With three specks of land in the western Caribbean dominating the offshore hedge fund space for decades, and despite ever-competitive rival jurisdictions, Cayman remains in undisputed top spot due to a unique set of conditions.
In addition to Cayman's tax neutrality, the flexible corporate environment, which contains no unnecessary impediments to getting business done, has supported industry growth. Cayman's well- developed and widely understood structures that can be established quickly and easily have stood the test of time and operate within statutory regimes that are investment-focused and highly responsive to changes in the global marketplace. As an Overseas Territory of the United Kingdom, the Cayman Islands also enjoys a strong and secure relationship with the UK, with an English common law system providing the certainty that investors and other participants require. Cayman's fund structures provide an efficient platform for international investments to be pooled in funds without an additional layer of taxation beyond that imposed by the investors' home jurisdiction and the jurisdictions where trading profits are made. In addition to attracting investors from all around the world, this benefit is also particularly welcomed by the tax- exempt investors of the US, such as university endowments and pension funds. As such, the Cayman Islands resides right at the heart of the process of capital deployment back into the US securities market, which results in significant investment into the US from overseas through Cayman Islands hedge funds.
Over 11,000 funds currently sit on the register of the Cayman Islands Monetary Authority (CIMA), approximately twice the number in Ireland and far ahead of the rest of the competition offshore. Clearly the predominantly institutional clientele that domiciles funds in Cayman welcomes the appropriately balanced regulatory framework and robust anti-money-laundering regime, as do the mainly institutional investors in the Cayman fund sector, which had a net asset value of US$1.73 trillion in 2010, according to the most recent Statistical Digest from CIMA.
The Cayman Islands was the first offshore jurisdiction to introduce specific legislation for hedge funds, with the Mutual Funds Law in 1993 – long before the hedge fund industry really came into its own as global assets began to build toward the end of that decade. While Cayman has certainly made its 'first mover advantage' count, the jurisdiction has never rested on its laurels and the Cayman product has been continually refined over the years. One of the most notable characteristics of the Cayman Islands financial services industry is the collaborative relationship between government and the private sector, meaning that legislative changes reflect the desires of the industry and the needs of the ultimate clients.
An integral part of the financial services industry is the presence of highly skilled professionals, with the fund administrators, lawyers, auditors, company directors, and banking and trust personnel of an equivalent standard to that which you will find in any leading onshore financial centre. As the pre-eminent offshore jurisdiction, Cayman has been able to attract the best talent; being at the centre of a vast array of fund structures and transactions, those professionals have rapidly become the most experienced in the offshore market with a sophisticated and nuanced understanding of the investment-funds business. Investors and those looking to do business in the Cayman Islands can therefore be assured that the jurisdiction's infrastructure will meet their needs, however complex they might be.
Just as with all jurisdictions with major investments in financial services, the Cayman Islands was required to demonstrate its flexibility and responsiveness in the face of the market turmoil which has challenged the industry since the global financial crisis. Indeed, Cayman's investment- funds model proved to be remarkably robust and practical when faced with the worst conditions seen by the industry for generations.
The government also continues to take every necessary step to ensure compliance with the global initiatives for transparency and the exchange of tax information.
Among more recent developments, CIMA has reviewed and issued guidance on minimum standards of corporate governance, which has been broadly welcomed by the local industry; a revised Exempted Limited Partnership Law will shortly be introduced; and, in response to keen interest from US managers, a new law will provide for the formation of an exempted limited-liability company (a new vehicle to Cayman's offering) modelled on the Delaware limited- liability company.
As legislative enhancements in the Cayman Islands continue to mirror the requirements of international fund managers and investors, while operating at the leading edge of international standards for transparency and information
About the Author
Ben Benson is a partner in Walkers' Global Investment Funds Group in the Cayman Islands. He specialises in hedge funds, private equity and general corporate law matters. Ben advises leading hedge fund managers in all aspects of fund formation, restructuring, management and distressed situations.
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