Kenneth Krys, managing director of Krys & Associates Cayman Ltd., and liquidator of a number of high profile and complex cross-border engagements and David Bree, managing director of dms Management Ltd., a company management firm, providing independent directors to hedge funds were recently interviewed by HFMWeek. This is the article that first appeared in that publication, reproduced by kind permission. First in a two-part series.
Well-established as a leading hedge fund domicile, HFMWeek finds out how, in the wake of a turbulent two years, the Cayman Islands is responding to the changing industry landscape and how regulatory developments in Europe is likely to impact the jurisdiction going forward.
HFMWeek: How is Cayman recovering from the challenges of the past two years?
David Bree: The Cayman Islands’ model has held up well under recent challenges. There were no bank failures in Cayman and no bail-outs required. The hedge fund industry, which is the crown jewel of Cayman, is well-poised to take advantage of the rejuvenation of the industry, and with Cayman’s place on the OECD white list secure, the newly appointed premier and government are adopting the necessary policies to take advantage of the mobility of global and human capital.
Kenneth Krys: Clearly, with the Cayman Islands being one of the largest offshore financial centres, the global downturn has had a knock-on effect here and, as a result, we have seen more restructurings and insolvencies. The downturn and situations like Madoff have made investors and directors more diligent in reviewing the businesses they participate in.
The impact, however, has not been as significant as elsewhere. The total number of mutual funds registered with the Cayman Islands Monetary Authority, which dipped a bit in 2008, has seen recent growth and appears to returning to its historical levels of 2007.
HFMWeek: In an increasingly competitive environment, how does Cayman maintain its relevance as the acknowledged home of the hedge fund industry?
DB: Maintaining our appropriate regulatory and legal framework and cultural flexibility is key. The new Financial Services Division of the grand court is the most recent manifestation of Cayman’s strength and adaptability. Our jurists are top-notch and the court is designed with the efficient resolution of cases in mind. Cayman continues to pass the stress tests of the global financial community and is raising the bar for competing jurisdictions.
KK: The Cayman Islands will continue its dominance as the dominate offshore hedge fund owing to the experienced and knowledgeable professional sector that supports this industry and a regulatory environment that is effective but not overbearing. Additionally, the Cayman Islands government and private sector have just completed a number of road trips to the US, Europe and Asia to listen to the major players in the market as to their needs. The feedback from government is that the trips were very successful and that they will take steps to ensure Cayman Islands remains the premier jurisdiction for the hedge funds.
HFMWeek: What impact do you think Cayman’s inclusion on the OECD ‘white list’ will have on the jurisdiction?
DB: It will further solidify Cayman’s position as the domicile of choice for hedge funds and other financial transactions. International practitioners can continue to recommend our jurisdiction with confidence that the recognised standards of tax transparency are afforded while privacy is maintained. Also deserving of attention is the election of Cayman to the steering group of the OECD, recognising the important value Cayman adds to the international group.
KK: Clearly any time a jurisdiction gets on an OECD white-list, it adds legitimacy to the jurisdiction. However, from what I understand, the exercise of liaising with fellow regulators has also had a greater benefit in demonstrating to those other regulators with whom Cayman signed tax information agreements Cayman’s commitment to complying with international standards.
HFMWeek: As industry-wide focus on transparency and liquidity increases, what can be done to ensure adequate investor protection?
DB: The Cayman Islands’ hedge fund product is intended for and generally sold to sophisticated investors and has been a huge success. Being a disclosure-oriented jurisdiction, in the offering documentation of each fund there is information about the liquidity of the product and the ability of a fund to participate in less-liquid investment opportunities. However, it is for each investor to determine if they can accept the risks of investing. The most effective means of protection I have seen has been appropriate due diligence by investors, combined with an independent board of directors: as a leading provider of corporate governance services to hedge funds, we at dms see increased numbers of investors coming to Cayman to visit our office, review our systems, and meet our people.
KK: The Cayman Islands Monetary Authority has made a commitment to providing key information on their website to investors of funds, although the details of this have not been specified. But outside of this, the investor needs to take a greater role. The largest investors in hedge funds are sophisticated financial institutions who act as agents for their clients. These financial institutions need to conduct greater due diligence prior to and during their investment making to ensure that their investments are protected adequately.
Read about the possible impact of the growing popularity of UCITS III on Cayman hedge funds next month.