Cayman Islands: Export Cayman – Hedge Funds In Asia

Last Updated: 24 February 2016
Article by David Bentley

The importance of Asia, its growing dominance of global financial assets – and its role as an engine of growth for the world economy, is reflected in the region's strong links with the Cayman Islands financial services industry, particularly Hong Kong, Singapore and Japan, all key export markets for Cayman financial product.

When the major Cayman Islands law firms were looking to open offices in Asia to provide time-zone sensitive support to an expanding client base in the region, Hong Kong's stable environment and well developed financial architecture made for a natural choice. Singapore has also become an important outpost for the leading firms in recent years, while Appleby and Ogier have each established a presence in Shanghai.

The success of Brand Cayman in the Far East can be attributed to the fact that Cayman Islands corporates and partnerships are both widely accepted and familiar to investment managers and financial institutions. Cayman is favoured for its flexible corporate regime under UK common law and is widely used for financing work, corporate restructurings and forming investment vehicles. "Much of the work we do for our clients in the region continues to involve the use of Cayman Islands structures," said Walkers partner Arwel Lewis, based in Hong Kong. "In particular in China, Chinese State Owned Enterprises and private entities use these structures for outbound investments, both as holding companies for external investment and to provide investment capital in investment funds for outbound investment."

Walkers said it has demonstrated a longstanding commitment to the Asia-Pacific region having established a dynamic presence through continual regional growth. "Over the last 12 years, we have steadily expanded in Asia to meet the growing demand from increasingly sophisticated regional clients, not only by offering time sensitive advice but also in the client's own language be it Mandarin, Cantonese, Japanese and others," Lewis said.

Asia has always been an important part of Maples and Calder's global footprint. Established in 1995, our Hong Kong office was the first office our firm set up outside of the Cayman Islands as we recognised the importance of Asia to the alternative investment industry," stated Global Managing Partner, Henry Smith. "We expect this trend to continue as fund managers based in the region continue to grow and diversify their business, and we anticipate that fund raising outside the region from US and European investors and use of Cayman, BVI and Irish domiciled investment funds and holding companies will become even more important and prevalent." ."

Maples said its Asian investment funds team is recognised as a market leader across all the key fund jurisdictions in the region, including Hong Kong, Mainland China, Singapore, Japan, Korea and Taiwan. With strong Chinese language capabilities and a team of lawyers from diverse backgrounds, Maples said it advises a large number of start-up and established hedge fund managers in the region, while its MapleFS affiliate has grown substantially.

Cayman's influence on corporate dealmaking in Asia is significant and well illustrated by the recent move by Hong Kong billionaire Li Ka-Shing to restructure his US$100 billion business empire away from Hong Kong to the Cayman Islands. In what was described as an exercise to improve transparency within his conglomerate corporate structure, news that Asia's richest man was re-domiciling to Cayman certainly grabbed the headlines. "Cayman Islands structures are increasingly popular in Asia, with over 75% of the companies listed on the Hong Kong Stock Exchange in the last 10 years being incorporated in the Cayman Islands," Walkers' Lewis said. "We have seen increasing use of Cayman Islands domiciled hedge and private equity funds and Cayman Islands corporates being used as holding companies to pool investor funds into investments in the region."

Alex Last, partner with Mourant Ozannes in Hong Kong, which set up its office there in 2012, said Cayman's traditional leadership in the offshore funds sector is an important factor. "In Asia, Cayman is almost seen as the default option when structuring investment funds. It has had first mover advantage and is supported by a very high quality network of lawyers and other service providers who operate in the Asia time-zone," Last said.

"Cayman has an important role to play in both inbound and outbound investment into the region," Last added. "The stable and robust legal regime in the Cayman Islands makes it an attractive structuring option for international investors who are looking to invest in emerging markets. Typically, such investors are looking to take investment risk but are unwilling to take structural risk. Using a jurisdiction like Cayman which provides a significant degree of legal certainty helps to mitigate this."

Across the region

As hedge fund and private equity markets have developed further in Asia, since the financial crisis there have also been regional regulatory changes and an influx of new managerial talent. A number of high profile launches have taken place where managers have broken away from their former shops or investment banks in response to the Volcker Rule, such as former Goldman Sachs star trader Morgan Sze in Hong Kong with Azentus Capital. The capital raising environment is as tough in Asia as it is elsewhere and with ever increasing compliance costs, the larger managers have had more success fundraising as they are better able to meet the new regulatory requirements.

In Singapore, tighter regulations introduced by the Monetary Authority of Singapore, have had a more significant impact on the smaller end of the market. Among the changes were new capital requirements and limits on investor numbers, along with more onerous requirements for reporting and auditing. Smaller managers have been able to overcome these tricky regulatory issues and meet the licensing requirements by joining platforms which provide office space and infrastructure to managers that otherwise wouldn't be able to get to the launch stage. The 2014 partnership between Singapore sovereign wealth fund Temasek and one such platform – Dymon Asia – was a landmark event for the jurisdiction, as the state agency's $500 million investment was seen as a major vote of confidence and likely to spur further growth.

Japan was thrust back into the spotlight for institutional investors as the Abenomics-inspired market bounce in 2013 saw asset allocation and exposure to the region increase. Increased risk appetite internationally for Japanese assets came alongside a notable move by Japan's Government Pension Investment Fund – the pension fund for public sector employees in Japan and one of the biggest retirement savings pools in the world – to increase exposure of its US$1.2 trillion portfolio to equities. The announcement in October 2014 saw target exposure to domestic and international stocks more than double from 12% to 25%, while domestic bonds dropped from 60% to 35% of the portfolio and international bonds increased from 11% to 15%. Officials said the move was a response to Japan's departure from an economy with persistent deflation and analysts expect funds to continue their focus on Japan, with major infrastructure investments taking place ahead of the 2020 Tokyo Olympics and continued recovery from the 2011 Tohoku earthquake. Japanese equities continued to perform during the first half of 2015, with the Nikkei 225 reaching a 15-year high. Managers with funds targeting Japan continue to favour Cayman exempted limited partnership and unit trust vehicles, Walkers said in a recent research note, with most of the bank and trust companies they deal with, establishing Cayman unit trusts for ultimate distribution in Japan.

Against a global backdrop of rapidly increasing compliance and operational costs, raising barriers to entry in the hedge fund sector, managers located in Asia have also had their own local regulatory challenges to contend with. Despite the obstacles, funds continue to launch in this competitive market. If we are now living in the 'Asian Century', Cayman Islands funds look set to play an increasingly prominent role.

About the Author

David Bentley is a financial writer and editor with over 20 years' experience, specialising in offshore finance and regulation. Reporting in London, he worked for Dow Jones Newswires, appeared in the Wall Street Journal and covered structured finance for the International Financing Review. Currently with a specialist Cayman-based writing agency, he is a former editor of the Cayman Financial Review and spent six years with one of Cayman's biggest offshore law firms.

Originally published in Cayman Finance Magazine, 2015-2016, Issue 2

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.

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