For most of the past decade, the Cayman Islands have been the world's dominant offshore alternative fund domicile. At the last count, the jurisdiction had around 10,000 funds, the vast majority of which are hedge funds of one stripe or another, not to mention a substantial but unquantifiable number of unregulated private equity vehicles.
But with offshore financial services under hostile scrutiny as never before, Cayman finds itself on a 'grey list' of jurisdictions assessed by the Organisation for Economic Co-operation and Development as having signed up to the principles of tax transparency and exchange of information but failed, so far at least, to have adequately implemented them by signing tax information exchange agreements with OECD members.
Cayman's performance is far from dismal; at the time the OECD published its report it had agreed more bilateral Tieas - eight - than any other jurisdiction on the grey list. But with three rival offshore financial centres, Jersey, Guernsey and the Isle of Man, having been adjudged by the OECD to have satisfactorily implemented the required international standard, and with the status of US jurisdictions such as Delaware having been conveniently glossed over in the report, Cayman may no longer be able to rely on its position as the default choice for an offshore fund domicile.
Some observers see this situation as an opportunity for existing offshore jurisdictions, or for onshore international centres such as Luxembourg and Ireland. Others believe that alternative funds, so far as they are tolerated, should be firmly under the thumb of national regulators for fear of the systemic disruption they are supposed to threaten.
Kurt Tibbetts, the Cayman Islands' leader of government business (chief minister by any other name) describes the territory's assessment by the OECD as 'the lightest shade of grey'. Certainly the organisation's report noted that Cayman had 'set a good example' by enacting legislation - currently under review by the OECD - that allowed it to exchange information unilaterally and had identified 12 countries, according to Tibbetts, with which it was prepared to do so.
If the outcome of the review is positive, that brings to 20 the number of tax information exchange commitments made by Cayman, comfortably above what appears to be the OECD's threshold for co-operation of 12, paving the way for the territory to join the so-called white list.
This may or may not help to remove the shadow hanging over the reputation of jurisdictions such as Cayman. But it's not clear that the alternative fund industry, with its international array of investors and assets, can function adequately without the much scoffed-at 'tax neutrality' and the legislative flexibility that have made Cayman, and to a less extent other jurisdictions, domiciles of choice.
Some opponents of offshore centres won't find that a problem, being also opponents of alternative funds. But for decision-makers who take a broader view, a Cayman that meets international standards on tax and co-operates with the home countries of investors is an asset to the cause of global financial stability. In the coming months we'll see whether reason prevails.