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Times are changing for Cayman as hedge funds start physical operations on the island - Roundtable

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Since 2009, I have been six times to Georgetown to produce the Opalesque Cayman Islands Roundtable. For the first time we were able to include this year a hedge fund manager who actually operates and and set up his fund management company on the island. And he’s not the only one.

It has often been criticized that fund managers would be operating from their onshore jurisdiction with just a nameplate on the door with their token service providers rubber stamping things in the offshore market and claiming the benefit of being offshore in terms of tax and regulatory mutuality. But with more and more governments looking for more revenues, they will search for ways to increase their tax revenues by all sorts of measures. So actually those managers who create true substance offshore may be ahead of the curve...

Stefan Henning, who launched his Cayman fund from Cayman in September 2014, was “amazed by the professional business environment that we found in the Cayman Islands in general, and the Special Economic Zone (CEC) in particular: Besides taxes, we are being offered a full service, plug-and-play situation with the Cayman Enterprise City. We didn’t have to find office space, buy a printer and all those other things that take a lot of time for a startup, but could instead work on the fund launch from day one. It took us less than a month from the time we made the decision to set up our company in Cayman until we received our work visa. Going forward, it will take five business days to receive additional work visas for new employees.”

Flight to quality: How investors drill down

Investors have increased their level of diligence and some institutional investors require new funds to change their structure in order to accommodate a particular level of oversight. Investors have always commented on or requested changes to fund terms, particularly seed or strategic investors, but now we are seeing that comments are not just limited to the terms of the offering, but extend to the identity or quality of the service providers. More investors are coming to the island for more in-depth conversations with the local service providers and directors before they make their investment.

Those investors will drill down, they will ask a fund director about the documents and question things like, “why did you allow this clause through, and what was your thinking on that clause?” This means the fund director really need to know the fund and the documents inside out which naturally means that he can’t take on hundreds of relationships. Some investors may even request that the manager representative who is proposing to sit on the board reconsider the appointment in favour of a third party provider, or switch out a third party director in order to accommodate what the investor perceives to be the right quality of independent oversight.

Rise of regulated products not at the expense of hedge funds

The trend for more regulated products has not been at the expense of the hedge fund industry so far. The new fund business has not slowed down for Cayman service providers. There is a strong demand for not only new funds but also for more customized solutions, bespoke products and more funds of one. Hedge fund assets are at record levels and continue to grow while regulated vehicles provide a middle ground to traditional products, so you find them side by side giving managers a suite of products through which they cater to a diverse investor base. This Opalesque Roundtable took in Georgetown, Cayman Islands, with:

  1. Ingrid Pierce, Global Managing Partner, Walkers
  2. Darren Stainrod, Principal, HighWater Limited
  3. Stefan Henning, Co-founder, Managing Director and Portfolio Manager, balmoREAL Capital SEZC Ltd
The group also discussed:
  • How is the industry prepared for another 2008 scenario? What has been done to improve investor protection?
  • Why it is time for a regulatory paradigm change to turn the “we need to protect people from the evils of the hedge funds” notion?
  • Did you know that some 12,000 independent fund directors are now registered with the Cayman regulator?
  • How are managers today selecting independent directors?
  • Cayman recently upgraded its LP law to make it more attractive: about 1/3 of launches are now using an LP at the master level
  • Why Cayman won over New York or London to set up balmoREAL fund management company
  • Should the minimum investments be lowered for hedge funds?

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