Erik Nelson was working in Stamford, Connecticut, as a research analyst at FMG USA LLC, the U.S. arm of FMG, a fund of funds specializing in emerging and frontier markets, when his bosses called him into a meeting in September 2009.
They had recently moved FMG’s corporate headquarters to Malta from Bermuda and now they wanted Nelson, 27 at the time, to head up the new office. “I’ll have to think about it,” Nelson replied. Then he went home and tried to find Malta on a map.
Three months later, the young American touched down on the rocky, sun-drenched island in the middle of the Mediterranean Sea, joining a wave of hedge-fund executives washing up on Malta’s shores, lured by low taxes, cheap labor and a coveted address inside the European Union, Bloomberg Markets magazine reports in its February issue.
As of early November, the number of funds located in Malta had grown to more than 500 with 8 billion euros ($10.7 billion) under management from 165 funds with less than 5 billion euros under management in 2006, according to the Malta Financial Services Authority, or MFSA.
While that’s not much compared with Luxembourg, which has more than 143 billion euros 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 percent and their total assets were up nearly 15 percent as of early December.
Malta has also begun to win business from more-established fund jurisdictions. The island has benefited 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.
In 2010, nine companies from the British Virgin Islands, seven from the Cayman Islands and six from Luxembourg switched their legal domicile to Malta, according to the MFSA.
In addition, at least a dozen large U.K. hedge funds and funds of hedge funds have shifted part of their operations, including accounting and investor relations, to Malta.
These include Clive Capital LLP, which has about $4 billion under management, Comac Capital LLP, which has $5.2 billion under management, the $1.2 billion commodities and energy hedge fund BlueGold Capital Management LLP and the $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 euros, estimates James Farrugia, director of investment services at the Maltese law firm Ganado & Associates.
The growth of Malta’s fund industry has been so rapid that Prime Minister Lawrence Gonzi says he worries whether Malta, with a population of just 414,000, has enough accountants and financial analysts to keep up with demand.
Invasions, friendly or otherwise, are nothing new to the Maltese. Phoenician sailors, Roman centurions, Arab traders, pirates and Norman mercenaries were all drawn to the island’s natural harbors and strategic location between Europe and North Africa.
The Knights of St. John, a Catholic military order popularly known as the Knights of Malta, ruled the island for more than 250 years beginning in the early 16th century.
The legacy of their trading wealth can be glimpsed in the baroque palazzos and lavishly decorated churches of Valletta, Malta’s compact, walled capital city.
Napoleon conquered Malta en route to Egypt in 1798. Two years later, the British fleet seized it from the French and remained until the islanders were granted independence in 1964.
The British left three bequests that have been critical to Malta’s rise as a financial hub. One is the English language, which gives the island an advantage over some other popular fund locations. The vast majority of Maltese speak it fluently, along with the island’s second official language, Maltese, which is similar to Arabic yet written in Latin script.
Another legacy is English commercial law, which Andre Zerafa, a lawyer at Ganado & Associates, says was grafted onto the island’s civil law system. “The Maltese Companies Act is roughly based on English company law principles from the U.K. Companies Act,” Zerafa says.
Finally, there’s Malta’s “Anglo-Saxon” work ethic, as fund managers describe it.
“They definitely work more like beer drinkers than wine drinkers,” says Andrew Frankish, the director of client relations for IDS Group, a South African fund services company that set up offices in Malta in 2010.
A 125-square-mile (324-square-kilometer) island with scarce natural resources, Malta has had to think creatively to attract investment. In 1988, Malta introduced business-friendly low taxes.
Today, while companies pay a nominal income tax rate of 35 percent, refunds can reduce that to 5 percent or less for most foreign-owned corporations. Most capital gains and dividends aren’t taxed.
Business friendly doesn’t mean offshore in the sense of being lightly regulated.
“We want to be a financial center of the highest reputation possible,” Gonzi says during an interview, sitting beneath the 20-foot-high (6-meter-high) ceilings of the Auberge de Castille, a palazzo that once belonged to the Knights of St. John and now serves as his office.
In the late 1980s, before it joined the EU, Malta tried positioning itself as an offshore haven. In addition to low taxes, it offered foreign companies total confidentiality and a laissez-faire regulatory regime.
In the mid-1990s, the country reversed course, bringing its regulations in line with the EU ahead of becoming a member state in 2004. Among other requirements, Malta demands audited annual financial statements and background checks for fund owners and directors.
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.
Range of Funds
“At the beginning of 2008, we started to see investor sentiment changing,” FMG’s Nelson says. “Regulation, liquidity and transparency were becoming real factors in the decisions that investors were making.”
Nelson says that change prompted FMG -- which has about $200 million under management across a range of funds that invest in markets from Brazil to Iraq, to Mongolia -- to shift its headquarters to Malta.
FMG has also shifted Chief Investment Officer Andrew Jameson, an Englishman who was living in Geneva, to Malta, becoming one of the first foreign fund companies to relocate investment strategists to the island.
For Malta, the influx of hedge funds has been a boon. The firms’ profits feed into the local economy, as do the legal and accounting fees the companies generate. Total income from financial services constituted about 12 percent of the island’s gross domestic product of 6.2 billion euros in 2010.
While the government takes in relatively little direct revenue from fund companies because of the island’s low taxes, the firms have boosted employment on Malta, along with spending on everything from office space and hotel rooms to restaurants and transportation.
The government’s goal is for financial services to become a pillar of the economy, accounting for 25 percent of Malta’s GDP by 2015.
Malta has a way to go, says Joe Seet, a senior partner at Sigma Partnership, a consulting and accounting firm in London that advises hedge funds.
“If someone wanted to do something more than a straightforward long/short fund, Malta may not be the right place because the legal advisers, the auditors, the fund administrators and the directors don’t really have deep experience compared to Dublin and Luxembourg,” Seet says.
Joe Bannister’s job is to change that perception. Bannister, 66, a former biochemistry professor with a doctorate from Oxford University, has headed the MFSA for more than a decade. He says the MFSA is approachable, not pliable.
“We do extensive due diligence,” Bannister says. “No due diligence, 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.
Malta’s adoption of the euro in 2008 gave a lift to the island’s ambitions as a hedge-fund center by eliminating a layer of foreign-exchange costs. So did the prospect of a change to EU hedge-fund regulation called the Alternative Investment Fund Managers Directive (AIFMD).
As first proposed in April 2009 by the European Commission, the AIFMD would have allowed only fund managers headquartered in the EU to market funds within the bloc, barring funds based in the Caymans or Switzerland, not to mention the U.S., from raising money in the EU.
The prospect of being shut out of Europe frightened many managers into seeking an EU address, says Chris Bond, head of global banking and markets business at the Maltese arm of HSBC Holdings Plc.
In the end, as published in 2011, the AIFMD opened the door to funds outside the EU as long as their managers were located in “well-regulated” jurisdictions.
Malta’s small size is a weakness as well as a strength, according to the prime minister. Gonzi says he worries that hedge-fund demand will exhaust the island’s talent pool.
Andrew Manduca, chairman of Maltese business for Deloitte LLP, says the professional services firm already has had to recruit English-speaking accounting graduates from the Philippines to fill vacancies.
To encourage more talented expatriates to move to the island, in 2010 Malta introduced a 15 percent individual tax rate, down from 35 percent, for certain categories of financial professionals earning more than 75,000 euros a year.
Outside of major financial centers such as London, Malta’s chief competitors for hedge-fund business within the EU are Luxembourg and Ireland.
Malta has a competitive advantage, says Peter Hughes, group managing director in London for Apex, an international fund administration company that has offices in some 23 countries, including Malta. He says it costs about 20,000 euros to set up a fund management company in Malta -- about half of what it would cost in Luxembourg.
Luxembourg and Dublin are not openly concerned.
“We have no major, short-term worry about our market position,” says Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry.
Likewise, Gary Palmer, chief executive officer of the Irish Fund Industry Association, dismisses any threat to Ireland’s 40 percent global market share in hedge-fund administration.
Ireland’s funds industry has bounced back from the 2008 financial crisis, which damaged the reputation of the country’s bank regulators and saw the assets of hedge funds based in the country fall 14 percent over the course of a year.
As of November, those assets were up 23 percent from 2007.
“Ireland has unrivaled breadth and depth of experience across the widest range of investment structures and strategies,” Palmer says.
Paul Keegan, a hedge-fund senior analyst who’s originally from Ireland and now lives in Malta, has more than investment structures on his mind when he stares out his office window at the imposing bastions, church steeples and red-tiled roofs of Valletta.
Keegan spent 10 years in London working for BlackRock Inc. and Merrill Lynch Investment Management before he decided to move to Malta in 2010 with his wife and two sons, both under 5 years old.
“With a young family, we decided that life outside of London was more appealing,” Keegan says.
300 Days of Sunshine
Keegan works at Finisterre Capital LLP, a $1.75 billion hedge fund with offices in London, Malta and Westport, Connecticut. Finisterre moved its parent company to Malta from the Caymans in 2009.
Rather than just registering the business in Malta for tax reasons, however, Finisterre has also moved important operations to the island.
Keegan heads a Malta-based team that works with others in London on fund performance analysis, trade settlements, investor relations and financial reporting.
Frode Foss-Skiftesvik, one of Finisterre’s founders, says the fund probably saves 40 percent by performing those tasks in Malta rather than in London or Westport.
Keegan says adjustment to life on Malta is easy. U.K. newspapers and British television are ubiquitous. Public telephone booths are even the same iconic red ones found in Britain.
Keegan doesn’t miss London’s weather. Malta averages 300 days of sunshine per year. And he and his wife are building a house on the island, something he says they could never have afforded to do in London, where they lived in a two-bedroom apartment.
Two years after setting foot on Malta, Erik Nelson shares Keegan’s enthusiasm for the place. Strolling along the harbor in Sliema, a section of Malta’s northeast coast known for its bustling bars and restaurants, Nelson says he doesn’t regret leaving Connecticut.
Nelson’s apartment is a two-minute walk from FMG’s offices. He plays squash. He sails. He goes spearfishing.
“I’m a big water sports guy,” Nelson says. “Here, I can walk out my front door, cross the road and jump in the water.”
He says if he gets “rock fever” and feels he has to get off the island, the rest of Europe is just a short flight away. As long as Nelson comes back to the rock, Malta’s government will be happy.