In 2011, ahead of the introduction of the AIFMD in Europe, an article entitled "A foot in both camps", was written by Derek Delaney, Managing Director of DMS Offshore Investment Services (Europe) Limited. In it, Delaney (pictured) wrote: "There is an enduring perception that the established European domiciles such as Ireland and Luxembourg are in direct competition with the leading offshore domiciles such as Cayman. This perception has transcended reality to the extent that leading participants in both camps deem it necessary to fight their corner."
With over 225 staff, DMS is the world's largest provider of fund governance services and has long been at the vanguard of establishing robust governance controls for hedge funds.
What Delaney's article sought to do was highlight the fact that investment managers, depending on their size, the location and type of their investors, and other factors, need to look at both offshore and onshore domiciles and weigh up the best approach to structuring their fund(s).
Whereas a few years ago Cayman would have been the default choice, that's no longer the case. European domiciles are an important consideration, and with its heritage and location both in Cayman and Europe, DMS is well placed to support managers as they look to adjust to regulation.
"Ultimately, there's no right or wrong approach. If we were talking to a US manager we would be saying, 'Here's the default option, Cayman, and this is the cost. If you're looking to establish a European fund it will be more expensive because of the need to appoint an independent depositary and the addition of a management company'," says Delaney.
"If someone says that their investors are exclusively US then they would choose Cayman and avoid the costs of a European vehicle. If someone has a high concentration of investors domiciled in, say, the UK it makes more sense to set up a Cayman fund and distribute that fund under National Private Placement Rules. That restricts the manager to marketing the fund to institutional-level investors, which might be an issue if they want to target HNWIs."
The third scenario is if the manager has a high number of European investors. If 25 per cent or more of the fund's investors originate from Europe, they should opt to establish a European regulated fund.
"When setting up the European fund the manager will quite often have a Cayman feeder fund coming in to that structure. However, the Cayman feeder would have to be in the European domicile under EU regulations," explains Delaney.
The fourth scenario is where the manager expects to have a predominantly European investor base. Here, it would make sense to have a single European regulated fund with no Cayman element at all.
"In three of those four instances, Cayman plays a role. I think it will still be the default jurisdiction for US managers who at a minimum will have a Cayman feeder fund in their structure but from a European perspective, the extent to which Cayman is used may reduce somewhat going forward," opines Delaney.
It is logical that a manager would prefer Cayman, given the lower costs but what is coming increasingly into play is necessity according to Delaney, who concludes: "Where a mandate is domicile-dependent then the manager will swallow those additional costs and that additional oversight because ultimately that discomfort will pale into comparison with the inability to raise capital."
The following article appears in the 2014 Hedgeweek Cayman Islands Special Report.
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