Expertise that keeps Cayman ahead of the pack
The hedge fund administration sector in Cayman is currently enjoying vigorous growth, with new players entering the market, and existing ones expanding their clientele and operations.
Two or three new players have set up operations over the past 12 months and many of the administrators already in the market have been growing. For example, UBS has grown from 90 staff at the end of 2004 to 130, an increase of more than 40 per cent. That's not to say Cayman doesn't face plenty of competition in the fund services business. Dublin - where we also have an operation - is a big centre for administration of Cayman funds; indeed, a large proportion of its administration business consists of Cayman-domiciled funds.
However, this is due in large part to the fact that although European managers may be structuring their products in Cayman, they want administration in the same time zone.
It's not down to any shortcomings on the part of Cayman administrators. It's estimated that about 70 per cent of all offshore hedge funds are domiciled in the Cayman Islands. That's a huge market share when you think that all the other offshore fund centres, including the British Virgin Islands, the Bahamas, Bermuda and the Channel Islands, have just 30 per cent between them. At the moment Cayman towers above everyone else as a hedge fund domicile, and there's no reason why it should lose that lead. It has a great deal of expertise in the law firms, the accountants, the banks and the fund administrators to facilitate the structuring and administration of funds. It's difficult to find the same level of expertise, infrastructure and support in many other offshore jurisdictions.
In the medium to long term, Cayman is likely to face increased competition not from other offshore fund centres but from onshore centres. As more long-only managers move into hedge funds, and as institutional investors increase their exposure to alternative assets, hedge funds will progressively become more of a mainstream asset class, and it is institutions that may prefer to invest in funds domiciled in an onshore regulatory framework.
One challenge faced by offshore and onshore administrators alike is coping with the industry's continuing growth. Cayman is no more under pressure than other centres in its capacity to handle increasing volumes of new fund services business, since most hedge fund administration is done in centres where the labour market is fairly tight.
Competing centres such as Dublin, the Channel Islands and even New York have full employment, so it's no easier there to add staff in response to growing volumes. Frankly, Cayman has an advantage because it's an attractive place to which people want to come to live and work. Turnover is extremely low here, certainly compared with many competing centres.
Another challenge for administrators is the changing nature of the product itself. The trend is moving away from traditional strategies such as long/short equity, which involve easy to value and liquid instruments, to multi-strategy funds that adopt more complicated strategies and trade highly complex instruments. The administrator must now have the capability and resources to value some of these complex instruments devised by investment banks and trading houses.
Sean Flynn is Chief Executive and Head of UBS Hedge Fund Services
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