Thu, 19/01/2006 - 06:05
When the Cayman Islands enacted the territory's Mutual Funds Law in 1993, hedge funds were all but unknown outside a small, rarified circle of alternative asset managers and their high net worth clients.
At that time, when cross-border initiatives such as the European Union's Ucits directives were still in their infancy, the attraction of offshore centres for most providers was to escape the red tape and bureaucracy that surrounded national investment fund markets rather than offering a completely different kind of product.
Twelve years on, however, and the offshore centres are now key hubs for the domicile and servicing of funds that eschew the strict prescriptions of national regulation. But thanks to the Mutual Funds Law, Cayman has achieved a seemingly unshakeable grip on a business that has grown from a small niche market into a permanent and substantial feature of the investment landscape.
A three-year bear market in the traditional long only products has fuelled part of the growth in alternative investments as investors seek out both diversification and higher returns in the many different strategies offered by hedge fund managers.
Since 1993 the number of hedge funds in Cayman has grown from fewer than 1,000 to more than 7,000 today, which represents around 70 per cent of the total offshore hedge fund market, an impressive share.
Cayman's success in becoming the jurisdiction of choice for hedge funds is not just down to its legal framework based on English common law, the efficiency of its supervisory authority and the rigour of its measures to prevent financial crime, important though those factors are. The jurisdiction would not have been able to dominate the industry without the expertise of its service providers, from fund administrators to lawyers, accountants and auditors - a wealth of human resources its rival struggle to match.
The quality of these providers has become increasingly important as the hedge fund industry has developed. Today's funds adopt increasingly sophisticated strategies and invest in exceedingly complex instruments that require well-educated and experienced specialists to service them.
Cayman's success as a financial centre is down to a partnership between an industry with the capability to delivering excellence and innovation to a fast-moving sector and far-sighted governments that have repeatedly acted to ensure the islands remain equipped to provide the services required by the market. At the same time, the public and private sectors have worked together to ensure that the jurisdiction's standards of regulation, governance and market probity are second to none. Today, with the growing regulation of the hedge fund industry worldwide chiming with Cayman's insistence on the highest standards, the islands are more than ever at the heart of the financial mainstream.
By Sean Flynn - Head of UBS Hedge Fund Services
For the full hedgeweek report on Cayman Hedge Fund Services, please click here
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