Gonzalo Jalles, CEO of Cayman Finance, talks to HFMWeek about the impact, challenges and benefits of the AIFMD on the Cayman Islands
HFMWEEK (HFM): WHAT ARE THE MAIN CHALLENGES MANAGERS FACE AS THEY SEEK TO BECOME AIFMD COMPLIANT?
GONZALO JALLES (GJ): AIFMD has come into force, but its implementation is in stages and the way some of the future stages are going to be implemented is not clear. Implementation within Europe is patchy at present despite the 22 July 2013 deadline having passed. The challenges faced by managers and funds to become compliant will depend on the nature of the fund, where it is managed and where the investors are, but it is clear that the scope of AIFMD captures to a differing degree not only European managers with European funds, but also non-European funds that are managed from Europe and non-European funds managed from outside Europe but sold to European investors. For those managers required to comply fully with the Directive, a few of the more contentious areas of regulation are on the way risk is managed including limitations on leverage and on the way the manager is remunerated. Additionally the amount of reporting has been significantly increased, for those that seek only to use private placement rules and for those that seek full Directive compliance. This will drive up costs that may cause higher fees to the final investor.
HFM: TO WHAT EXTENT IS THE CAYMAN ISLANDS READY FOR THE POST-AIFMD HEDGE FUND INDUSTRY?
GJ: Cayman has agreed a form of MoU with ESMA (the pan- European securities regulator) and individual MoUs have now been signed with most of the regulators in Europe (five are pending at the time of writing). These agreements are a prerequisite to managers of Cayman funds looking to continue selling Cayman funds to European investors using existing country by country private placement regimes – the way most have been sold to date. This ability to use private placement regimes in Europe will continue indefinitely unless Europe positively determines to extend the passport to third-country managers (the first opportunity to do so being in 2015), in which case the private placement regimes will still last until 2018. That said, it is open to individual European countries to impose additional restrictions via their private placement regimes. It remains to be seen whether Europe will decide to permit non-European managers with non-European (for example, Cayman) funds to follow the passport route. If this does not happen we are likely to see complementary fund structures being established for different target investor locations, where managers will run more expensive and constrained funds within Europe to obtain the passport to sell in Europe, and less constrained and more cost-effective funds to sell outside of Europe.
HFM: WHAT HAVE BEEN THE BIGGEST CHANGES REQUIRED OF CAYMAN AS A RESULT OF THE AIFMD?
GJ: Cayman has made minor changes to its monetary authority law to facilitate the MoUs. The MoUs signed envisage increased cooperation and sharing of information, which is in line with the historic policy of transparency and openness that the Cayman Islands has followed for over 20 years. Managers of Cayman funds which opt to continue to use private placement regimes will make relatively minor documentation changes and be subject to an enhanced ongoing and annual reporting regime within Europe. No non-European manager or non-European fund (for example, a US manager with a Cayman fund) can at present become fully AIFMD compliant in order to obtain a passport.
HFM: HOW WOULD YOU RESPOND TO SUGGESTIONS THAT THE AIFMD WILL SEE OFFSHORE JURISDICTIONS – SUCH AS CAYMAN – LOSE BUSINESS TO ONSHORE DOMICILES?
GJ: It is difficult to predict how the final implementation will impact places like Cayman vis-à-vis Europe. What in my opinion is clear, is that the Cayman product continues to be the most competitive when considering cost-efficiency, reputation and security. If European investors are restricted from investing in Cayman funds even through private placement or real reverse solicitation, or the burden of proving reverse solicitation is such that the managers decide not to accept European investors in Cayman funds, this will primarily be detrimental to European investors. The Cayman product will not disappear as the bulk of alternative investment fund investors are based outside of Europe. Those investors outside of Europe will not be prepared to pay the additional costs related to AIFMD. Some managers may opt to run parallel funds with one being subject to the AIFMD or may discontinue servicing European investors if most of their customer base is not European.
HFM: WHAT BENEFITS DOES THE AIFMD BRING FOR CAYMAN?
GJ: AIFMD may mean that European onshore jurisdictions that have sought to gain market share from Cayman, with a view to challenging its undisputed leadership position in the alternative funds space, are not in a position to compete with the Cayman product any longer and will choose to focus on AIFMD-compliant products.
HFM: WHAT BENEFITS DOES THE AIFMD BRING MANAGERS WITH CAYMAN-BASED FUNDS?
GJ: Managers outside Europe with Cayman-based funds using the existing private placement regimes to sell the funds across Europe will continue to enjoy the flexibility and efficiency of Cayman funds with a relatively light European overlay, while their European peers subject to the full limitations imposed by AIFMD will see the impact of the new restrictions and requirements translated into fund performance. To that extent Cayman funds may become relatively more competitive.
HFM: LOOKING AHEAD, HOW WILL THE AIFMD CHANGE THE RELATIONSHIP CAYMAN HAS WITH EUROPEAN MANAGERS?
GJ: A European fund manager will be subject to the AIFMD regardless of where the fund is based. Today, the majority of the managers of Cayman funds are non-European, although Cayman is also used significantly by European managers. It is unlikely that we will see a significant change in the use of Cayman structures by European managers, except that European managers servicing a significant customer base outside Europe may choose to use a combination of manager entities outside of Europe (either existing or newly established) and non- European funds to continue to service that customer base. n
Gonzalo Jalles was the CEO of HSBC in the Cayman Islands for almost six years and was appointed CEO of Cayman Finance in January 2013. He served as president of the Cayman Islands Bankers' Association from 2009 to 2012. Jalles has a degree in economics, a Masters in finance and a CFA designation.
Originally published by HFMWEEK.COM, 8-14 August, 2013
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