More certainty will bring more opportunities

The financial services industry is now operating with far more certainty after two to three challenging years, say Ernst & Young’s Regional Managing Partner Dan Scott and Financial Services Partner Jeffrey Short.

In 2010 Ernst & Young hosted 19 hedge fund symposiums worldwide. The annual hedge fund events, which started seven years ago in New York and have since expanded to more locations across the world, focus on what may well be global trends, but also the local realities around that, says Scott.

In Cayman, the invitation-only event drew 200 participants from Ernst & Young clients, industry players and government officials to regulators, and featured three panels in addition to the key note speaker Premier McKeeva Bush.

“From a Cayman perspective we have been seeing for the last couple of year s a lot of challenges coming from outside our control, whether it was potential changes in regulation in Europe or whether it was new legislation in the US, Dodd-Frank, FATCA,” says Scott.

“And I think where we are at now, is that all these things have crystallised, we are now operating in a time of far more certainty than over the last two to three years,” he notes, adding that it is a positive development for Cayman as a jurisdiction to be more in control of “decisions that we make in Cayman as to how we are moving forward and how successful we continue to be”.

This would involve a number of areas, including how the government manages its budget and financial affairs, how it responds to international calls for effective regulation and to demands from the market place, Scott says.

Jeffrey Short agrees that there is a feeling that “we have turned a corner”, not only in terms of the challenges, but also as far as new fund registrations are concerned.

“We are averaging around 100 new set-ups per month, which a year or two ago was an entirely different story.  So the expectation is that we are soon going to be over the 10,000 mark of registered hedge funds in Cayman,” Short says.

Regulation and transparency
New legislation like “Dodd-Frank makes it clear that there will be more involvement of regulators and how we manage through that, how the funds and the investment managers work through that is critically important,” says Scott.

But in addition to new regulations, the key issue for investors continues to be transparency.

Despite the administrative and cost burden that investor demands for more transparency place on funds, Scott believes, the majority of fund managers realise the importance of becoming more transparent. At the same time, sophisticated investors are asking the right questions and appreciate that there is an important balance between transparency and the need to protect proprietary trading strategies, he says.

Yet, Ernst & Young’s survey results also showed that there is still a discrepancy between what investors require in terms of information and what fund managers thought investors wanted.

However, fund managers will respond to that, Scott and Short agree. In particular, Madoff has permanently changed the industry dynamics in this regard.

Everything comes down to the ease of access to information and technology will play a big part in that, Scott says.  “Investment managers will continue to figure out how to strike that balance between the protection of proprietary trading strategies and investor needs. I don’t think you will see a reversal, because at the end of the day the key thing with this business is how you protect investors.”

He thinks that more transparency will prove to be helpful and, in fact, strengthen the industry.

Nobody, including investors, wants over-regulation, he says, because hedge funds continue to perform well and ultimately they are accountable because “investors have the power to move their money”. And currently money is coming back into the hedge fund space.

The beauty of the hedge fund industry, says Scott, is that you can structure products depending on investor needs and appetites, for example, with regard to increased demand for more liquid funds.

No trend to UCITS
Both Short and Scott are adamant that there is no trend towards the European UCITS structure.

“Do they fit a certain need? Perhaps, but I would not put them as a Cayman product hedge fund’s main competitor,” says Short, giving the example of a large UCITS structure that recently had to be closed down, because the constraints placed on the fund did not allow it to replicate the performance of the hedge fund it was supposed to mirror.

“And indeed I have not seen, as the press has suggested, a mass exodus from Cayman,” adds Scott. “That has not happened. Quite the contrary, if you look at the statistics, the number of new formations in Cayman is more than the other two to three jurisdictions combined.”

Scott says that “with more certainty, there is more opportunity and more growth“.

Some of this growth might come from emerging markets, the Hedge Fund Symposium in Cayman showed. One of the panels covered emerging markets with a focus on Brazil, “because, certainly for the Cayman market place, it is a tremendous opportunity”, says Short.

Local challenges
Locally the Foreign Tax Account Compliance will become an important issue for banks, hedge funds, directors, fund administrators and trustees.

Irrespective of the type of financial institutions, they will need to know who their investors are and whether they are US citizens. “It is effective in 2013, but there is a lot of work that needs to be done today to get prepared for that,” says Short.

“It is important for people to get focused on it, to have the appropriate systems in place to deal with it from a reporting standpoint,” Scott adds.

“What it seeks to do, which is quite sensible, is to ensure that persons responsible for paying US tax are reporting, recording it and paying it. That is absolutely right, but it will require a lot of effort and energy around the systems and indeed a lot of work around the various agreements.”

The other challenge in Cayman will be to ensure that appropriate immigration policies are in place to be able to attract the talent needed for Cayman’s economy to grow, Scott says. This has to be balanced with the need to ensure that Caymanians have opportunities in this process and are engaged.

Referring to Thomas L. Friedman’s book ‘The World is Flat’ he cites the global competition for talent that Cayman is facing.

He says Cayman benefitted from its immigration system in the sense that it attracted very skilled professionals who contributed to the Cayman economy. The rollover policy is needed to ensure that when these workers hit retirement age they do not become a burden.

“But I don’t say that the rollover policy should be used to rollover talent that we need and that is important for our continued success.
“We have professional people coming in who are very skilled. These are the people that you want to stay and become part of the community, make this their home and contribute to it,” he says.
While the economy is improving, Scott believes the public sector is still spending far too much. He also is a strong advocate of privatisation.

“There are really good examples of things that we can privatise in a manner such that a large percentage of Caymanians and residents get a chance to invest into their infrastructure assets,” he says, naming the government administration building, water, the port and the airport as examples.

It gives people a chance of ownership and responsibility and it would no longer be run by the government, but by the private sector with broad-based ownership. In addition, access to additional capital, through bond issues, would become easier.

“All this has been done very successfully in other countries,” says Scott.