimum subscription 100000
• initial offering size 50m

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Bermuda Institutional Scheme

• Administrator must
• have a physical presence in Bermuda
• be independent of the scheme and other
  functionaries
  
• Warning language - regulated to a lesser degree

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Establishing a Mutual Fund

• Incorporation by registration
• application to BMA
• BMA to approve offering materials
• Prospectus filed if public offering

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Officers or Representatives

• Two Resident Directors
• One Resident Director and a Resident Secretary
• Resident Representative and a Resident Secretary

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On-going ReportingRequirements
Declaration filed annually with fees
Monthly statistical report Prospectus - refiling
on material changes

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Recent Changes
Minimum capital lowered No annual prospectus refi
ling
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Future Proposals
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Fergus HealyVice PresidentBank of Bermuda
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Substance to Investment FundBusiness In Bermuda

• Bermuda is in an almost unique position in the
  offshore world as many facets of the investment
  management industry have a substantial presence
  on the island.
• Leading jurisdiction for the incorporation
  management and administration of investment funds
  of all types and the provision of custody
  services.
• 1339 open ended funds constituted in Bermuda
  with nearly 40 billion in assets as at 30th June
  2000.

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Very Good Infrastructure

• Excellent telecommunication network
• E-commerce hub
• Regular flights to the US London and Canada
• Safe stable economic and political environment
• Excellent accounting legal and technical
  professional support services

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Strong but Flexible Regulation

• Bermuda Monetary Authority (BMA) has a sound
  track record for prudent regulation
  
• Excellent working relationship/partnership
  between government and industry
  
• Bermuda is not on the FATF or OECD blacklists
  due to strong Know your Customer requirements.
  
• KPMG recognized Bermudas strong regulatory
  environment in its Review of Financial Regulation
  in the Caribbean Overseas Territories and Bermuda
  for the UK Government.
• Pending Licensing of Fund Administrators

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Experience with DifferentFund Structures

• Hedge Funds
• Equalization
• Series Accounting
• Hot Issues
• Electronic links to Brokers
• Huge growth in European based sponsors
• Fund of Funds
• Very popular in 2000
• Allow investors to be exposed to a number of
  hedge funds
  
• Seeing a trend for lower minimums
• Many large custodian do not want the custody side
  of the buisness

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Experience with DifferentFund Structures

• Private Equity Funds
• A large number of Private Equity Funds have been
  set up in the last three years in Bermuda by
  European Managers
  
• Very unique accounting requirements
• Bermuda has built up an expertise in the
  administration and auditing of Private
  
• Equity Funds
• Emerging Market Funds
• Seeing a revival after September 98
• Structured Trusts
• Can be very effectively used for some commercial
  transactions

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Expertise in Administration

• Many well respected administrators in Bermuda
• Ability to service funds from many jurisdictions
• State of the art systems
• Exposure to developments in many jurisdictions
• And most importantly . . . . .
  . . . . for the fund sponsor

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A Great Place forBoard Meetings!
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QI Status

• Bermuda recognized as an approved jurisdiction
• Benefit the custody business but also the unit
  trust business
  
• QIs who are non-US Custodians and Trustees - No
  disclosure of client details to IRS

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Removal of Ten Commandments

• Has not had the drastic impact some thought
• Expertise cost effectiveness and flexibility
• Many investors still look to a 3rd party
  administrator for comfort
  
• Provided opportunity for many of Bermudas
  administrators to move some of their operations
  on-shore
  
• Opens up new market - domestic U.S. Hedge fund
  market

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Summary

• Bermuda has a substantial multi-faceted
  investment management industry.
  
• Fund administration is major component of the
  investment management industry.
  
• Bermudas Administrators are among the leading
  off-shore fund administrators in the world.
  
• The BMA enforces a strong but flexible regulatory
  regime.
  
• Bermudas continues to take steps to protect its
  good reputation.

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Bank of Bermuda Contacts
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Johann WongPresident FounderHedgeWorld Ltd.
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Alternative Investments
E-Commerce
Risk Transfer
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BermudaThe Convergence Island

• All Good Things Converge In Bermuda
• Bermuda is the premium offshore jurisdiction
  where alternative investments risk transfer and
  electronic commerce converge to offer a seamless
  solution for businesses

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Bermuda The New New Thing

• Innovative building blocks include
• Seamless Solution - accounting administration
  banking capital markets custody insurance
  Internet infrastructure legal...
  
• Rule of Law - Electronic Transaction Act 2000
  and Investment Business Act 1998 and respective
  Code of Conducts...
  
• Estimated 10 billion in reporting hedge funds
  domiciled and/or custodied in Bermuda (TASS)
  
• PlusMarkets joint-venture with the BSX and
  Plusfunds.com
  
• HedgeWorld.com HedgeTrust Exchange and the
  BSX...
  
• Annual MAR/Hedge industry conference
• Estimated 84 billion in total assets and 23.4
  billion in capital in insurance companies
  (Deloitte Touche 12/31/99) 1500 insurance
  companies
• XL Capital MaxRe Imagine Tremont Insurance...

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www.bermudaconvergence.com
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Regulatory Overview Links

• Bermuda International Business Association
• Bermuda Monetary Authority
• Bermuda Stock Exchange - FIBV IOSCO Member
• Insurance Advisory committee
• IRS Qualified Intermediary - Bermuda is
  Qualified
  
• KPMG Report - Recognized jurisdiction
• OECD - FATF - Not on any black lists
• U.S. Treasury Advisory - Not on black lists

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Fact Sheets

• The Convergence Island
• Why Bermuda Mean Business
• Financial Services
• Hedge Funds
• Mutual Funds
• Insurance Industry
• E-Commerce Legislation
• E-Business Solution

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Case Studies

• DotRisk.com - insurance site
• HedgeWorld.com - hedge fund B2B infrastructure
  solution
  
• Imagine Re - reinsurance wrapped around hedge
  funds
  
• Invesdex - online alternative investments index
• Max Re - reinsurance wrapped around hedge funds
• PlusMarkets - online trading of hedge funds with
  BSX
  
• Principal Guaranteed ACE XL Zurich -
  insurance-based principal guarantee of hedge
  funds products
  
• Tremont International Insurance Ltd. - insurance
  and annuities wrapped around hedge funds

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Hedge Fund Insurance Companies
Widely Held
Moore Capital
350 million
150 million
NOTES Not a PFIC or CFC Tax Free Income Roll-U
p Leverage Using Premium Flow IPO Likely-Multipl
e
500 millio
n MAX RE First class insuranc
e management team Class 4 licence

Life and PC Reinsurance (Low Volatility)
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40
AlternativeAssets Portfolio Managed by Moore C
apital
TOTAL ASSETS
Fixed Income
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Principal ReturnGuarantee
INVESTORS
TRUSTEE
CAPITAL
NOTES - Wider Invest
or Pool - Effective use of Capital - I
nsurer looks for liquidity track record
transparency ability to understand risks
control - Costs
GUARANTEE PRINCIPAL RETURN AT
MATURITY
COLLECTIVE INVESTMENT
SCHEME
MANAGER
MANAGEMENT
CONTRACT
INSURER
CUSTODY AGREEMENT
REPORTS TO
ASSETS
CUSTODIAN/ TRUSTEE
HELD BY
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Where is the opportunity
Global Hedge Fund Industry

• Estimated 3000 to 5000 hedge funds
  U.S./non-U.S.
  
• Estimate US300-500 billion in assets
  U.S./non-U.S.
  
• Estimated 25 growth rate new assets received
• Estimated to grow to trillion U.S. dollars in 5
  years
  
• Institutions and their consultants
• High net worth investors and financial service
  providers
  
• Growth in hedge funds under US100M
• Transparency and risk management

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Hedge Fund Industry Trends

• Traditional to alternative manager brain drain
• Inherent supply side constraints increasing
• Emergence of a elite class of hedge funds
• Fee discounts on unproven managers
• Demand for hedge fund transparency increasing
• Demand for hedge fund increasing with knowledge
• Financial institutions outsourcing to hedge
  funds
  
• Hedge funds are moving down market to affluent
  investors

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Hedge Fund Industry Trends (cont.)

• Capacity will increase with institutionalization
  
  
• Liquidity is decreasing
• Structured products are increasing
• Lenders consolidating credit and trading risk
• Managers want stickier funds
• Regulatory reform focusing on creditors
• Managers becoming more marketing-orientated

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Great Performance...
Source Tremont Advisers Inc.
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Superior Rewards vs. Risk (1986-1995)
Cottier Philip Hedge Funds and Managed Futures
University of St. Gallen Verlag Paul Haupt
Bern 1997
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Creates StrongHedge Fund Growth
E
E
E
E
E
E
E
E
E
Tremont Advisers HedgeWorld.com Dr. Rama Rao
and Jerry J. Szilagyi The Coming Evolution of t
he Hedge Fund Industry RR Capital Management
1998
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Stronger Growth Offshore...
Source U.S. Offshore Funds Directory
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of Mutual Fundsvs. Hedge Funds
E
E
E
Investment Company Institute TASS Investment
Research
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Assets of Mutual vs.Hedge Funds
E
E
E
billions. Investment Company Institute TASS
Investment Research
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Hedge Fund Investor Profile
60 -75

• High-net-worth families
• Swiss private banks
• U.S. endowments/foundations
• Institutional Structured notes
• Insurance companies

40 - 25
TASS Research Investment Research
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Allocations to Hedge Funds
RRCM KPMG 1998
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Hedge Fund Opportunities for Investors

• 68.9 - Will be more available to less wealthy
  investors
  
• 68.2 - Only the rich get to invest
• 64.8 - Best investment managers run hedge funds
• 63.7 - Everyone should be able to invest
• 62.2 - Would invest if opportunity arose
• 57.3 - Good way to create a diversified portfolio

N 267 emerging wealth investors (100000 or
more) High-Net-Worth Psychology Finding Winning
and Keeping Affluent Investors Prince
Associates
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Pension Plans Alternative Investments
Greenwich Associates
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U.S. Institutional Investors Demand
Greenwich Associates
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BermudaThe Convergence Island

• Seamless Solution -
• Alternative Investments Risk Transfer and
  E-Commerce
  
• Business friendly environment and stable economy
• Accounting Administration Banking Custody
  Financial Services Insurance Internet Legal
  
• Rule of Law - Electronic Transaction Act
• US10 billion from over 120 hedge funds
• US30 billion from over 1000 mutual funds
• US100 billion assets from over 1500 insurance
  companies
  
• Proven case studies - ACE DotRisk.com
  Hedgeworld.com Imagine Invesdex MaxRe
  PlusMarkets Tremont International Insurance
  Ltd. XL Zurich

All Good Things Converge In Bermuda
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