A new low-cost fund with a fast-track registration process in Bermuda is not going to threaten Cayman’s leading position in funds just yet. But Bermuda’s cheaper fund offering highlights the higher cost of Cayman funds, Jon Fowler, global head of the Investment Funds Group at Maples and Calder, said at Ernst & Young’s Hedge Fund Symposium last week.
“Speed and cost alone won’t shift the needle, but the industry here needs to stay on its toes to be aware and listen,” he said.
In October, Bermuda modernized its fund legislation, establishing a new class of exempt funds that can be registered and launched on a fast-track basis.
“We believe that as funds focus on this development and combine it with regulation, cost, location and the availability of intellectual capital to oversee and administer their funds, Bermuda stands apart and will be the intelligent choice for investment funds,” Grant Gibbons, minister of Economic Development for Bermuda, said at the launch.
The faster registration is aimed at managers regulated by a recognized authority such as the SEC or the U.K. Prudential Regulatory Authority, or those with at least $100 million of assets under management. Their funds can be launched after completing and filing an exemption notification and offering memorandum with the Bermuda Monetary Authority and paying the filing fee of $1,500.
‘Is Cayman still value for money?’
“There is a big question: Is Cayman still value for money? Bermuda highlights the fee issue,” Mr Fowler said, adding that government’s commitment on no additional fees was important to avoid pushback from investors and managers, in particular because Cayman not only faces competition from Bermuda, but also other offshore and onshore centers, including Cyprus, Malta, Dublin or Luxembourg.
Bermuda currently has a much smaller funds market than Cayman. The number of Bermuda funds peaked in 2007 at 1,303 and has since dropped to 712 in the first quarter of this year. Cayman is still the world’s largest hedge fund domicile with 11,343 total funds if master funds are included.
Cayman has always had speed to market, noted Mr. Fowler. The legislative changes in Bermuda only match the speed of the online registration process that what was already available in Cayman.
Bermuda is also going to struggle to match the depth of professional talent that exists in Cayman. The recent launch of 100 Women in Hedge Funds, an association of more than 12,000 women working in the funds industry, with 250 Cayman members from the start, is evidence of that, he said. “That is very important to instructing counsel.”
The existence of commercial courts with the relevant experience is another plus for Cayman. “We are seeing more and more case law on topics that really matter to managers and investors on suspensions, redemptions in kind, side letters.”
Track record of responsiveness
Cayman also has a track record of responsiveness to investor demands, including a recently issued new version of the statement of guidance on fund governance issues and a consultation on a directorship database.
In addition, government has reacted appropriately to international regulatory initiatives, such as the EU Alternative Investment Fund Managers Directive, FATCA and the OECD phase 2 peer reviews. “[These are] all just where we would like them to be,” said Mr. Fowler.
To comply with FATCA, the U.S. law that effectively forces financial institutions worldwide to report bank accounts of U.S. taxpayers to the Internal Revenue Service, Bermuda is opting for a Model 2 international governmental agreement with the United States.
“That is a big differentiator and requires individual [foreign financial institution] agreements with the IRS and full-blown responsible offices,” Mr. Fowler said. Cayman financial institutions, in turn, will follow the simpler procedure of passing on FATCA information to Cayman’s Tax Information Authority, which then sends it on to the IRS.
Moreover, Bermuda is wrestling with the fallout of an internal government expenditure report that decried public sector waste and incompetence. The report implied that the territory’s high level of government debt and expenditure is a threat that lower fees may not be guaranteed in the future.
However, Mr. Fowler warned that Bermuda may have additional plans for its funds product. “We need to watch out for what they do next. This was just the first step.”