Smaller managers dominate market

Hedge funds

Data from the latest CIMA Investment Statistical Digest shows that smaller hedge funds are the most common type of Cayman Islands-registered funds. Most of the managers of Cayman hedge funds are based in North America, but managers from Asia have also increased their share.

Nearly a third of managers of Cayman-registered funds are based in New York, according to the 2011 Cayman Islands Monetary Authority investment digest. UK managers are the second largest group (18 per cent), following by fund managers in Connecticut (12 per cent), California (9 per cent) and Massachusetts (4 per cent). Other important fund manager locations for Cayman funds are Hong Kong (3 per cent), as well as Japan, Singapore and Switzerland with 2 per cent apiece.

Overall, US fund managers make up more than 60 per cent of Cayman-registered funds, while European managers represent less than a quarter.

The vast majority of Cayman-registered funds are small; 36 per cent have a size of less than $20 million, while 67 per cent, unchanged from 2010, are smaller than $100 million. Large funds of $500 million or more represent 11 per cent of the Cayman funds market.

Just less than half of all Cayman funds are master feeder funds, a structure used to separate different investor groups. Different feeder funds are created for each investor group, for example US and non-US investors, and the feeder funds in turn invest their assets with the master funds.

The number of fund of funds, which hold a portfolio of investment funds rather than divesting directly into stocks, bonds or other securities, declined in 2011 from 26 to 24 per cent.

Cayman-registered funds target sophisticated individual and institutional investors. They are typically not listed on the stock market, 90 per cent are unlisted, and they require in many cases (44 per cent) a minimum investment of US$1 million and, by law, no less than $100,000. The investments digest, which presents the 2011 aggregate statistics gathered from approximately 7,000 or three quarters of regulated funds, shows a significant decline in hedge funds profitability, reflected in the decrease in total net income from $170 billion to $14 billion in 2011.

While the total net income is not as robust as 2010 figures, it represents a positive return for the industry. Overall, net assets increased by 4 per cent from US$1,728 billion in 2010 to US$1,798 billion in 2011.

This significant decline in net income earned by funds is indicative of the challenges faced by the industry in a volatile market, CIMA said. However, there has been an increase in subscriptions and a decrease in redemptions over the period.

In spite of the lower profitability, the net cash inflow, the difference between subscriptions and redemptions, into hedge funds increased from US$96 billion to US$139 billion.

Not all Cayman investment funds are regulated under the law. Close-ended funds, which have no redemption or repurchase rights for investors, funds with fewer than 15 investors who are able to appoint or remove the operators of the fund, or debt issues do not have to be registered with the 
monetary authority.