In spite of the ongoing global economic downturn, Cayman’s fund industry is marching on.
Cayman Islands Monetary Authority Managing Director Cindy Scotland spoke about how the difficult times could actually present opportunities for Cayman’s fund sector during the recent Ersnt & Young symposium
‘It is not business as usual and we must expect the pressure on Cayman and other offshore centers to increase,’ she said at the time. ‘Being the optimist that I am, I would quickly add that every situation/crisis presents opportunities.
‘The opportunity for Cayman is to use this time wisely . . . and position ourselves so that when the dust settles, this jurisdiction will remain a key player in the global financial markets, but with new products and services.’
Ingrid Pierce, Walkers’ partner and head of the Cayman Hedge Funds Group for the Cayman office, noted that despite the reduction in the number of regulated funds, her firm has seen a great deal of activity in the last quarter.
‘Some of the work has been on restructuring, funds to help get them through the distressed market,’ she said.
‘We have been giving ongoing advice on all aspects of redemptions, in some cases assisting funds with restructuring terms of the offering, and in other cases, helping fund managers and their onshore counsel to open new funds.’
Ms Pierce noted that while regulated funds are not being formed with the same frequency, there has been a rise in the number of newly formed unregulated funds.
‘Funds are subject to regulation by CIMA in certain specified circumstances, but a fund that has only one investor is not required to be regulated. Of the new funds that we are seeing, there are quite a few unregulated single-investor funds,’ she said.
Ms Pierce also noted that funds are paying a lot more attention to their constitutional documents.
‘The importance of having the documents say what the parties intend them to say cannot be overstated,’ she said. ‘There is also a greater demand for flexibility in fund documents to enable managers and fund directors to take appropriate action in times of crisis in the best interest of investors.’
For example if permitted by their documents, some funds can put illiquid assets into side pockets.
‘This has proved hugely beneficial in the current climate. New funds are now considering this mechanism even if they do not plan to acquire illiquid assets,’ said Ms. Pierce.
‘As we have seen, liquid assets can very quickly become illiquid.’
There is also more focus on matching the actual terms of the fund with the nature of the underlying securities.’
Ms Pierce said increased disclosure is another trend the firm is seeing.
‘This is likely to continue for a long time to come.’
Sophia Harris and Paul Scrivener of Solomon Harris have also been busy these past few months.
‘We continue to be very busy but there has been some shift in the investment funds work we are doing,’ said Ms Harris.
We continue to form new funds as some managers seize opportunities arising from the current problems – we see particular interest in managed futures and commodities at the present time – but inevitably a good deal of our work has been focused on helping existing funds deal with liquidity problems in the face of significant redemptions.’
Ms Harris noted that the firm’s advice has inevitably been sought on redemption gates, suspensions and side pockets as managers consider the tools available to them to avoid a run of withdrawals.
‘These are difficult times and we are already seeing some funds closing down,’ said Mr. Scrivener.
‘With Cayman such a dominant player in the funds industry we are bound to see a decline in numbers of funds over the coming months, but the percentage decline is very hard to predict,’ he said.
‘Nevertheless, I am encouraged by new funds and potential new funds that we are still seeing come through and whilst in the short term they are almost certainly not going to make up the numbers for those that will disappear, over time I anticipate further strong growth in fund formations once some level of normality returns to global markets.’
Ms Harris and Mr. Scrivener were adamant that one aspect of the financial services industry must not be allowed to fall by the wayside.
‘More than ever, service providers need to focus on the high level of client care that has become the hallmark of Cayman’s dominance in the hedge funds industry,’ said Ms. Harris.
‘The legal and regulatory environment has always been a very significant factor in making Cayman the number one offshore domicile for hedge funds, but it is Cayman’s infrastructure of quality service providers that enables it to retain that position.’