Matthew Feargrieve: UCITS and Alternative Strategies
The following dynamics are central to Cayman’s ongoing attractiveness to managers:
1. Cayman has good political standing. It is OECD whitelisted, and compliant with IOSCO and the initiatives of the Financial Action Task Force. It has an anti-money laundering regime comparable with that of the UK and France (per the FATF). Cayman is well placed to implement systemic information exchange agreements with EU member states.
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 downturns and the spectre of EU tax hikes and harmonization.
3. Cayman is well regulated, but not over-regulated says Matthew Feargrieve. 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 Madoff out of Cayman (but not 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.
6. Cayman is synonymous with hedge funds. Its selection by a manager like Matthew Feargrieve is instantly intelligible to investors and other managers.
7. Cayman enables managers like Matthew Feargrieve to establish a flexible regulated product at a 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.
Importantly, Cayman is not a UCITS domicile. 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.
Some alternatives managers like Matthew Feargrieve is capable of absorbing the cost of EU regulation have utilized UCITS to distribute products and raise retail monies. Others have dipped their toes in the UCITS waters by using distribution platforms. Inflows into UCITS continue to increase. But the cycle will be adjusted when managers whose assets have reached a plateau at small levels pull the plug and move back into offshore products.
The ability to automatically passport UCITS may be attractive, but the lower returns, together with growing concern about its suitability for the replication of alternative strategies, will be significant countervailing factors. These concerns will increasingly be played out against the backdrop of a challenging economic situation and a renewed search by institutional investors and pension funds for managers capable of generating above-average returns.
Matthew Feargrieve is an investment funds lawyer with more than twenty years’ experience of advising managers of investment funds operating in the leading jurisdictions of the United Kingdom, Luxembourg, Ireland, and the Cayman Islands. Learn more about Matthew Feargrieve’s here. Alternatively, you can also visit the Matthew Feargrieve blog for the latest updates and news here.