As private capital assets grow, both legacy alternative manager firms and traditional managers looking to distribute alternatives will need to focus on fund domiciliation, with jurisdictions where managers can demonstrate substance, offer a strong regulatory environment, provide sophisticated service providers, and a strong support structure all being critical for managers seeking geographical expansion, according to a recent report.

Globally, alternative investments are in a “Goldilocks” moment, finds the report Fund Domicile Selection: Enabling Global Alternative Asset Growth, published by Cerulli Associates and Guernsey Finance. Since year-end 2018, global private investment assets have almost doubled, increasing 92%, and posted double digit increases each calendar year through 2021.

Global alternative investment markets reached US$8.7 trillion as of 3Q 2022, and hedge funds held another US$3.6 trillion as of 2021.

As US firms develop and deploy alternative capabilities internationally, they will need to decide where to domicile their offerings (for example, Cayman Islands, Guernsey, Luxembourg), which investor segments to target, and how to structure their funds to gather international capital, the report says.

While firms take different approaches to domicile selection, common to all is a tremendous focus on tax implications for investors and seeking out stable yet flexible limited liability legal regimes.

The success of firms looking to gather capital from international investors is reliant on myriad service providers. External counsel, fund administrators and accountants, the report points out, are critical and provide valuable guidance and input. Human capital within domiciles as well as the orientation of that workforce towards financial services should be taken into close consideration.

“The strengths and weaknesses of each jurisdiction mean that firms may well be best suited by a nimbler jurisdiction other than the larger ones (in terms of assets under management and number of funds),” states Daniil Shapiro, a Cerulli director. “Tax law is key for pass-through structures as alternative investment managers want to make sure that taxes are paid but not for every jurisdiction the firm is in. In other words, the focus is on avoiding double taxation of dividends and optimizing returns.”