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Opalesque Roundtable: Cayman regulator turns the spotlight on Corporate Governance

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In January 2014, CIMA, the Cayman Islands financial regulator, issued a “Statement of Guidance” on corporate governance which is discussed in depth in this Roundtable.

The recent developments have to be seen in context with a groundbreaking report in the Financial Times from 2011 exposing what are called 'jumbo directors' - companies that provide directorships for hundreds of Cayman funds. These relationships were only found out through investigative journalism, which subsequently drew the attention of regulators. Since then, Cayman has offered investors access to a database that shows the directors relationships in an effort to let them make up their own minds during the due diligence process. Critics have called for even more transparency, although industry insiders say limiting the number of director roles is unrealistic. Participants of this Roundtable commented on how they see the issue from inside Cayman, as CIMA works through how to handle directorships. The situation will be difficult for the regulator as jumbo directors are a virtual cottage industry in Cayman, and relationships within the alternatives space are intertwined.

Will U.S. managers have to form more advisory committees?

Another industry development is the increasing use of Limited Partnership structures for a master fund, whether via a Delaware LP or a Cayman LP. This has increased from 5% to 10% of launches to 30% to 40% of recent launches as the partnership structure is more suitable for U.S. investors for tax reasons. This creates an interesting situation from a corporate governance standpoint as traditionally the independent director would sit on the boards of the Cayman feeder and the Cayman master. Once that becomes a Delaware master or a Cayman LP master, then the directors will typically have no responsibility, especially for U.S. managers who usually are the General Partner to the LP master: directors on such a feeder board will have no insight or control over what is happening at the master level where the portfolio is. In order to address this situation, managers are encouraged to form an advisory committee which then has certain powers with respect to the master fund such as liquidity, suspensions, etc.

This Opalesque Roundtable took place in February 2014 in Georgetown, Cayman Islands, with:

  1. Ashley Gunning, Partner, Walkers
  2. Darren Stainrod, Principal, HighWater Limited
  3. James George, Partner, BDO
  4. Kobi Dorenbush, CEO, Caledonian Global Financial Services
The group also discussed the following trends and topics:
  • Mega funds versus Boutique: How have the emergence of major hedge fund complexes with assets in the order of $50-100bn AUM changed the industry?
  • Why do large hedge funds tend to underperform?
  • Why may the last six months of 2013 have made a difference to a startup manager and help them to survive 2014?
  • Increased spin outs from existing fund management groups and mergers of both funds and of fund management groups
  • Increase in special situations funds, real estate based private equity funds, and activity on managed account platforms
  • Should investors be wary of irregularities regarding the proper allocation of expenses and compliance between managed accounts and funds?
  • How do U.S. based managers deal with AIFMD?
  • What are the prevalent fee structures now?
  • How does the future for Cayman and other IFC jurisdictions look like?

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