Matthew Feargrieve: The Cayman Islands still the default domicile for HFs

The Cayman Islands continues to be the leading offshore domicile for hedge funds. As of 31 March, 9,261 open-ended funds (around 90% of which can be categorized as hedge funds) were regulated by the Cayman Islands Monetary Authority (“CIMA”). This is not far removed from the all-time high of 10,271 funds recorded by CIMA in 2008. There are currently more funds Registered with CIMA than there were in the years 2003 to 2007, respectively. And thousands of more funds with long lock-ups (typically five years or longer) or fewer than 15 investors are registered in Cayman without needing to be regulated or monitored by CIMA says Matthew Feargrieve.

These statistics speak both to Cayman’s dominance of the offshore alternatives market and to a significant upturn in startup funds domiciled in Cayman over the last twelve months.

Whilst there has been some increase in the use made by alternatives managers of EU domiciles like Ireland, Luxembourg, and Malta, Cayman has maintained its position as the default jurisdiction for hedge fund products. The following dynamics are central to Cayman’s ongoing attractiveness to managers like Matthew Feargrieve in Switzerland and globally:

1 — Cayman has good political stand-ing. It is OECD whitelisted, and com-pliant with IOSCO and FATF initiatives. It has an AML regime compare-blewiththatoftheUKandFrance(per the FATF). Cayman is well placed to implement systemic information ex-change agreements with EU states (required by the AIFM Directive);

2 — Cayman is a stable offshore financial centre. Contrast Ireland, Luxembourg, and Malta, which have larger populations to look after and so are susceptible to economic down-turns and the spectre of EU tax hikes and harmonization;

3 — Cayman is well regulated, but not over-regulated. CIMA understands that risk lies with the onshore manager more than the offshore fund. Contrast Ireland, Luxembourg, and Malta, where non-UCITS products are subject to retail-type restrictions. And CIMA’s policy on fund audit kept out Madoff out of Cayman (contrast Luxembourg);

4 — Cayman has been home to hedge funds for more than thirty years. CIMA has more experience as a hedge fund regulator than its counterparts in Ireland, Luxembourg and Malta;

5 — Cayman’s courts are more experienced in hedge fund matters than the courts in Ireland, Malta, and Luxembourg.700 cases of Mad off-related litigation are likely to deprive the Luxembourg courts of capacity for some time;

6-Cayman is synonymous with hedge funds. Its selection by the manager like Matthew Feargrieveis instantly intelligible to the investor and other managers;

7 — Cayman enables managers like Matthew Feargrieve to establish a flexible“regulated” product low cost. Contrast Ireland, Luxembourg, and Malta where more regulation and national economic drivers result in a higher Total Expense Ratio and higher taxes and duties;

8 — Cayman is not a UCITS domicile. A growing number of managers, investors, and industry observers are voicing concern about the use of “Newcits” for alternative strategies. A UCITS blow-up in Luxembourg, Ireland or Malta will result in the exodus of billions from all three jurisdictions, and irreversibly taint them as “regulated” domiciles. Cayman will be immune to the toxic fallout.

Post-2008, political paranoia, and media hype suggested that investors demanded “better regulated” funds. Some managers made a knee-jerk reaction and set up funds in EU domiciles. Others redomiciled their funds from Cayman to EU jurisdictions. Proportionately, the number of man-agers like this is tiny and is vastly overstated by players in Ireland, Luxembourg, and Malta, who would stand to gain the most from any con-traction in Cayman’s market dominance. Domicile choice is still driven primarily by the manager, and far less by the concerns of investors.

The economic outlook is slowly improving. Managers and investors care less about regulation, and increasingly about returns. UCITS and non-UCITS in Ireland, Luxembourg, and Malta are available to those managers who want to target retail monies, or who are otherwise prepared to sacrifice returns in favour of having a “better regulated” fund product. The majority of alternatives managers and investors want returns, and a regulated fund product in Cayman remains the optimum solution. Learn more about Matthew Feargrieve here. Alternatively, can also join Matthew Feargrieve’s professional network by connecting with the official Matthew Feargrieve Crunchbase page here.