Despite the credit crunch in the US, new hedge funds continue to be launched, and the Cayman Islands remain the domicile of choice for the majority of hedge fund managers.
Despite the credit crunch in the US, new hedge funds continue to be launched, and the Cayman Islands remain the domicile of choice for the majority of hedge fund managers.
Ten years ago, at the end of 1997, the year when the ‘ten commandments’ were repealed, there were 1,685 active mutual funds registered in Cayman: 1,037 of which were the type of fund that would now be classed as an offshore hedge fund. It took another two years for the numbers to pass 2,000, but since the mid 2000s the growth rate has surged.
‘As of 30 September 2007, we had 9,384 funds registered in the Cayman Islands,’ says Yolanda McCoy, head of the Investment and Securities Division at the Cayman Islands Monetary Authority. On average CIMA is processing some 35 – 37 registrations per week in 2007, and the magic figure of 10,000 registered funds is edging ever closer. ‘I am confident that the numbers by year-end, if they don’t pass the 10,000 mark, will come extremely close,’ adds McCoy.
Anthony Cowell, partner at KPMG in the Cayman Islands, believes that the outlook for Cayman remains rosy. ‘It is looking very bright – we’re continuing to see tremendous growth here and it’s not just hedge funds – it’s private equity, it’s structured products and despite the current issues with the markets at the moment, this doesn’t seem to be deterring anybody. In fact it seems that there are managers starting up distressed-type funds to take advantage of where the values are at the moment in the markets,’ he says.
According to Jennifer Collins, head of business development and client relationships for UBS Fund Services, Cayman continues to be the jurisdiction of choice, both in its time to market, where she sees it as a leader in the industry, as well as the quality of the infrastructure surrounding the jurisdiction. ‘We have good quality counsel, administrators and independent directors all working well together. This is very positive and, rather than resting on its laurels, we believe Cayman will continue to work to maintain itself as a leading jurisdiction’ says Collins.
There are several interlocking factors that come together to make Cayman the jurisdiction of choice for new hedge fund formations. High amongst these is the depth of talent within its fund services industry. According to Rohan Small, partner in the Assurance and Advisory Business Services Practice of Ernst & Young in the Cayman Islands, Cayman continues to attract highly talented and experienced individuals who are attracted to work in fund servicing in Cayman.
‘As the hedge fund industry continues to mature, we do see Cayman being tested, as it were, in terms of how it can be innovative to attract the right people to come here and grow with us, but thus far we’ve seen this only to be a challenge similar to that faced by our competitors,’ says Small.
One of the great advantages that Cayman has over competing offshore jurisdictions, according to Cowell, is to have an excellent legal framework in place, which other jurisdictions are aiming to emulate. In addition, he highlights Cayman’s infrastructure as a major attraction for managers. ‘We’ve been here for a long time now. We have the legal profession, the auditing firms and administrators who work alongside each other very efficiently, hence the reason why Cayman is seen as the place to set up a hedge fund these days, which is why we continue to grow.’
Alongside growth, come both challenges and choices. Cowell believes that a continuing issue for the island will be to what extent it can actually cope with the flood of money from institutional capital. ‘It’s going to continue to grow over the next few years, and it’s going to grow in a big way,’ he says. The important question to answer, according to Cowell, is to what extent Cayman can continue to develop the infrastructure to support that wall of money.
‘We’ve done very well, but it’s now time to consider where we want to be in the future. Do we want to be attracting the institutional capital or continuing the way we are going, so we get institutional and high net worth? There are definitely some important decisions for Cayman to make,’ Cowell says. He sees a real opportunity for Cayman’s fund services sector to focus on the true value-added services – front and middle office-type services – that are increasingly being demanded by institutional investors.
Perhaps the most eagerly anticipated initiative in Cayman in 2007 has been the implementation by CIMA of e-reporting, which became fully operational at the end of March. If there were fears surrounding e-reporting adding significantly to the workload of fund administrators and auditors, then those fears have proved to be unfounded. In fact, CIMA were very mindful of these concerns when designing the e-reporting platform.
‘The intention was to allow the operators to fill this information out quite easily. We did not want to make this a burdensome or onerous task on the persons who were going to complete this form. The answers to all the questions that are on the Fund Annual Return (FAR) can basically be found either in a fund’s offering document or the audited accounts. There is no difficult fact finding in any of the questions posed,’ says CIMA’s McCoy.
She goes on to point out that Cayman’s service providers, auditors and operators, who have worked very closely with CIMA over the past 24 months from the initial stages of e-reporting to post-implementation have been ‘absolutely fantastic.’ ‘We have had a number of queries fed through to the authority, which we had anticipated, and as will occur when anything new is introduced, but there have been absolutely no major hiccups in terms of the platform,’ she adds.
Ernst & Young’s Rohan Small believes that the implementation of e-reporting places Cayman head and shoulders above its competition. ‘It is quite unique to have something like e-reporting in place,’ he comments. Indeed, not only is e-reporting making the filing and review of fund data much more efficient and streamlined, but there is great anticipation throughout the industry, not just Cayman-based but across the world, in advance of the promised release of statistical information gleaned from e-reporting, which it is hoped will be available in early 2008.
‘At this point in time we are in the process of testing the data quality. If all goes as planned, we anticipate that we will be in a position to start releasing some of the aggregate statistical information that the industry and a lot of the service providers around the world, including regulators and standard setters are interested in, during the late part of the first quarter of 2008,’ says McCoy.
Despite the level of excitement about having such detailed, verified information on the fund industry, CIMA is ensuring that it does not rush into releasing anything that has not been checked and verified. ‘It is absolutely critical that we get as accurate information as possible, and that is what we want to ensure, so we are in the process of testing the data quality at this moment,’ adds McCoy.
KPMG’s Cowell is another fan of CIMA’s e-reporting initiative, which he believes differentiates Cayman from any other jurisdiction. ‘CIMA now ultimately has data on 9,000 or more hedge funds and can give very clear statistics on where the industry is moving. We have never had that before from anybody – any service organisation, any industry body – nobody else has that wealth of information, so the industry here is very excited about the news of where the industry is moving to. I think that CIMA will become very much an authoritative source of information for the future, which adds credibility to the industry,’ he says.
Despite the fact that the industry will have to wait a little longer for the statistics, Yolanda McCoy is happy to offer an insight into the type of information that she anticipates that CIMA will be able to release to the world. ‘We will be able to tell the world how many total assets we have in Cayman, subscriptions versus redemptions in a particular jurisdiction, we’ll be able to do a cross reference – for example New York versus London, or Hong Kong versus Singapore – and take more of a proactive approach in looking at where the hedge fund managers are, where the funds are being primarily managed and distributed. And we will be able to disseminate this information to the world, not only within Cayman.’
Both Cowell and Small agree on the potential value of CIMA’s statistics for the industry. ‘Transparency is the buzzword at the moment, so CIMA is going to be in a very good position to be able to deliver some really good statistics on where the industry is at,’ says Cowell.
For Small, the methodical approach that is being taken in compiling the statistics is key. ‘We will be able to say to the world that, from a Cayman perspective ‘here’s what we have’. Any other jurisdiction that chooses to compete against Cayman, I believe, will be hard pressed to compete against that, because it’s based on facts – there will be less potential in place for interpretation,’ he adds.
Small believes that e-reporting offers two important benefits for Cayman as a jurisdiction. Firstly, an independent world body, for example the IMF, visiting offshore jurisdictions is likely to leave Cayman with a unique perspective, one which he believes cannot currently be replicated in any other jurisdiction. In addition, for a fund manager who is assessing offshore jurisdictions in order to choose a domicile for a new hedge fund, the statistics produced by CIMA will be an invaluable tool to back up Cayman’s position as a preferred jurisdiction.
Small adds: ‘The Cayman government had a lot of foresight when it went down the road of deciding on an e-reporting system, because they saw that from a cost perspective – whether that be human capital or infrastructure – to ensure that it was operating effectively, it would need to pay a high premium in the next 2 – 10 years, if it continued down the path that was there before e-reporting.’
But despite the praise for e-reporting, CIMA is certainly not guilty of resting on its laurels. ‘E-reporting will be looked at again to continue to enhance the practices and procedures within the division,’ says McCoy. ‘In my opinion this is only the beginning of what is going to take place in the jurisdiction in terms of the electronic submission of any form of data. There are wonderful things on the horizon.’
