Cayman competitiveness in hedge funds services questioned

Cayman’s ability to compete globally and to attract and retain the talent needed to service the hedge funds industry has been put into question by a panel debating the future of the industry at the Campbells Cayman Fund Focus at the Westin Casuarina on Friday, 16 November.

In their arguments, speakers at the conference distinguished between the Cayman hedge fund product, in terms of legislation and regulation, and the services to the industry.

“There is no better product, I don’t see a competitor on the horizon. That will continue in the future,” said Don Seymour, managing director of dms. “But when I look at the services, I think that is where we have the biggest challenge. When you look at our competitors for services, I think they are better positioned than we are to succeed. That is primarily because our labour policies and our approach to labour is not conducive to strong growth in the services sector,” Mr. Seymour said. “These are issues that we have to address in strong partnership with the government.”

Canover Watson, managing director of Admiral Administration, a firm that was recently acquired by fund administrator Maitland, agreed. “It is all about talent and relationships. Don said, as subtle as he could, the labour issue is a big one. Being able to attract talent and retain talent and build and maintain those relationships [with fund managers and onshore law firms] long term is key to continued 
success in Cayman.”

However, Mr. Watson, who was a member of the Immigration Board and is the deputy chairman of the Immigration Review Team, predicted some stress for Cayman going forward, saying the needs of the industry have to be aligned with policies that fit the territory as a whole. “I am not as optimistic about Cayman’s ability to compete successfully as regards to 
physical presence.

“Our policies are not aligned with the future growth and the retention of that talent.” Stating that immigration rules are “too simplistic”, he named the seven-year rollover as one of the policies instituted some time ago that is now hampering the ability of the 
industry in that regard.

In recent years Cayman fund administrators, in particular, have been shifting work and jobs to Canada, Ireland and India to take advantage of lower labour costs and the higher availability of skilled staff.

Mr. Watson noted onshore jurisdictions are aggressive in attracting companies to set up operations and grow. Using the largest fund administrator CITCO as an example, he said, the firm had created 2,000 jobs in Toronto during the past 10 years and has 1,000 staff in Nova Scotia after only five years. “[Locally] we have not seen that same type of growth from CITCO, which has been in Cayman for probably 20 years, for a very long time.”

Mr. Watson said the trend toward outsourcing will continue because the industry has become more labour intensive as a result of increasing reporting requirements, such as daily as opposed to monthly reporting, and Cayman simply does not have a sufficient number of people to meet the demands of the industry.

Mr. Watson did not respond directly to whether his own company after the acquisition by Maitland would “back-office jobs to South Africa”, but later in the discussion he noted the reality Cayman faces is that global managing directors have to look at “moving jobs from Cayman to other jurisdictions simply because the arguments are so compelling”.

He noted Cayman has well-established, highly skilled individuals on the ground, who have a unique and specific skill set geared toward hedge funds. Cayman has to find a way to “retain that talent and almost recreate and focus on a niche area of the industry to capitalise on that talent”, he said, “because we cannot compete in the volume business”.

“That’s where the discussion with the service providers and the government on the policies on labour and what kind of labour we want to keep in the jurisdiction becomes critical to the industry,” he said.

“It is all well that we have a great product, it is all well that we have over 10,000 funds domiciled in Cayman. But unless we can find a way to retain the talent in Cayman and 
do the work here at some level we are not going to be as a country offering opportunities [to the next generation].”

Mr. Watson said the industry can only create opportunities for Caymanians when businesses are allowed to bring talent in and grow, provided there are checks and balances that prevent the system from abuse. Without this ability, opportunities for Caymanians “would be zero”.

“We have to think very carefully about who we need and align our immigration and labour policies around whatever those needs are,” he said.

Another area of concern was the expectation that hedge fund numbers, and with it government revenue, will continue to grow. Lindburgh Martin, chairman of Intertrust, urged caution. “It is possible that that number declines and we have to be careful that we don’t over-leverage ourselves on the basis that the number of funds is going to continue to grow and creep up from 10,000 to 15,000. It actually defies logic, just about every industry starts big and eventually then whittles down to a smaller number.”

CIMA statistics support this assessment. Without the inclusion of master funds, for which the registration requirement was only introduced this year, the number of registered hedge funds in Cayman has continuously declined from more than 10,000 in 2008 to 9,130 in the third 
quarter 2012.

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