The Cayman Islands hedge funds industry is facing an ambivalent future according to panelists at the Campbells Cayman Fund Focus. While Cayman’s hedge fund product, in terms of legislation and regulation, will continue to be superior, the ability of the service industry to hedge funds to attract and retain talent is threatened, speakers said.
Cayman has emerged as the global leader for hedge fund registrations. A panel on the future of the hedge fund industry in the Cayman Islands listed the main advantages that put Cayman in this position. Rohan Small, partner with Ernst&Young, noted as strengths the established innovative and proven system of laws and regulations, the speedy registration of funds, extensive professional services expertise and the marketability of the Cayman product in the sense that the “Cayman brand” is now strong and associated with hedge funds.
Government-private sector cooperation
Lindburgh Martin, the chairman of Intertrust, added the flexibility with which Cayman reacted to market changes and the interaction between the private sector and the government as other factors that contributed to Cayman’s success.
However, putting on his head as deputy chairman of the Cayman Island Monetary Authority he said one issue at the regulator level when consulting with the industry on hedge funds is that the private sector does not respond with a unified voice through its associations. This is in stark contrast to other sectors of the industry, such as insurance, he said.
Canover Watson, managing director of Admiral Administration, said in the past the private sector has been taking the lead on many of the issues but globalisation has changed the approach of the law firms.
“Firms that historically were Cayman-centric, if you look at Walkers or Maples, firms that were integral to developing the products in Cayman, when they promoted themselves to the outside world, inherently they were promoting Cayman,” he explained. “Today they are global firms and they are promoting their products, and when they go out in the market place they are not necessarily focused on this is a Cayman product and this is the Cayman solution. They say this is a solution that we can provide globally wherever you are located. That is the challenge that CIMA and the government are going to have: How do you now sit with those firms that have a global focus?”
Attracting and retaining talent
The impact of globalisation also affects the industry in terms of its competition for talent and the ability to outsource tasks more easily than in the past. Panellists distinguished between the Cayman hedge fund product, in terms of legislation and regulation, and the services to the industry.
Don Seymour, managing director of dms, argued that “there is no better product” and “no competitor on the horizon”. This will continue in the future. “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,” Seymour said. “These are issues that we have to address in strong partnership with the government.”
Watson agreed with Seymour that the labour issue is a big one. “It is all about talent and relationships. 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.”
Stating that the needs of the industry have to be aligned with policies that fit the territory as a whole, he said, he is not optimistic about Cayman’s ability to compete. Cayman’s immigration rules are “too simplistic”, for example with regard to the seven-year rollover, which is hampering the ability of the industry in terms of future growth and the retention of talent, 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].”
Watson said, as a service centre in general, it is an issue whether Cayman has the infrastructure to meet the demands of the hedge fund industry. “Particularly for administrators that is an increasing challenge,” he concluded.
The number of NAVs calculated in Cayman and reported to CIMA has dropped from 43 per cent four years ago to 22 per cent. Largely due to lower labour costs and better access to skilled labour, more services are now provided from onshore jurisdictions such as Canada or Ireland, Watson said.
“And certainly we are seeing much more of an outsource solution where administrators may contract the funds in Cayman but outsource certain aspects of the services of that fund to places as far as India.”
This trend is going to continue, he predicted, simply because Cayman does not have a sufficient number of people to meet the demands of the industry. Post-2008 there has been a trend toward more transparency and reporting, for example with a transition from a monthly to a daily reporting structure, making the industry more labour intensive.
“Cayman does not have the labour force to support that,” Watson said. This puts into question the physical presence of the industry in Cayman going forward.
Growth of the fund administration industry has taken place elsewhere in the world, but not in Cayman he noted, referring to the largest fund administrator CITCO, which created 2,000 jobs in Toronto and 1,000 jobs in Nova Scotia.
Watson, whose firm Admiral has recently been acquired by Maitland, did not respond directly to whether his own company would “back-office jobs to South Africa”. Later in the discussion, however, he remarked that global managing directors have to look at “moving jobs from Cayman to other jurisdictions simply because the arguments are so compelling”.
Given that Cayman cannot compete in the volume business, he said, it has to find a niche area of the industry to capitalise on the well-established, highly skilled individuals who are based here.
“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.
“We have to think very carefully about who we need and align our immigration and labour policies around whatever those needs are,” he said.
The attraction and retention of talent becomes even more important as a generational shift is taking place globally, said Small. Many of the stalwarts have been around for the last 20 years in onshore law firms and the question is are we building relationships with the next generation to maintain Cayman as the domicile of choice for hedge funds, he said.
Overseas the image of the Cayman Islands is still intact. Kelli Moll, a partner with Akin Gump Strauss Hauer & Feld LLP in New York, confirmed that Cayman has done a great job of attracting business and remains the jurisdiction of choice, also because of its timezone and the depth of the people on the ground. The key is servicing the industry as a whole in terms of responsiveness from a relationship and services perspectives. But the relations between onshore and offshore firms are very close, she said.
Cost pressure is another factor that impacts the industry, panellists said. Seymour highlighted that 69 per cent of hedge funds in Cayman are small, at less than $100 million assets under management. “That is the reality that we can’t lose sight of. Because of the enormous focus on large managers people tend to think that every manager is a John Paulson and they have billions and you can charge them whatever you want and it does not matter. That is not the reality. The hedge fund business is a very entrepreneurial business.” Cayman can only continue its success if it remains the best place for a new manager to start up a fund, both in terms of costs and the value that is added.
Martin agreed and urged caution with regard to government revenue based on growth of the number registered funds. “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,” he said. “It actually defies logic; just about every industry starts big and eventually then whittles down to a smaller number.”
Panellists concurred that regulation of the industry is not necessarily the answer. Small quoted a survey according to which 85 per cent of investors believe that regulation will not be effective in preventing the next crisis and only 10 per cent believe that regulation will protect their interest in hedge funds. Watson said the statistics are clear that rather than regulation investors are looking for governance and transparency.
In this respect, the industry is moving in the right direction, Seymour said, but he also added that CIMA is right to be concerned about the regulatory environment around fund governance.