By Simon Gray – The Cayman Islands are best known in the global financial industry as the world’s dominant offshore hedge fund domicile. Less familiar outside industry specialists is that the Caribbean jurisdiction is also home to a substantial fund services industry that continues to thrive, despite the combined pressures on costs and skilled manpower at home and competition from rival locations, especially in North America.
In the 1990s, Cayman and other Caribbean locations such as Curaçao benefited from the so-called ‘10 Commandments’ that stipulated what activities relating to the management and operation of a fund had to be performed outside the United States in order to escape the US tax net. The rules changed 14 years ago, and today offshore funds run by US managers may well be administered in New Jersey, or perhaps Canada.
It’s true that especially in the past five years, some administrators with Cayman operations have shifted some activities onshore, especially to Halifax, Nova Scotia, which has set itself up as an inexpensive fund-servicing centre. The inevitable costs of doing business on a small island and pressure on the availability of skills, coupled with uncertainty about the territory’s immigration policy, have all affected Cayman’s competitiveness in the fund services market.
Yet Chris DeNigris, marketing and sales manager with the North American operations of financial services software firm Koger, notes that Cayman remains the firm’s second largest market for fund administrators, its core client base, after Ireland. “It is a very important domicile that continues to see a lot of growth, because of the stability of the market there and the fact it is the go-to place for master-feeder structures, which remains a staple of the industry,” he says.
“Cayman still has the critical mass that makes it very challenging for other jurisdictions to compete with directly. The sheer volume of funds domiciled there attracts best-in-class service providers that continuously look for improvements and innovative new products. Because of this, industry surveys still show Cayman well ahead globally as the hedge fund domicile of choice, even though it faces ongoing challenges to remain so in the face of changing financial regulation.”
However, he cautions: “We are seeing competing domiciles, for instance Luxembourg, the British Virgin Islands and the Channel Islands, catching up. Cayman administrators all have their systems, structures and procedures in place, but firms elsewhere are looking to emulate that infrastructure in a bid to attract fund business.”
DeNigris is echoed by Larry Leonard (pictured), chief technology officer of Admiral Administration, which was founded in Cayman in 1996 and today has expanded internationally with the establishment of operations in Virginia and Dublin. “Cayman is still the jurisdiction of choice, but we along with all administrators across the world are facing new challenges,” he says. “In the end, the administrators that survive will be those that meet the enhanced reporting requirements of attentive institutional investors.”
Leonard believes that one way of developing the necessary competitive edge, and one that also helps businesses in Cayman compensate for cost issues, is investment in technology. Admiral has developed an in-house software application called Avatar to pull together all the different facets of its information systems, and is now rolling out a client interface called Avatar FM that allows managers to access fund data in real time.
“Avatar FM not only offers clients a better service but also saves both them and us time,” adds Leonard’s colleague, head of research and development Simon Boor. “The user interface allows fund managers to obtain all their answers without contacting us, and to access information at any time and helps to enhance the client relationship as both parties are viewing the same data concurrently. Offering this kind of accessibility is the future of fund administration. We are rolling it out now, while other service providers seem to be still wondering how they will offer it.”
Darren Stainrod, who heads business across the Americas and Asia-Pacific from the Cayman office of UBS Fund Services, argues that the flexibility of the Cayman product, including the fact that it has almost no restrictions over the location of service providers, is one of the jurisdiction's main attractions as a hedge fund domicile.
“There has been a continuing trend for administration work to be done onshore, which is part of Cayman’s open-architecture approach and why it represents the most popular product not just in the American market but for Europe and Asia as well,” he says. “The fact that administration tends to have migrated onshore, particularly to New Jersey and Canada, is a reflection of costs, immigration issues and proximity to markets.
“However, all fund audits have to be signed off in Cayman, and quite a significant proportion of full audits are still carried out here, hence the large offices of the Big Four and other audit firms on the island. Cayman law firms are also flourishing, although the biggest ones have also opened offices worldwide that deal with Cayman funds – you find specialists in Cayman law in centres such as London, the Channel Islands, Dublin and Hong Kong. But that doesn’t reflect any diminution in legal work carried out in the jurisdictionitself, rather a growth in the popularity of the product in general.”
Stainrod notes that the provision of independent directors has become a major industry in Cayman in recent years. There are even a handful of investment managers operating out of Grand Cayman, albeit probably more for lifestyle reasons than because of the emergence of any hub of portfolio management expertise. In addition, he says, some managers prefer to keep shareholder services for offshore funds outside the US, although much of that is done in Canada too these days.
Yet he also points out that some clients prefer for their funds to be fully administered offshore; some have been serviced by UBS in Cayman for a decade or more. That’s one reason why UBS Fund Services is still the largest administrator in the jurisdiction and Cayman is its largest operation more than 150 staff excluding support functions. Another is the fact that around 70 per cent of the office’s business consists of funds of funds and private equity, as opposed to single-manager hedge funds.
“We do have the full capability to service large complex single-manager funds either from Cayman or from Toronto, but overall the profile of our client portfolios is different,” Stainrod says. “We are able to attract and retain significant numbers of qualified accountants, and we have our own banking licence, both of which facilitate the high-touch approach required for funds of funds, with all the moving parts to be co-ordinated at month-end. In addition, funds of funds typically do not operate in a daily dealing environment or require links to brokers.”
The devastation wreaked by Hurricane Ivan on Cayman in 2004 had an impact on the views of some types of client, but not others, he adds: “For multi-broker hedge funds with high trading volumes and a daily or an intra-daily environment, it’s about their comfort level. We can replicate data to our back-up site in an instant – it’s not like the days when you had to fly tapes off-island – but an onshore US hedge fund manager may feel more comfortable having an administrator in New York, New Jersey or Toronto.
“For funds of funds or certain low-volume trading hedge funds, it’s less critical, and the possibility of a hurricane once every 10 years is not the end of the world.” Besides, Stainrod notes wryly, Cayman is used to coping with the effects of hurricanes, whereas onshore locations can be more vulnerable to disruption as a result of extreme weather and other events: “The only time I was evacuated from a hurricane last year was when I was on holiday in New York.”
UBS is far from the only group to see Cayman as a competitive base for the provision of fund administration services – Maples and Calder’s Jon Fowler notes that Maples Fund Services has grown into a sizeable provider with around USD30bn in assets under administration. “Clearly we have a vibrant and very successful fund administration centre here in Cayman,” he says. “That is testament to the fact that we have managed to weather any headwinds successfully.”
Phil Griffiths of the JP Funds Group argues that costs in Cayman as not as high as is sometimes perceived, especially in comparison with European jurisdictions. “From an investor’s perspective, the costs are relatively low, especially for fund administration, lawyers or any form of accountancy. It’s a very competitive market in Cayman with plenty of professionals here. Costs may have risen in the heady days of the early 2000s, but now supply and demand is back in a better balance.”
It probably helps, at least psychologically, that the Cayman government is reviewing the ‘rollover’ provision of its immigration policy which imposed on expatriates not designated as key personnel for their employers a maximum residency period of seven years, after which they would be required to leave the territory for at least a year.
Anxious not to cause disruption particularly in the financial sector at a time when increasing number of employees may be affected, the government last year instituted a two-year suspension of the policy while it examines whether the rollover concept is the best way of addressing the islands’ resources and population issues.
In general, firms such as lawyers and fund administrators report that they have not been substantially affected by the policy to date, because the government has been flexible in the award of key employee status. In addition, groups with extensive operations elsewhere in the world have the ability to second employees affected to other offices. However, uncertainty over the length of time expatriates can stay in Cayman may affect decisions such as the possible acquisition of property.
“We haven’t seen a massive impact,” says Walkers’ Ingrid Pierce. “Some of our support staff have reached the point where they would have to leave, so the current suspension of the policy is very good news for those who can now stay for longer. However, we have been able to obtain key employee status and permanent residence for many of our legal and certain other staff.”
Please click here  to download a copy of the Hedgeweek Special Report: Cayman Islands Hedge Fund Services 2012