Financial regulators in the Cayman Islands say they are keeping a close eye on developments in Jersey, where regulators are set to announce a ‘zero regulation regime’ for certain hedge funds.
According to a Wall Street Journal report, requirements placed on Jersey domiciled funds with a minimum of US$1 million will effectively fall to zero in January.
Ted Bravakis, director of public relations with the Portfolio of Finance and Economics said ‘We take note of what other jurisdictions are doing but we don’t necessarily model our regime after others.’
While Cayman Islands regulators will listen to the wants of the market, he said any suggestion of a regulatory race to the bottom among off-shore jurisdictions – as was suggested by the Wall Street Journal report – was not accurate.
‘Our regime is strong for a reason. Why else would four in five hedge funds in the world domicile in the Cayman Islands? Clearly, we have advantages that have helped us establish our leadership position.’
Although further details of the move are still to be announced, the move seems to represent a change of course for Jersey, which has traditionally erred toward greater regulation for hedge funds.
According to a Walkers Group press release, eligible funds that choose to set up shop in Jersey will not be subject to regulation or review from Jersey financial regulators for the purposes of the Collective Investment Funds (Jersey) Law.
The regime will apply to both open and closed ended funds, the fund will not require a Jersey based fund administrator or director, there will be no requirement for the fund to have an audit, and funds that do have audits will not required to get local sign off on the audit.
‘Imitation is the greatest form of flattery,’ said David Egglishaw, director of SPV Services with Walkers Cayman Islands. He said the proposed regime sounded similar to what exists in Cayman, but added he would need to look deeper at the new Jersey regime.
However, an important difference is that Cayman requires audits, he explained.
By taking away auditing requirements, investors are denied an important safety net that gives them confidence, Mr. Egglishaw said.
Robert Kirby, a technical director at Jersey Finance, told the Wall Street Journal the decision to introduce the new regime was based on demand from the hedge-fund and other alternative-investment management community, which wanted an unregulated product.
Moves to lower the regulatory bar in other off-shore financial centres could prove controversial among regulators and politicians in the US and Europe, particularly after the massive losses some off-shore domiciled funds recorded during the recent US sub-prime mortgage crisis.
That crisis revealed that many investors and regulators knew far less about the assets owned and sold by financial companies than some had assumed.
As of 30 June, there were 8,300 funds registered in the Cayman Islands, 90 per cent of which could be characterised as hedge funds, the Cayman Islands Monetary Authority recently said.
According to a recent HedgeFund Intelligence Survey, global hedge fund assets climbed 19 per cent to about $2.5 trillion in the six months to July.