Loss of hedge funds predicted

Turmoil caused by the US financial meltdown will likely effect Cayman’s hedge fund industry.


Mr. Kurt Tibbets

Leader of Government Business Kurt Tibbetts acknowledged at the Cabinet press briefing Friday that Cayman’s economy ‘does not operate in isolation and that we are not immune from the global volatility and uncertainty’.

Although Mr. Tibbetts said preliminary consultations with the financial industry indicated the retail banking sector was not experiencing any problems, the story was different for other key aspects of the sector.

‘The areas that are expected to suffer most are those connected with hedge funds and structured finance,’ he said. ‘Current global market conditions in the hedge fund arena are characterized by heavy redemptions, suspensions and re-structurings coupled with much-reduced… new fund formations.’

Mr. Tibbetts said some experts estimated the number of hedge funds globally could contract by 20 to 30 per cent, ‘which will obviously affect Cayman’s book of business’.

The Cayman Islands is currently one of the world’s largest domiciles of hedge funds.

Former head of the Cayman Islands Monetary Authority’s Investment and Securities Division Gary Linford, also thinks hedge funds will fell the pinch of the financial crisis.

‘The number of existing hedge funds left standing following a disastrous Q3 2008 will, in my personal view, shrink by at least 25 per cent in number by Q1 2009 compared to hedge funds operating at the start of Q3 2008,’ he said.

‘This will be partly offset by a number of new funds being set up, but I still think active funds registered with CIMA will decrease by the largest annual figure since CIMA has kept track,’ he said.

It wasn’t very long ago that professionals in the industry were much more optimistic.

In July, the Compass reported on the continued growth in net hedge fund registrations, a phenomenon partly explained by the absence of a significant spike in fund terminations. While there had been a slight increase in terminations over the previous 12 months, funds were not being closed at an unprecedented rate and experts thought the industry might be able to ride out the storm.

That storm, however, now looms bigger than expected, which might cause more funds to fail.

At the end of June 2008 there were 10,037 funds on the Cayman Islands Monetary Authority’s register. Mr. Linford said failed funds might not become immediately evident.

‘One difficulty we might have in evidencing this will be the number of funds that simply become dormant and do not formally terminate their registration with CIMA,’ he said.

Mr. Linford warns that the Investment & Securities Division, together with the Compliance & Enforcement Division, must be more proactive in chasing down dormant funds, particularly where such funds have a local director that can be held responsible.

‘Absent any action on closing out dormant funds by CIMA, all their hard work in producing statistics becomes meaningless,’ he said.

With a likely fall in the number of new funds being set up and existing funds maintaining registration, Mr. Linford predicts the Cayman Islands Government will see a fall in CIMA registration fees and annual fees paid to the Companies Registry.

‘In addition, our local service providers involved in new fund launches, audits, provision of directors and fund administration should see a decline in business,’ he said.

However, he does not anticipate the level of hedge fund business dropping below the funds in existence at the end of 2005.

‘I recall our industry was pretty vibrant three years ago and therefore I believe the Cayman fund industry will withstand these difficult times far better than New York, London etc. and therefore I am not as pessimistic as I have heard others on the impact on Cayman,’ said Mr. Linford.

‘Of course there will need to be some belt tightening by [Cayman Islands Government] to reduce their deficit spending, and by employees in the financial sector who might want to reduce their bonus expectations for 2008.’

However, Mr. Linford remains optimistic.

‘I am confident that Cayman will still maintain its pre-eminent position as the leading financial centre for the domicile of hedge funds and private equity funds, and that local businesses involved in this sector will adapt and prosper under the new regulatory landscape that will undoubtedly follow this global meltdown in the financial sector.’