Cayman Islands: Focus On Cayman Islands

Last Updated: 14 June 2013
Article by Julian Stockley-Smith

Focus On Cayman Islands

MWEEK (HFM): WHAT CONTINUES TO MAKE CAYMAN AN ATTRACTIVE AND VIABLE DOMICILE FOR HEDGE FUND MANAGERS?

JOHN WALLACE (JW): The Cayman Islands developed into the leading offshore jurisdiction for hedge funds because of its regulatory regime and the quality and expertise of the local administrative, accounting and legal professionals who live and work on the island. The flexible but effective regulatory framework provides safeguards to investors but does not impose restrictions on a hedge fund manager's investment strategy; coupled with the infrastructure and world-class service providers, this jurisdiction continues to attract the majority of global hedge fund managers. The past few years have served to demonstrate its strength and viability as a leading regulator which dynamically adjusts to best practices and the needs of the marketplace.

IAN DILLON (ID): Essentially, the willingness to adapt and address issues as they arise has allowed Cayman to retain its position as the world's premier hedge fund jurisdiction. Despite the offshore bashing that's been going on for the past few years, Cayman's consistently positive approach to dealing with the challenges of increased scrutiny and regulation has ensured that it remains attractive to hedge fund managers and the sophisticated and high-value clients they service.

JULIAN STOCKLEY-SMITH (JSS): The Cayman Islands are generally regarded as the world's leading offshore hedge fund centre for a number of widely accepted reasons: flexible financial services and fund laws, pragmatic regulation and the presence of locally based fund-servicing professionals (including lawyers, administrators, accounting and other supporting services). One of the key and more prominent characteristics of the Cayman Islands fund environment is that any reasonable, fully disclosed strategy is normally possible. In Cayman, it's about working with qualified investors that understand the nature of the venture, rather than expending resources dealing with compliance and red tape; ultimately, this all adds to the potential for improved performance. As the regulatory burden (sometimes with uncertain benefit) increases in some regions, this characteristic of Cayman Islands funds is likely to become more popular.

HFM: HOW HAS CAYMAN CHANGED AS A DOMICILE FOR FUNDS IN LIGHT OF THE CURRENT SPATE OF ONSHORE REGULATION (AIFM, DODD-FRANK)?

JW: Recent changes proposed which would require master funds (in the context of master/feeder funds) to register with the Cayman Islands Monetary Authority (Cima) are evidence of the jurisdiction responding to changes in the global regulatory landscape. As generally all of the assets of this fund structure are held at the master level and custody of assets has been a specific target of regulatory change across the globe, the proposed regulations are very much in line with changing best practices.

Under the AIFM Directive (AIFMD), non-EU AIFs (such as funds registered in the Cayman Islands) will continue to be able to market their funds in the EU under the current private placement regime and much of the onus to comply with AIFMD largely rests with the non-EU jurisdiction. Although there is a modest increase in regulatory reporting, it is not likely to result in the competitive disadvantage that was initially feared. With the US being the largest hedge fund market and Cayman the leading jurisdiction for hedge fund domiciles, there will be Cayman-based fund managers who will now need to become SEC-registered investment advisers due to the Dodd-Frank legislation. Many Cayman-based hedge fund managers are existing SEC registrants, so precedent exists for managers to adopt and comply with their new regulatory obligations. Deutsche Bank is actively monitoring the impact of Dodd-Frank and we have already enhanced our administration offering with investments in technology and infrastructure to help meet the needs of US-based managers, whether new SEC registrants, existing SEC registrants who are now deemed major swap participants due to their OTC investments or managers currently exempt but planning for the future.

ID: Cayman has always been a jurisdiction with strong, yet appropriate, regulation. During the past few years, in particular as a result of increased regulatory pressures and scrutiny from onshore jurisdictions, our local regulator – always very aware of external pressures – has moved rapidly to address them in local regulation. But whether the increased regulation has improved the offering remains to be seen. You would be hard pressed to find, in the litany of issues and problems that occurred during the global financial crisis (which AIFMD and Dodd-Frank were at least partially aimed at addressing), a problem whose genesis was a failure of Cayman Islands regulation.

JSS: Cayman Islands regulatory changes have been targeted to improve compliance in line with generally accepted international standards in several areas, including anti-money laundering (AML) and anti-tax evasion. For example, the Cayman Islands government has executed tax information exchange agreements (TIEA) with 25 jurisdictions to ensure tax transparency and a number of new agreements are in the final stages. There will inevitably be some impact from the changing regulations in Europe and the US and the jury is still out on the net result of this, largely because new legislation hasn't yet fully come into effect. As above, this is an opportunity for the Cayman Islands, provided the key AML procedures and information disclosure agreements are in place. We understand the Cayman Islands government is working with the EU towards recognition of AIFMD equivalency and, given that private placement rules remain in place until at least 2018, there is no immediate concern about the ability to offer Cayman funds in Europe.

HFM: HOW WOULD YOU RATE THE CURRENT INVESTOR APPETITE FOR FUNDS DOMICILED IN THE CAYMAN? WHAT INVESTOR TRENDS ARE YOU SEEING?

JW: Strong. At Deutsche Bank, we have seen increased asset inflows across our administration clients, but predominantly those which are domiciled in Cayman. In recent months, we have seen a growing number of investments into managed account platforms and Segregated Portfolio Companies (SPC), which have the ability to quickly rebalance their portfolio holdings and provide better liquidity terms.

ID : Although the appetite for new fund establishments is nothing like the pre-2007 heyday, in the context of global trends there is no reduction of investor appetite for Cayman funds in favour of, for example, Irish or Luxembourg funds. The Cayman Islands remains a hugely relevant jurisdiction for sophisticated, professional, institutional and high-net-worth investors and nothing that we are seeing in the global markets would appear to suggest otherwise. The only change in attitude with regard to investors and Cayman Islands funds would appear to be a trend towards better due diligence and understanding of the products into which they are investing. But this is more of a global, rather than a specifically Cayman, trend.

JSS: It is important to note investors in Cayman offshore funds are required to be institutional, or qualified, in their local jurisdiction, which is in itself a moving target. In general we find these investors remain very comfortable with the Cayman Islands and have a sound understanding of what is really important in terms of the fund, including transparency, independent oversight, administration, reporting and audit. Some smaller investors may have been deterred by press and political rhetoric but for the most part these investors are less likely to be target investors for Cayman offshore funds in any case.

HFM: WITH INCREASING INTEREST IN ONSHORE AND UCITS PRODUCTS, HOW WILL CAYMAN CONTINUE TO REMAIN RELEVANT?

JW: Ucits products are not suitable for every manager and every fund. In order to operate within the Ucits framework successfully, a hedge fund manager must first establish whether his or her strategy is compatible with applicable investment restrictions and whether the additional legal expense of a Ucits fund formation will be offset by the new capital raised as its result. Cayman will continue to be relevant as it affords hedge fund managers the freedom to manage assets in accordance with the investment strategy defined in its offering memorandum, not in accordance with statutory guidelines. Plainly put, regulatory investment restrictions are inconsistent with the often varied and complex trading strategies employed by hedge fund managers.

ID: For Cayman to continue remaining relevant, I think we simply need to keep doing what we have been doing for the past few decades – keeping up with investor and manager requirements in terms of structure and flexibility, while at the same time balancing the requirement for stronger global regulation. With regard to the increased interest in onshore and new Ucits products, I remain to be convinced the Ucits product is ever going to be a significant competitor for a Cayman Islands hedge fund. By their very nature, Ucits funds can never operate in the same manner as a hedge fund and will always have significant limitations and restrictions that hedge funds can operate outside of, by virtue of the nature of their regulation, but also by virtue of the sophisticated investors that use them. Put simply, Ucits funds and hedge funds are not comparable as financial products, as they both serve entirely different purposes.

JSS: While Ucits and similar formats may be an excellent vehicle for retail strategies, we do not see them as a sustainable structural model for the alternative investment fund industry, nor one that would replace the standing of Cayman offshore structures. Anecdotal evidence suggests the industry is increasingly aware of the limitations imposed by the increased costs and regulatory constraints of Ucits funds, as well as some serious and fundamental problems with offering complex strategies to retail investors (as facilitated by Ucits), although the impact of AIFMD will be interesting. We would be very interested to see a Cayman domiciled AIFMD-compliant product as this may provide a way to offer the advantages of the offshore fund in an EU-compliant format.

HFM: WHAT SORT OF LAUNCH ACTIVITY ARE YOU CURRENTLY SEEING? ARE YOU SEEING A PARTICULAR TYPE OF MANAGER OR STRATEGY SET UP FUNDS IN THE DOMICILE?

JW: Strong. We have seen increased activity in fund formation and have noted two trends: smaller niche managers who demonstrate a deep expertise in specific market segments have returned; and managed account platforms, which have been embraced by institutions that require greater transparency and liquidity than a typical hedge fund structure.

ID: We continue to see increased launch activity year on year. I think Cayman has been able to say with some confidence since 2009 that activity levels have been regaining traction, and although we might be short of the peak in terms of launch activity, there is certainly a lot more conversion of enquiries. Interestingly, this seems to be more across the board, rather than with any particular type of strategy or manager involved. Effectively, everybody seems to be regaining confidence and getting back into action.

JSS: Our current hedge fund creation activity has been relatively steady during the past three years and has maintained a broad diversity of strategy. It would also be fair to say this is more dependent on our own promotional activities. The group is looking to expand its services and can assist in launching funds in a range of jurisdictions according to best fit on each occasion. However, Cayman Islands funds still offer many advantages for investment managers and investors and we anticipate it will continue to be the jurisdiction most in demand for some time.

HFM: HOW DOES YOUR BUSINESS HELP MANAGERS WHO CHOOSE TO USE CAYMAN? ARE YOU OFFERING ANYTHING NEW AT THE MOMENT?

JW: Deutsche Bank has a long history in the Cayman Islands and offers a three-deep client service team of professionals that have global experience in accounting, investor relations, investment management and auditing. In addition to the quality of our team, we continue to make substantial investments in our technology and infrastructure, which has recently resulted in a world-class middle-office risk-reporting offering and solutions to address the changing regulatory landscape. We encourage everyone to take a look at what is new at Deutsche Bank.

ID: Very much in keeping with what we believe is a strong theme in the Cayman Islands generally, Campbells prides itself in providing pragmatic and business-focused solutions for managers looking to either establish products in the Cayman Islands for the first time, or managers with existing products looking for solutions to challenges that may have arisen over time. Campbells continues to offer a partner-led service to all our clients and we pride ourselves on our continuity and the high experience levels of our senior staff. While other firms continue to be very cautious about the future, we firmly believe in the potential for future growth in the Cayman Islands and as such are continuing to actively recruit senior staff. We are constantly adding to the experience and expertise of our team and therefore the offering we give to our clients.

JSS: When we engage with investment managers requiring new structures we generally find the most appropriate jurisdiction is clear. Whether it is EU, US or Cayman, the right solution will also depend on the type of strategy and the target investor base. There are a number of features that make JP Fund Group structures attractive; investment managers may opt to use umbrella funds that are held independently of the investment manager, have independent directors, independent fund administration and independent audits. This can give considerable comfort and assist when raising money from investors.

This article is for information purposes only and the services described in it are provided by Deutsche Bank AG or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation

This article was also written by John Wallace of Deutsche Bank, Ian Dillon of Campbells

Originally published in H F M WEEK.COM, August 2011

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions