Hedge funds are in great demand in the Cayman Islands and are proving extremely popular with high net worth individuals due to flexible regulation
The Cayman Islands continues to be a domicile for institutional-type investment products. There are few retail products available from the Cayman Islands and the private client business is undergoing some changes. Hedge funds remain the biggest growth area.
Institutional products are experiencing the highest growth right now, says David Titcombe, Caribbean head of private banking at Ansbacher.
Cayman's financial industry can be split in two ' comprising institutional and private clients. Private client products include private banking services, trust and company management (for tax and estate-planning purposes) and invest- ment management. Institutional services include the administration of mutual funds (particularly hedge funds) and the administration of special purpose vehicles (effectively the securitisation of assets).
Taking the private and institutional business as a whole, it is arguably hedge funds for which there is most demand, particularly during these difficult market conditions. Investors are internationally-oriented high net worth individuals almost certainly with an excess of US$1m in liquid assets as the minimum entry levels for many funds is typically quite high.
Martin Laidlaw, senior manager of mutual fund services at CIBC, says the hedge fund industry will continue to grow. The main reason for growth in the hedge fund market has been due to flexible regulation, the political stability of Cayman and the ease and speed of setting up hedge funds. All the relevant service providers such as accountants, lawyers and fund administrators can be found in the Cayman Islands. There are monthly meetings between the government and the private sector to help maintain a favourable environment.
A sound exchange
The Cayman Island Stock Exchange (CSX) is another reason why growth is occurring in mutual funds. Monique Melis, head of business development at the CSX, says a listing on the exchange brings multiple benefits to a mutual fund. Because certain types of investor may only invest in listed, rather than unlisted securities, a listing enhances the marketability of a mutual fund and gives it access to a wider investor base. For closed-ended funds, where there is no facility to redeem, a listing on the CSX can provide a secondary market with a trading platform for both buyers and sellers. The CSX's understanding of this highly specialised market has enabled it to develop sophisticated listing rules. These have been specifically tailored to meet the needs of debt issuers and accommodate the latest sophisticated structures and products.
Melis says the listing rules also reflect that such securities are usually purchased and traded by a limited number of institutional investors who are knowledgeable in investment matters. Accordingly, the rules focus upon the disclosure of all relevant information without imposing unnecessarily onerous conditions upon the issuer.
Unlike other stock exchanges, according to Melis, there is no requirement in the CSX's listing rules for a local listing agent to be appointed in connection with an application to list specialist debt securities. The lead manager or the issuer's legal advisers may deal directly with the CSX's listing department. This helps to reduce costs and improve time efficiencies.
Melis says the CSX's competitiveness lies in the adherence to the issuer's timetable as well as in its low listing fees. In normal circumstances the CSX guarantees a two to five-day turnaround time on reviews of listing documents.
By listing on the exchange, issuers gain visibility and transparency for investors.
Keen to pitch up
There is a lot of money trying to find a home in the Cayman Islands, says Laidlaw. Investors are looking to invest in the offshore market. There are fewer opportunities on the mainland to make substantial returns and investors therefore want to invest in alternative investment strategies, offshore.
According to Sean Flynn, managing director at UBS, the Cayman Islands has approximately 60% of the world's offshore hedge funds domiciled on the island. He says: 'The increase in growth in hedge funds is because of volatility of global equity markets over the past few years. In addition, HNWIs and institutional investments are increasingly putting assets into the hedge fund market as they can offer a track record with attractive risk adjusted returns with low volatility.'
He expects this trend to continue. As the global hedge fund industry is only worth US$600-US$700bn, it still has a long way to go.
Cayman is also a Financial Action Task Force-compliant (FATF)jurisdiction and is not on the Organisation for Economic Co-operation and Development (OECD) blacklist.
Laidlaw says the Cayman Islands has also introduced legislation in response to the OECD initiatives, which fine-tuned the legislation that already was in place. The majority of big players in the industry already had those practices in place as most are run in the same way as their parent companies in North America or Europe.
Neil Heck, head of the Cayman Island Fund Administration Association, says investors have the opportunity to make money through hedge funds. The pension market has become more liberal and has created opportunities for investors to invest in alternative investments.
According to Nick Freeland, banking partner at PricewaterhouseCoopers, international investors are attracted to the zero tax base of the Cayman Islands.
However, in the private client area companies are moving off the island. Laidlaw says the companies that have moved from the Cayman Islands have been in the private client business and have moved due to a regionalisation of the market.
Heck says some private banking companies have closed down due to the tax treaty signed by the Cayman Islands with the US. Larger banks have been going through a period of consolidation. This has been a worldwide trend to make things more efficient because banking margins have been reduced and interest rates reduced. Heck adds that licence fees have gone up. He warns the Cayman Islands has to be careful not to price itself out of the market as fees for licences have almost doubled.
Laidlaw says the increase in licence fees means that service providers will have to absorb the increases due to the competitive nature of the business. Service providers can not expect to increase their fees, as the fund administration business has become very competitive in the past five years.
Seamus Tivnan, branch manager at Marsh Management Services, says the Cayman licensing fee and ongoing annual fee may be higher than some jurisdictions, but they are not significant in overall programme costs and rarely a decision maker in selecting domicile.
According to Freeland, the increase in licensing fees is not a big deal for the major players. For the smaller companies he says the increase might prove a problem as it will be a bigger proportion of their overall costs. He says it will cause some consolidation of the industry which he doesn't think is a bad thing.
Flynn says in terms of business from the Cayman Islands, the US is still the major player due to its close proximity to the island, but the Cayman Islands also attracts business from other countries from around the world.
Cayman's financial industry can be split in two ' institutional clients and private clients.
The hedge fund industry looks set for further growth due to flexible regulation, the political stability of Cayman and the ease and speed of setting hedge funds up.
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