Despite dire predictions for the Cayman Islands hedge fund industry reported in the Financial Times this week, local figures paint a very different picture. As of 30 June there were 9,486 funds in this jurisdiction, an increase of over one hundred on the previous quarter. Other good news is that so far this year, authorizations have outstripped terminations each and every month. Ingrid Pierce, partner and head of Walkers' Hedge Fund Group in the Cayman Islands, said clients continue to have the utmost confidence in the Cayman Islands as the domicile of choice when it comes to hedge funds, and despite concerns to the contrary, very few funds have either redomiciled or determined to set up funds elsewhere.
With clients among the world's leading investment managers and financial institutions, Walkers reports a healthy flow of instructions for new funds to be established.
“Recent press commentary has pointed to a preference for new hedge funds to be domiciled in Ireland and Luxembourg at the expense of Cayman, however a more likely scenario is that these jurisdictions will co-exist with the Cayman Islands, each appealing to different if partially overlapping segments within the investor and investment manager communities,” Pierce added.
In a short article in the UK’s leading financial paper, The Financial Times, the future picture of the Cayman Islands hedge fund sector was painted as bleak, with some hedge fund managers stating that institutional investors are increasingly choosing to invest in funds that comply with Europe’s onshore Ucits regime rather than unregulated offshore hedge funds.
Mark Fleming, a partner at Tiburon Partners, an Asia specialist that runs both Newcits and Cayman funds, said that the Cayman Islands would “wither on the vine” and his firm would not open another Cayman fund.“If I was a Cayman lawyer with more than three or four years of career expectation I would wonder what I’m going to do with the rest of my working life,” he told the FT. Dan Mannix, head of sales at London-based RWC Partners, said his firm was also looking at redomiciling its Cayman funds into the EU. “Funds in offshore centres such as the Caymans are not favoured at the moment by the investment community,” he said.
However, Pierce pointed out that, while UCITS funds are suitable for particular strategies and investors with certain requirements, they are wholly unsuitable for a large number of other funds that continue to enjoy the benefits offered by funds established in Cayman.
“This shows that the Cayman model is incredibly resilient and this is borne out by the statistics on fund registrations as well as the experience of Walkers and other firms regarding instructions for the establishment of new funds,” she said.
Meanwhile, on Thursday morning Anthony Travers, Chairman of Cayman Finance, said he was bemused by the comments made to the FT. Based on CIMA’s figures, he predicted there would be in excess of 10,200 fund registrations by the financial year end. “This will exceed the all-time high watermark for the Cayman fund Industry,” he added.
Company incorporations were also growing again, he noted, with increases of over 14% for Q1 and 24% for Q2. “It is more helpful to report on the actual numbers rather than the wishful thinking on the part of competitor jurisdictions,” Travers observed.
“We take a statistical approach to these matters and will also look forward to comparing the performance metrics of our traditional and successful hedge fund product to the EU regulated ‘Newcits’ funds over the next couple of years. Monthly fund dissolutions in Cayman appear well within historical norms and do not evidence any trend towards redomiciliation. We would anticipate however that fund managers with a purely retail product will in the immediate term create a Eurocentric model but Cayman has not historically provided a UCITS product,” the Cayman Finance chair explained.
An article in Hedge Funds Review concerning Dalton Strategic Partnership’s doubling the investment risk of its Melchior European Fund in a bid to seek higher returns illustrated the point that Cayman offers a different kind of fund regime.
Magnus Spence, a partner in the firm, pointed out that traditional hedge fund investors are still prepared to take more risk in order to achieve higher returns outside of UCITS where investors are happy to sacrifice returns for a lower risk profile. Spence pointed out the need of the hedge fund sector to offer investors the choice. "If we want to be attractive to both types of hedge fund investors we need to be structured in the right products and we need to have the right risk return profile," Spence added.
Pierce pointed out that Cayman's leadership of the investment funds industry as the domicile of choice for hedge funds has developed over time as a result of its pro-business, cost efficient environment within a strong system of regulation that adheres to international standards. Even though Cayman was catering to higher risk investors, she said, it was still likely to be able to maintain access to the European market.
“Looking at any of the likely conditions that non-EU countries would be required to meet in order for their funds to gain access to the European market, there is nothing to suggest that the Cayman Islands will not maintain its leading position and continue to play a valuable role in the international financial system.”
Over the medium to long term, Pierce indicated that it was unlikely that the AIFM Directive will adversely impact Cayman’s position. “Government has already demonstrated its commitment to do everything within its power, acting with propriety and integrity, to safeguard its place among the world's leading international financial centres, including, where necessary, making amendments to its regulatory and legislative regime,” Pierce told CNS.
The statistics from CIMA reveal that despite the economic recession and the international criticism that Cayman and other offshore jurisdictions have faced in recent times, the hedge fund business here remains solid.
At 30 June 2010 there were 8929 registered funds in Cayman, 427 administered and 130 licensed. In January 158 funds were domiciled and 74 terminated, while in February there were 104 started and only 32 terminated; in March 100 came and 35 went; and again in April 96 new funds arrived compared to 28 which ended; In May 70 funds were gained compared to 36 terminations; and in June 57 were registered while 46 terminated.
The legislation which has caused some concern for the local fund industry, however, is the proposed EU Alternative Investment Fund Managers directive which would block funds from outside the region from being marketed to Europeans countries unless the jurisdiction adopted “equivalent” legislation, a restrictive barrier few countries are expected to meet.
The controversial proposal provoked a storm of opposition, not just from offshore jurisdictions such as Cayman but also the US and Europe’s governments. As a result the EU is now engaged in an effort to reconcile the now three separate suggested versions of the AIFMD text produced by the European Commission.
Instead of an “equivalence” stipulation, it is expected that non-EU fund jurisdictions will need to meet four criteria, such as having co-operation agreements between their regulators and those in the EU, not being blacklisted over money laundering or terrorist financing failures, having tax treaties with Europe and allowing reciprocal access to their market for European products. This means the Cayman Islands would have much less difficulty in complying with the AIFMD and therefore the industry is far less likely to suffer any adverse effects.
Source: www.caymannewsservice.com
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