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Expertise that keeps Cayman ahead of the pack

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The hedge fund administration sector in Cayman is currently enjoying vigorous growth, with new players entering the market, and existing

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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