Mar 2007 Cayman Hedge Fund Services 2007 - ETF Express · hedge fund. Many smaller and start-up funds are comfortable working with a niche administrator on their own level. At the

Industry hailsMutual Funds Lawamendments

New vistas openup for Caymanadministrators

E-reporting putsCIMA ahead ofthe pack

Cayman HedgeFund Services

2007

Mar 2007

In this issue…03 IntroductionBy Andy Stepaniuk, AIMA Cayman Chairman

05 Moving administration to a new levelBy Darren Stainrod and Colleen Montain, UBS

06 Cayman fund industry keeps rivals atbayBy Simon Gray

08 The cornerstones of a high-qualitydomicile

11 Growing up with the marketBy Canover Watson, Admiral Administration

14 In praise of pragmatic regulationBy Neal Lomax, Quin & Hampson

17 Law change eases servicing ofnon-Cayman fundsBy Greg Bennett, Butterfield Fund Services

18 New vistas open up for CaymanadministratorsBy Simon Gray

20 Staying ahead of the packBy Jonathan Tonge, Walkers

23 Meeting Cayman’s demand for talentBy Dan Scott, Ernst & Young

26 Building a business for the long termBy Christopher Lumsden, Cayman National Corporation

29 Light regulatory touch sets a globalstandardBy Giorgio Subiotto, Ogier

CAYMAN Hedgeweek Special Report Mar 2007 www.hedgeweek.com | 2

CONTENTS

Special Report Editor: Simon Gray, [email protected]

Sales Manager: Simon Broch, [email protected]

Publisher/Editor-in-Chief: Sunil Gopalan, [email protected]

Marketing Director: Oliver Bradley, [email protected]

Graphic Design (Special Reports): Siobhan Brownlow at RSB Design

Photographs: Cayman Islands Tourist Board

Published by: Hedgemedia Limited, 72 New Bond Street, London W1S 1RR

Tel: +44 (0)20 7692 7398 Web-Site: www.hedgeweek.com

©Copyright 2007 Hedgemedia Limited. All rights reserved. No part of this

publication may be reproduced, stored in a retrieval system, or transmitted, in any

form or by any means, electronic, mechanical, photocopying, recording or

otherwise, without the prior permission of the publisher.

Publisher

In the spring of 2006, at the request of itslocal members and the Cayman IslandsMonetary Authority, Mary Richardson of theAlternative Investment ManagementAssociation ventured from chilly Londondown to the sunny Caribbean to explore theopportunity and interest of forming an AIMAchapter in the Cayman Islands.

The timing for Mary and the CaymanIslands hedge fund industry could not havebeen better, as by mid-May AIMA’s Caymanmembership had jumped to nearly 40corporate members, up from the previousmark of 13. The result was the creation ofthe seventh chapter within AIMA’s globalnetwork, after those in Australia, Canada,Hong Kong, Japan, Singapore and SouthAfrica, and the first in the Caribbean region.

Today, out of more than 1,100 AIMAmembers worldwide, the Cayman Islandschapter comprises 48 corporate membersand an additional individual member. Thelatter has taken advantage of AIMA’s uniqueprovisions for independent directors, whomay join the association and the Caymanchapter as individuals, as opposed to thecustomary corporate form of membership.

AIMA, the global trade association forhedge funds and related industries, provides acentre of knowledge for professionalalternative investment practitioners by focusingon education, regulation and promotion ofbest practices. The overriding objective of allAIMA chapters is education, and naturally ourfocus in Cayman is to provide education andpromote sound practices in the localalternative investment industry.

The AIMA Cayman chapter is dedicated torepresenting the islands’ alternativeinvestment community in addressing currentissues affecting international and localindustry participants, becoming the voice ofthe alternative investment industry in theCayman Islands.

The alternative investment industry inCayman was founded upon an activedialogue between the public and privatesectors, which fostered innovation andknowledge sharing that allowed the industryto flourish locally. With the support of CIMA,the founding members of the Caymanchapter of AIMA have seized the opportunityto come together for the first time as a singleindustry body, under the umbrella of aninternationally recognised organisation, torepresent all parties involved in theinvestment fund sector.

Global interest in hedge funds and otherforms of alternative investment has neverbeen greater. Massive amounts of capitalhave poured into the alternative investmentspace in recent years, and currently thereare more than 8,100 funds registered inCayman, fuelled by annual growth of around20 per cent over the past five years.

The formation of the chapter is a notableand natural milestone, and a signal ofAIMA’s growing influence worldwide.Cayman is the offshore jurisdiction of choicefor the domiciliation of hedge funds, and withits wealth of experience and stronginfrastructure, it plays an integral part in theglobal alternative investment industry. Thechapter provides the ideal platform for theCayman Islands hedge fund industry tomake a unified contribution to the globalhedge fund debate.

I look forward to the future of thealternative investment industry both globallyand in the Cayman Islands with muchoptimism. As investment managers the worldover continue to develop innovativestrategies to capture superior returns, AIMACayman and its members remain strongdrivers behind education and advancementof industry sound practices. ■

Andy Stepaniuk

I N T R O D U C T I O N


A global voice forCayman’s hedge fundindustry

Andy Stepaniuk is chairman,Cayman Islands chapter, AIMA

© UBS 2006. All rights reserved.

Successful HedgeFund Administration?

It’s a question of partnership.

When it comes to hedge fund administration, you need to know

you are working with a provider you can rely on. At UBS, our years

of experience in administering hedge fund assets now totaling over

$130 billion, allow us to offer the solution you need. One that is

flexible, bespoke, draws on a breadth of services and accesses state

of the art technology. But more importantly, it’s delivered through

a professional single point of contact, based from our offices in

the Cayman Islands, Ireland or Canada. That’s because we believe

successful hedge fund administration is all about the relationship

we build together, which can give you confidence to focus on your

core business. It’s what we call ‘You & Us’.

www.ubs.com/fundservices

You & UsGlobal AssetManagement

The hedge fund industry is experiencing anenormous growth cycle, which affects all theservice providers that deal with it, and iscreating opportunities for service firms atevery level. The kind of partnership with aclient UBS would bring to the table isdifferent from that offered by smalleradministrators, but there’s a fit for everyhedge fund. Many smaller and start-up fundsare comfortable working with a nicheadministrator on their own level.

At the other end of the scale, top-tierhedge funds that are trying to courtinstitutional investor money now find theyneed to take the operational efficiency,internal controls and compliance andreporting capability for their funds to a newlevel, and find added value in partnering withservice providers, such as UBS in fundadministration, who bring the additionalexpertise and experience that investorsappreciate.

This is particularly the case in the wake ofthe US corporate scandals of the early 2000sand the passage of the Sarbanes-Oxley Act,which brought home to many businesses thedangers of lax internal controls and poorcorporate governance. In the hedge fundindustry, where risk is part of the businessbut its monitoring and control is ever moreimportant, the challenges continue to growfor administrators.

At firms like UBS, the standards setinternally may be even higher than those ofthe industry as a whole. For instance, it willreprice every single position, rather thancarving out the more complicatedinstruments or conducting sample testing,and everything is drawn from independentsources. It does help, of course, that inpricing the increasingly complex instrumentstraded by hedge funds today, the

administration business can have modelschecked through the UBS investment bankas new products are launched.

At the same time, hedge fund managerclients seek more information and investorsare demanding greater transparency, and it’sno longer sufficient to send a spreadsheet tothe manager. Increasingly investors insist onreceiving information delivered directly by theadministrator, and they are asking for it moreoften. The managers often require dailyreporting for their investors, and some fundsof funds need a weekly valuation.

As a result, administrators are steadilytaking on greater volumes and complexity ofwork. Whereas a few years ago a singleperson might have been responsible forlegal, compliance, credit and other areas,today UBS has teams for each of thesefunctions, and the number of staff employedcontinues to grow.

Many administrators find themselvestaking on substantial additional costs withoutreceiving full compensation in the form ofcorresponding revenue growth. It can behard for top-tier administrators to deliverwhat’s required of them by hedge funds andtheir institutional investors unless they havethe resources of a global firm to draw on, togive them the extra edge in compliance, theability to price new instruments, and thecapacity to absorb the IT spending thisentails.

To fully know your clients and undertakethe required due diligence, as well as deliverreal-time figures on a P&L basis, requires arange of tools as well as experienced,knowledgeable people. This combination oftechnology platforms and systems, coupledwith experienced, qualified people deliveringa client-focused service, is what differentiatesthe UBS approach. ■

U B S


Moving administrationto a new level

By Darren Stainrod and Colleen Montain

Darren Stainrod is head offund services for UBS in theCayman Islands and ColleenMontain is global head ofbusiness development andclient relationships, hedgefunds, at Fund Services

So firmly entrenched are the Cayman Islandsas the world’s pre-eminent domicile forhedge funds that it’s hard to imagine a timewhen this was not the case. Yet little more adecade ago, when hedge funds were littleknown and even less understood outside afew financial industry specialists and ahandful of wealthy investors, Cayman was byno means the obvious candidate to becomethe sector’s jurisdiction of choice.

Practitioners in Cayman agree that thesine qua non of the islands’ developmentinto the fulcrum of hedge fund expertise it istoday was the introduction in 1993 of theMutual Funds Law, which introduced theconcept, since widely adopted round theglobe, of a light-touch regulatory regime forfunds dedicated to sophisticated – includingtoday institutional – investors.

Yet Cayman did not immediately sprint intothe lead in the hedge fund business, whichitself was to experience a major growth spurt

only toward the end of that decade. At thetime of the repeal in 1997 of the ‘tencommandments’ – the 10 administrativefunctions that a US-managed fund had tocarry out offshore in order to escape US taxliability – almost half of all offshore hedgefunds, 44 per cent, were domiciled in theBritish Virgin Islands, compared with 29 percent in Cayman, according to the USOffshore Funds Directory.

At the end of 1997, Cayman had a total of1,685 active mutual funds, including 1,037 ofthe registered type of fund that is nowsynonymous with an offshore hedge fund.The number of registered funds did not passthe 2,000 mark until the second half of 1999,but over the past three years, the number ofactive registered funds has been growing ata rate of more than a thousand a year. Atthe beginning of November 2006, there werea total of 8,194 Cayman mutual funds,including 7,531 registered funds, according to

O V E R V I E W


Cayman fund industrykeeps rivals at bay

By Simon Gray

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CaymanConyers Islands

If you want advice on the laws of the Cayman Islands, the choice is clear.

www.conyersdillandpearman.com

B E R M U D A B R I T I S H V I R G I N I S L A N D S C AY M A N I S L A N D S D U B A I H O N G K O N G L O N D O N S I N G A P O R E

The Offshore Law Firm

Conyers Dill & Pearman advises on the jurisdictions of Bermuda, British Virgin Islands and Cayman Islands.

The Cayman Islands is, by some distance,the offshore hedge fund market leader. Thisis due to a variety of factors: a well-calibrated system of regulation; modern andefficient infrastructure; a well-educated localworkforce; and a physical and professionalenvironment that attracts top-quality stafffrom all over the world. Cayman’s tax-neutralstatus makes it an efficient choice for fundpromoters throughout the world.

Richard Finlay, partner and head of theCayman Islands office of Conyers Dill &Pearman, comments: “Regulation embracesthe caveat emptor principle, and the CaymanIslands’ regulatory structure, based ondisclosure, is geared appropriately to theprotection of investors without beingunnecessarily onerous.

“The professional infrastructure comprisesa variety of highly experienced serviceproviders including accountants, lawyers andfund administrators. These are supported bythe type of contemporary communicationsand travel facilities and services any trueinternational business centre needs tothrive.”

This fertile environment has enabledCayman to draw maximum advantage fromthe growth of the global hedge fund industryover the past few years. As the volume ofbusiness has increased, the island’sadministration industry has developed tokeep apace.

This growth has been beneficial for bothexpatriates and locals. For example, for thepast decade or longer, virtually all the fundadministrators have been investing in trainingand development programmes for locals.They are now starting to reap the benefits,with the senior management of many firmsnow comprising a significant number ofCaymanians who have come through theranks.

It is also fair to say that the developmentof Cayman as a financial services centre

would not have been possible without theisland’s ability to attract talented expatriates.As with other island-based financial centresthere is acceptance that simply due to size,the local population alone is not able tomeet all the staffing needs of such adynamic industry.

Cayman benefits from a notably stableworkforce, a quality much appreciated by itscustomers. Expatriates have to completetheir work permit period, generally two years,before they are allowed to move to anotheremployer. However, “job-hopping” is not asignificant trend in the industry. Most peoplestick with the companies they work forbecause they are highly valued and wellrewarded.

These advantages have given thejurisdiction a track record as the domicile ofchoice in the industry. Craig Fulton, anassociate at Conyers Dill & Pearman, says:“The reputation Cayman has garneredgenerates and sustains a flow of business. Anewcomer to the hedge fund market willoften adopt the herd mentality and decide touse Cayman because that’s what everyoneelse has done and is still doing. They cansee that the model works and is successful.It gives Cayman a real advantage over otherjurisdictions in the global market.”

Adds Finlay: “As an international offshorelaw firm, Conyers Dill & Pearman is wellplaced to offer advice on funds in whicheverdomicile the client prefers. The firm practisesthe laws of Bermuda, the British VirginIslands and Cayman Islands, the three majorwestern hemisphere hedge fund domiciles.

“As a firm, we leave it up to the client, ortheir trusted advisers, to recommend thejurisdiction of domicile for the fund, safe inthe knowledge that Conyers Dill & Pearmanwill offer the same quality of service in eachcentre. The aforementioned notwithstanding,the enduring popularity of Cayman speaksfor itself.” ■

C O N Y E R S D I L L & P E A R M A N


The cornerstones of ahigh-quality domicile

Richard Finlay, partner andhead of the Cayman Islandsoffice of Conyers Dill &Pearman

Craig Fulton, associate withConyers Dill & Pearman in theCayman Islands

Yolanda McCoy, head of the Investment andSecurities Division at the Cayman IslandsMonetary Authority.

At the heart of Cayman’s appeal to theglobal hedge fund industry is its success ingetting the product right, according to Adrian(‘Gus’) Pope, co-head of the investmentfunds practice at the Cayman-based butincreasingly international law firm and fundand corporate services provider, Maples &Calder. “We have a very successful productand people are used to it,” he says. “It’srecognised in the marketplace, where peopleexpect to see a Cayman hedge fund.

“We were one of the early jurisdictions tothink about regulating funds in a light-touchway. We’ve had a regulatory framework inplace since 1993, whereas our competitorsare only really moving to our model now.Some jurisdictions came late to having anyregulation at all, like the BVI, whichsubsequently effectively replicated ourmodel. Meanwhile other offshore jurisdictionssuch as Jersey that traditionally were moreheavily regulated are now realising that inthe hedge funds arena there is a compellingcase for a lighter touch regime.

“Cayman’s regulatory philosophy gavepeople some degree of comfort that there wasan element of formality to the process. Therewas a regulatory agency with powers, but notintrusive powers. There were no prescriptiverules on what you invested in, or on where allyour service providers were located. That isanother big distinction with some competitorjurisdictions which have mandated that fundsmust have some directors, an administrator ora custodian in their jurisdiction.”

The only adjustment of that approach,Pope notes, was the introduction a few yearsago of the requirement for a local audit sign-off, but the concern aroused by the measurehas long ago died away. Meanwhile, heargues, Cayman’s position is also bolsteredby the intangible factors that attract clients:“Clients like dealing with people in Cayman,responsive professionals who return phonecalls promptly and don’t price themselvesout of the market.”

Gary Linford, whom McCoy succeeded ashead of the regulator’s Investment andSecurities Division last year and who is nowactive in the industry in consultancy and otherroles, notes: “Other jurisdictions don’t have

the critical mass in terms of the expertise ofaudit firms, administrators and lawyers. Thedepth and breadth of knowledge makesCayman an easy place to do business.”

Linford argues that the small size of thejurisdiction is actually an advantage in termsof the dissemination of knowledge betweenindustry participants. “Because the same lawfirms that are involved in setting up funds arealso involved in fund litigation, it means thatwhen cases are settled out of court – as theyusually are – word quickly gets around aboutpotential issues that may require, for example,changes in the way offering documents aredrafted. As soon as a negative appears in thestructure, it can be quickly tweaked. Thesmallness of the island enables it to reactmuch more quickly than other jurisdictions.”

Cayman is now aiming to take a furtherstep ahead of rival jurisdictions with the e-reporting initiative launched last year byCIMA. “E-reporting is long overdue,” McCoyacknowledges. “Since 1993 CIMA has beenmanually receiving and reviewing auditedaccounts. With around 8,200 funds today,that is no longer an efficient manner inwhich to do business. E-reporting will bringscalability by providing automation ofdocumentation coming into CIMA.

“Because 90 per cent of our funds have aDecember 31 year-end, at the end of June orbeginning of July we are receiving six orseven thousand sets of audited accounts, of50 or 60 pages each. There is no way at themoment for an analyst to know whether oneset of audited accounts is more high-riskthan another, but e-reporting will change this.It will also enable us to produce some

O V E R V I E W


p6 ➧

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At Admiral we know that each client isdifferent. To that end our services arecustomised to provide exactly what eachclient needs, instead of providing allservices to all clients.

At Admiral we provide a superior level ofservice backed by the expertise andknowledge of our team of Administrators,all of whom are Certified PublicAccountants or Chartered Accountants.

If your administrator isn’t giving youthe service you need

– why are you paying them for services you don’t need?

To find out more about how Admiral canadd value to your business please callCanover Watson at (345) 949 0704.Alternatively, fax (345) 949 0705 or [email protected]

Admiral Administration is a leadinginvestment fund administrator based inthe Cayman Islands serving over 180investment funds, with assets underadministration in excess of US$ 22 billion.

Our philosophy is to keep it simple andprovide only the services our clientswant and need.

We combine a sophisticated technicalunderstanding with individual attention toprovide a flexible solutions-basedapproach.

Admiral is a vibrant, innovative companythat puts clients first.

In short, when you partner with Admiral,whether you are large or small, alwaysknow you have our full attention and weare part of your team.

When Admiral Administration wasestablished 10 years ago, it was a smallplayer in the fund administration market.Much of our clientele was small and start-upfunds, who were often turned away by thebig players. That business not only enabledAdmiral to establish a foothold in the market,but has enabled it to grow alongside itsclients – such as one hedge fund managerthat started out with USD20m in its offshorefund and is now a USD4bn business.

Today Admiral has joined the ranks ofmedium-sized administrators, with more than250 funds and USD28bn underadministration. Three years ago the firm hadjust 20 employees; today it has nearly 70 andwe are already planning for a staff of 100and more within the next 12 months. InNovember 2005 we moved into a new,purpose-built 20,000-square foot building inthe centre of George Town, of which three-quarters is already occupied by Admiral.

The company’s growth has come througha mix of organic growth from our existingclients and a steady increase in newbusiness coming through the door. Over thepast few years the global hedge fundindustry has been growing rapidly, andCayman has consolidated its reputation asthe world’s premier domicile for alternativefunds as well as a repository of unmatchedexpertise among its service providers suchas lawyers, administrators and auditors.

For Admiral, the challenge is now tomanage this growth by ensuring that itmaintains the quality of service that hasattracted and retained clients, and to moveto the next level of development where it willbe a natural option when the largest funds inthe industry are examining their choice ofadministrator.

An important step was the decision toinvest in a top-level IT system, Advent

Geneva, and implement a web reportingsolution. These significant investments giveAdmiral the operational capability to competemore directly with the large institutionally-backed administrators, such as UBS, Fortisand Goldman Sachs, which in the past haveserved a different breed of client because ofglobal reputation and their ability to leveragetheir prime brokerage relationships.

It means Admiral can meet the needamong large hedge funds for an independentand expert third party that can providecomfort to a sophisticated investor base, andcan match the infrastructural capabilities ofadministrators that have come out of globalbanking groups and continue to draw upontheir resources.

But Admiral, too, is starting to build aninternational profile. An example is that lastyear the firm was ranked second amongadministrators in the world for globalexcellence in Institutional Investor’s Alphaawards, behind Goldman and ahead ofMorgan Stanley. The award, based on viewsof hedge fund clients, is justification of ourmodel of hiring qualified accountants in orderto offer a better level of service.

The next stage will involve broaderinternational scope. In the course of thenext few months we will be opening anoffice in Dublin, which will initially look tocapitalise on the growing shortage ofadministrators there able and willing to takeon smaller funds with around USD50m inassets. From there, we aim to takeopportunities in the future to expand intostrategic jurisdictions where we seeopportunities, perhaps in Asia, the MiddleEast, India, the US and Canada. Butwherever we go, our emphasis will be onmaintaining service quality, employing high-quality staff and ensuring that our businessis sustainable over the long term. ■

A D M I R A L A D M I N I S T R AT I O N


Growing up with the market

By Canover Watson

Canover Watson is managingdirector of AdmiralAdministration

meaningful statistical data, such as totalassets under management or subscriptionsversus redemptions for a particularinvestment strategy.”

Obtaining comprehensive informationabout the size and strategy of fundsregulated in Cayman may also shed greaterlight on developments in the structure ofCayman funds, such as the growing use ofside-pockets for illiquid investments as theboundaries between hedge funds and privateequity investments become increasinglyblurred.

Says Ogier partner Giorgio Subiotto:“Having illiquid investments causes problemsfor valuation, so by parking it on the sideyou don’t need a regular valuation for thatasset. The other benefit is that each of theshareholders can participate on a pro ratabasis in the illiquid investment. By putting itto the side you also prevent the illiquidinvestment becoming too great a proportionof the overall portfolio if some shareholdersredeem their investments.

“The legal issues with side-pockets involvethe structure of the fund, the allocation offees between the liquid and illiquid portfolios,and other possible costs. Sometimes illiquidinvestments will require you to go to court tounlock the value of the investment – how doyou pay for that? You need to makearrangements between the two portfoliosabout borrowing from the liquid class. Ifthere are capital commitments, do youaccrue them up front?”

Roisin Cater, head of the investment fundspractice at the Cayman law office of theJersey-based Mourant group, notes thatprivate equity work at least matches thevolume generated by hedge funds. “Theprivate equity side is just as strong as hedgefunds, but because closed-ended structuresare not regulated by CIMA, there are nofigures on the size of the sector. Somepeople say that their proportion of privateequity work is as much as double thevolume of hedge funds. Cayman has neverreally been a domicile for property funds, butwe are starting to see a few EasternEuropean property funds come through.”

Geoff Varga, who heads the office ofconsultancy and accounting firm KineticPartners, says that insolvency and forensicswork is a key focus for the Cayman business,

along with local audit sign-off. “It’s a pretty bigpractice for all the firms, because if somethinggoes wrong with a fund domiciled in Cayman,it needs to be managed where the legalstructure is, even though the manager mightbe in the US or UK,” he says. “Gary Linfordrecently estimated that 700 funds would beliquidated in 2006, although 90 per cent wouldprobably be voluntary liquidations, eitherbecause a fund comes to maturity or it nevergets off the ground.”

Whatever the particular focus of firms inthe Cayman fund industry, a constant topic isstaffing. The islands’ government is currentlynegotiating the delicate process of reviewingthe so-called rollover rule, which sets amaximum limit of seven years on the periodmost expatriates can live and work inCayman on a work permit (they can returnafter spending at least a year abroad).

Although most practitioners are confidentthat the government will ensure that thepolicy does not damage the financialindustry, for example through exemptions for‘key employees’, there is concern that theuncertainty is already affecting recruitmentabroad – a particular concern foradministrators already grappling with a globalshortage of qualified accountants.

“It has made recruitment more difficult,”says Neal Lomax, head of the corporatedepartment at law firm Quin & Hampson,which has just announced a merger withMourant. “If I get the chance to speak tocandidates I can explain it’s not somethingthat should be of serious concern to them, butsome people in the UK or other jurisdictionsfrom which we recruit may hear about theseven-year rollover policy and perhaps loseinterest in Cayman as a result. Previously itwas always a great advantage over Bermudathat you could own property here, and youwouldn’t have to leave after a certain period.”

Says Jonathan Tonge, managing partner ofthe investment funds group at leading lawfirm Walkers: “At the moment there’s a degreeof uncertainty. There are thousands ofresidency applications, a stepping stonetoward Caymanian status, waiting for adecision, some of them two or three yearsold, and each application is a person in limbo,wondering where their future lies. However,we’re not seeing a mass exodus – generallypeople want to stay, and we are hopeful that

O V E R V I E W


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Last year was another record one for hedgefund registrations in the Cayman Islands and8,282 active funds were registered with theCayman Islands Monetary Authority at theend of December. All the signs suggest that2007 will be another year of strong growthfor the hedge fund industry. The e-reportinginitiative introduced by CIMA represents afar-sighted move designed to keep theCayman Islands in the front rank ofinnovative industry practices, as befits whatis by far the leading hedge fund domicile.

The e-reporting initiative will apply to allfunds regulated by CIMA under the MutualFunds Law. E-reporting will enable theprocessing of fund information in a way thatwill streamline CIMA’s oversight functions ata time when the success of the CaymanIslands as a hedge fund jurisdiction hasimposed an unprecedented workload on theregulator. It will also provide for moreaccurate aggregation and dissemination ofstatistics relating to the funds industry,improve compliance with regulatoryrequirements and assist with businessrecovery and continuity.

The e-reporting initiative is beingimplemented in stages, starting with therequirement that auditors transmit auditedaccounts to CIMA in electronic form togetherwith a Key Data Elements (KDE) form to becompleted by the fund’s director, generalpartner or trustee. No new information isbeing asked for in the KDE Form and alldata requested should be contained in theaudited financial statements and the offeringdocument of the fund. Both the fund’saudited accounts and the KDE form must befiled with CIMA within six months of thefund’s financial year-end.

CIMA moved quickly to allay fears that theinitiative would represent any kind of

intrusion on funds’ confidential information,or that it would impose any additionalregulatory burden upon them. No informationrelating to the fund and its service providerswill be made available to the public. Onlyaggregate statistical information gleanedfrom the KDE forms will be published. Thereare no additional regulatory costs associatedwith implementation of the e-reportinginitiative, and the incremental costs to thefund in completing the KDE form should beminimal.

The Cayman Islands offer a number ofadvantages that underpin its domination ofthe offshore hedge fund market. One keyadvantage is the light but effective regulatorysystem that is calibrated to the sophisticatednature of hedge fund investors. In the wakeof episodes such as the demise ofAmaranth, there are inevitably demands,especially in the US, for legislative orregulatory action to prevent any recurrence.However, it is to be hoped that the CaymanIslands government and regulator will resistany pressure to make regulation moreintrusive.

Another significant advantage of theCayman Islands is the quality of its serviceproviders and, in unison with the growth ofthe hedge fund industry, Cayman Islands lawfirms have expanded rapidly in the last fewyears. In the most recent development, Quin& Hampson, one of the leading independentlaw firms, has announced its intention tomerge with specialist professional servicesgroup Mourant. As CIMA continues tointroduce new initiatives that will enableCayman to maintain its position as thedomicile of choice for offshore hedge funds,the law firms that service the funds industrywill keep pace by evolving to provide an everhigher level of service to their clients. ■

Q U I N & H A M P S O N


In praise of pragmaticregulation

By Neal Lomax

Neal Lomax is head of thecorporate department at Quin& Hampson

the government will do what makes goodbusiness sense. Firms want to keep valuedemployees rather than bringing in people toreplace them who have no experience.”

Tonge notes that the number of lawyerswho might be affected by the rollover policyis relatively limited, because many of themalready enjoy Caymanian status, following amass grant of status a few years ago by theprevious government. He adds: “There areexemptions built into the law anyway. We’reoptimistic that our lawyers, especially thosewho have been here for seven years, will beconsidered key employees.”

However, he says in general Walkers haslittle difficulty attracting the calibre of recruits itneeds. “What is particularly attractive is thelifestyle option,” he says. “People who’ve donefive to eight years in London and have barelyseen the light of day can have the pleasuresof the Caribbean on their doorstep. They haveto work very hard, but that’s also a good thing,because their aspirations won’t be satisfiedunless they have very good quality work.”

Says Alistair Walters, head of theinvestment funds practice at law firmCampbells: “I don’t think the seven-yearrollover period is a problem if people knowabout it from the outset. Most accountingfirms bring people down on fixed-termcontracts of one or two years, so they maybe leaving anyway. But it may be harder torecruit more senior staff who would bebreaking their career in their home country,and may find it harder to take the decision toput down roots here.”

Richard Finlay, head of the Cayman Islands

office of Conyers Dill & Pearman, says thatlike the administrators, law firms look toattract Caymanians, although the needs of theindustry far outstrip their availability. Recruitingabroad, he says, is becoming more of achallenge: “More jurisdictions are competingfor a fairly limited pool of qualified people.Working conditions in London are improving,and it’s getting more difficult to lure people toCayman. However, it is still a very attractiveplace to live, and we continue attract a veryhigh level of candidates.”

While firms are obviously keen to recruitand develop Caymanian employees who arenot affected by the rollover policy, somepractitioners believe more could be done ata national level to promote the hedge fundindustry as a career choice. Says CanoverWatson, managing director of AdmiralAdministration: “It’s one of the things thathas been talked about although not muchaction has taken place.

“When young people come out of highschool and consider careers, the fundindustry isn’t in the front of their minds. Thisis a great career, but we need to sell it a bit,because young people don’t reallyunderstand what the fund industry entails.We also need infrastructure to train anddevelop young people to move into theindustry, probably involving professionalsworking with the local university to offer afunds certification course. We need a long-term plan to sustain this industry.”

Adds Dan Scott, managing partner ofErnst & Young: “The biggest thing we needto focus on is our ability to acquire andretain talent. There is demand for talentglobally, and we have to ensure that we areone of the first choices when people arelooking to move. But while the localpopulation cannot meet all the industry’sdemand, developing local talent is aguarantee of long-term strength.

“The University College of the CaymanIslands should have some sort of schoolfocused on teaching people about theindustry in a very meaningful way – not justtheory but practice. We need to put in placeprogrammes through an on-island school togive people the skill set to be good fundadministrators. We can do a much better jobof ensuring that the local population havethat opportunity.” ■

O V E R V I E W


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Last year saw the milestone passed of 8,000funds registered with the regulator, theCayman Islands Monetary Authority, reflectingthe dominance of the jurisdiction as a domicilefor hedge funds aimed at professionalinvestors. This success has been aided by aquick-to-market regulatory framework, butanother important factor is that there is norequirement for the fund administration to becarried out within the islands.

This is something Butterfield FundsServices supports - those decisions shouldbe up to market forces, not mandated by thedomicile. We wouldn’t like to see this kind ofstipulation on administration impact anyone’sdecision on domicile, which might well goelsewhere.

Even without such a requirement, Caymanhas become a major centre of hedge fundadministration expertise, thanks to the hugetalent pool of qualified accountants andfinancial sector professionals in the islands.And even more work could flow to Caymanin the future thanks to one of the mostimportant changes, for administrators at least,among the recent amendments to the MutualFunds Law, which took effect last November.

Historically, for a non-Cayman domiciledfund to be administered by a service providerhere, that fund had to be registered withCIMA, which although a straightforwardprocess, required updated disclosure and thefiling of the fund’s offering document withCIMA. Although not a particular issue for aBritish Virgin Islands fund, for example, it wasan effective non-starter for US-domiciled funds.

US managers have had little interest inregistering US-regulated funds in Cayman,given the required additional disclosure thatthe fund would also be subject to regulation

by a non-US regulator. This issue wasaddressed as a direct result ofrecommendations made by a public andprivate sector working group, the purpose ofwhich was to make recommendations tostreamline and improve upon the existingMutual Funds Law. The end result was theremoval of the foreign registrationrequirement, so long as the foreign fund isadministered by a licensed administrator andregulated in another approved jurisdiction.

This represents an important developmentfor the industry because many administratorsare already serving Cayman master andoffshore feeder funds for US managers thatalso have a US feeder vehicle, and mightnow be interested in bringing all theiradministration under one roof.

This is especially true of groups that mayhave historically self-administered their USfeeders, but are now recognising that this maybe seen as a red flag by investors. As a resultit is a natural progression to outsource thisadditional work to the administrator alreadysuccessfully servicing other parts of the fundstructure. In addition, as a major fundadministration centre located within US timezones, Cayman-based administrators are wellpositioned to service stand-alone US entities.

Another aspect of the legislative changesis CIMA’s e-reporting initiative. Since asmany as 80 per cent of the world’s offshorehedge funds are domiciled in Cayman,collating the data will give a much clearerpicture of the size and scope of the industry.Given that the end result will be valuableindustry data, without disclosure of fund-specific information, feedback frommanagers and sponsors has beenoverwhelmingly positive. ■

B U T T E R F I E L D F U N D S E R V I C E S


Law change easesservicing of

non-Cayman fundsBy Greg Bennett

Greg Bennett is a director ofButterfield Fund Services(Cayman), with responsibilityfor business development andclient relations

With well over 8,000 registered funds on thebooks of the Cayman Islands MonetaryAuthority and new opportunities opening upfor the servicing of non-Cayman funds onthe islands, the opportunities for thejurisdiction’s specialist hedge fundadministrators are limited only by theircapacity to mobilise the resources requiredto handle the volume of work beinggenerated by the sector.

Cayman made its name as a centre foradministration of hedge funds in the dayswhen the so-called ‘ten commandments’required US managers to carry out a serieskey administrative functions in offshorelocations in order to avoid the fundbecoming subject to taxation on US-sourcedincome. The rules, introduced by the US

Treasury in 1968, were abolished by the 1997Taxpayer Relief Act, but by that timejurisdictions such as Cayman had built up astore of hedge fund servicing expertise thatwas hard to match.

A decade on, some of the administrationwork that used to go offshore is now carriedout in North American centres such as NewYork or Toronto, and in the Europeanadministration hubs of Dublin andLuxembourg, but Cayman’s role as the pre-eminent hedge fund domicile worldwide hashelped its administration industry to remain aleading player in the services sector.

Members of the industry point to the highlevel of expertise offered by Caymanadministrators, the ability of its firms toattract high-quality professionals from all over

A D M I N I S T R AT I O N


New vistas open upfor Cayman

administratorsBy Simon Gray

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Cayman is now definitely the first port of callfor hedge fund managers, certainly on thisside of the Atlantic, having moved decisivelyahead of its traditional rivals, in particularBermuda, over the past 10 to 20 yearsthanks to a variety of factors but in particularmodern legislation and effective but non-intrusive regulation as well as a veryresponsive, commercial approach that hasgrown up through administration providers,accountants and law firms. We’ve achievedcritical mass to the point where Cayman hasreally become the home of hedge funds.

Over the past couple of years a great dealof the development has been at the top endof the market, with an increasing number ofinstitutions now creating new regulated hedgefunds in large volumes. It’s estimated that thetop 100 fund managers now account for 65per cent of the industry’s total assets undermanagement, and the inflow of new moneytends to be on the institutional side. That fitswith our own experience; while Walkerspositions itself to service all funds, we seemto attract the higher-end funds in particular.

We are also doing plenty of fund of hedgefunds work, despite the public lossessuffered by some funds of funds as a resultof Amaranth Advisors and the continuingconcern among some investors about havingto pay double investment management fees,especially when returns are not particularlyhigh.

However, institutional money from pensionfunds and endowments with a moreconservative profile may be attracted tofunds of funds, which can deliver thetargeted return profile more easily and mayalso fit better with the changes to the ERISArules governing investment by US pensionfund managers. Funds of funds also offer thediversification that has a better chance ofdelivering the steady returns required.

Cayman has been adjusting its legislation

and regulation to adapt to developments inthe global marketplace, most recently throughthe Mutual Funds (Amendment) Law. One ofthe main changes is an increase in theminimum subscription level from USD50,000to USD100,000, unless the fund is licensed oremploys a Cayman-licensed administrator.

This will have virtually zero impact on theindustry, especially as it only applies to newfunds; existing ones will still have aUSD50,000 minimum.

However, we welcome the change in thatit gives a clear signal that we are catering toa sophisticated market. The minimum couldeven have been raised to USD250,000 toemphasise that Cayman funds deal withhighly sophisticated investors. In practice,only a small proportion of Cayman hedgefunds set minimum subscription levels ofless than USD1m.

The other main change is to abolish therequirement that any foreign fundadministered in Cayman has to be registeredand regulated by the Cayman IslandsMonetary Authority. Henceforth thatrequirement will no longer apply providedthat the fund is regulated in an approvedjurisdiction, which would include the BritishVirgin Islands, the US or Bermuda. That willmake it more attractive for foreign funds tochoose Cayman for administration, forinstance US funds that feed into a Cayman-domiciled and administered master fund.

CIMA has also launched an e-reportinginitiative that involves the electronic filing ofvarious pieces of information from the fund’soffering document and its audited accounts,in a form that allows the regulator toanalyse, process and use that informationmore intelligently. The initiative, which meansproviding data in a more convenient formrather than supplying new information, willhelp CIMA provide a much more completepicture of Cayman’s hedge fund industry. ■

WA L K E R S


Staying ahead of the pack

By Jonathan Tonge

Jonathan Tonge is managingpartner of the investmentfunds group at Walkers

the world as well as to make the most oflocal talent through recruitment, training andcareer development programmes geared toCaymanians, and the readiness of thepolitical and regulatory authorities to fine-tune the industry’s legal framework in orderto keep the jurisdiction competitiveness.

An important example of the latter wasthe amendments to Cayman’s Mutual FundsLaw introduced last November. Amid anumber of minor changes, the amendmentact removed the obligation for non-Caymanfunds administered on the islands to beregistered with the financial sector regulator,the Cayman Islands Monetary Authority, arequirement which industry practitioners saywas a serious impediment to attracting fundsdomiciled elsewhere.

Cayman administrators already servicefunds from other jurisdictions in and aroundthe Caribbean, notably the British VirginIslands, but the greatest opportunity lies inthe master-feeder structures favoured bymany US managers. Where Cayman-domiciled offshore feeders and master fundsare already serviced by a local administrator,

in many cases it would now make sense forthe latter also to handle the US feeder,typically a Delaware limited partnership.

“Previously you had the annual registrationfee, as well as the requirement for a Caymanaudit sign-off, which usually adds USD3,000or USD4,000,” says Patrick Agemian,managing director of Citco Fund Services(Cayman Islands). “But it wasn’t just aboutthe cost. Managers would ask why theyneeded to register their Delaware LP just todo the administration in Cayman, andsometimes the partners in the fund would beasking what they had to do with Cayman.But following the change in the law, wherewe would typically administer and doinvestor relations for an offshore feeder andthe master fund, we will now be looking toadminister the Delaware LP as well.”

The change in the law is an importantboost to Cayman’s attractiveness as aprovider of administration services at a timewhen the market is becoming more globalthan ever. Most of the biggest serviceproviders, such as Citco, UBS and Fortis,have administration operations around the



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Foresight is nothing without insight.

ey.com/cayman Phone: (345) 949-8444 Fax: (345) 949-8529

The Cayman Islands are the world's leading domicile for the

registration of hedge funds, and Ernst & Young in Grand Cayman is

a leading provider of audit services to these funds. For

unsurpassed expertise and unsurpassed service, we invite you to

consider Ernst & Young for your audit needs.

As the role of the Cayman Islands as acentre of the global alternative investmentindustry continues to grow, one of thebiggest challenges facing the jurisdiction isfinding the human resources to handle theincreasing volume, complexity andsophistication of business in the sector, fromlaw firms to auditors and administrators.

One of the advantages Cayman enjoys isthat it is now known worldwide as offeringan opportunity to work with the mostinteresting clients in the asset managementindustry and alongside some of its mosttalented and expert professionals. Inaddition, as a centre of expertise, Cayman isa useful step in terms of careerdevelopment in the sector. These areimportant factors in attracting top talent fromaround the world.

But there is a great deal of demandworldwide for accountants, attorneys andother quality professionals, so Cayman andother offshore locations need to be veryfocused on ensuring they are doing what’snecessary to compete in the global labourpool. The other side of the coin is thatjurisdictions that are unable to attract theexpertise will sooner or later see theirbusiness go elsewhere.

Service providers to the hedge fundindustry have to a large extent grownalongside it, developing their skills andknowledge in tandem with the managers.This is particularly the case in offshorejurisdictions where lawyers, administratorsand accountants need to stay up to datewith the latest developments in structuresand strategies, and it requires an ongoingeducational process on an internationalbasis.

The global hedge funds group at Ernst &

Young, consisting of more than 200 partnersand senior managers, meets regularly fortraining and exchanges of ideas to ensurewe stay ahead of the trends. This is a trulyglobal business, and without a globalnetwork providers will struggle to beeffective.

At home, efforts to ensure thatCaymanians are provided with the skillsneeded by the financial services industryhave so far met with mixed results. In part,that may be because the whole industry hasbeen so busy managing its growth thatsome organisations have not been aseffective as they could in focusing on thelong-term need to sustain and build talent onthe ground. Success in sourcing local talentis an assurance of long-term strength, even ifthe population is not large enough to meetall the demand.

At Ernst & Young we have a trainingprogramme that enables people to move upthrough the ranks and achieve theirambitions, and so do other firms. But muchmore could be done at a national level, suchas establishing, perhaps within the UniversityCollege of the Cayman Islands, aneducational facility that focuses on teachingpeople about the industry in a very practicaland hands-on way. There are many otheropportunities to explore together as wecontinue to search for the best talent andthe best way to deploy it.

Cayman has become the world’s leadingdomicile for hedge funds because of itsability to proactively respond to the demandsof the marketplace. As the jurisdiction facesthe challenges of continued growth, weknow we will need to demonstrate innovativeleadership if we are to succeed in the globalwar for talent. ■

E R N S T & Y O U N G


Meeting Cayman’sdemand for talent

By Dan Scott

Dan Scott is area managingpartner and assetmanagement sector leader forthe Bahamas, Bermuda andCayman region for Ernst &Young

world, offering them not only a presence inthe time zones of most if not all of theircustomers but also the ability to carry outwork in different centres in necessary.

These days a global footprint is no longerthe preserve of the biggest internationalinstitutions. Last November Butterfield FundServices, which has operations in Cayman,its home territory of Bermuda, the Bahamasand Guernsey, announced that it would opena fund administration centre in Halifax, in theCanadian province of Nova Scotia.

Admiral Administration, a start-up inCayman 10 years ago, is well advanced withplans to set up a Dublin business and isalso looking at markets such as Asia.Cayman National, part of a group thatincludes a leading local retail bank, recentlyacquired an administrator’s licence for itsprivate banking, trust and corporate servicesaffiliate in the Isle of Man.

Expansion abroad is one answer to thechallenge of finding sufficient staff withsufficient ability and qualifications, an ever-present concern for Cayman serviceproviders. Most administrators on the islandspoint out that shortage of accountants is aglobal issue, one that to some degree isexacerbated by the geographical situation ofa small group of islands with a population ofsome 45,000, around a fifth of whom areexpatriates.

To what extent the staffing issue is aserious constraint on the industry’s growth isdebatable, however. At Citco, Agemian notesthat as many as 80 per cent of the fundsadministered in the group’s 14 offices areCayman-registered. “Of 8,000 registeredhedge funds, how many are actuallyadministered in Cayman?” he asks. “TheCitco office here has 60-odd people out of1,700 in fund services worldwide, comparedwith nearly 300 in Toronto. Unfortunately,while we have the expertise and youprobably get better quality from a Caymanadministrator, the business is not scalablehere.”

Agemian says he doubts whether anyCayman administrator will grow at 30 percent over the next three years, but some ofhis colleagues politely disagree. Admiral, abusiness with currently around the same sizeof workforce as Citco, has grown from 20people to nearly 70 over the past three

years, and managing director CanoverWatson says the firm is now planning how itwill grow to 100 or more. Like Citco, UBS hasoffices in Dublin and Toronto, but itcontinues to grow in Cayman and has notrouble attracting the right calibre of stafffrom countries around the world.

“We’re able to attract and retain staff a lotbetter than many onshore locations,” saysDarren Stainrod, executive director and headof fund services at UBS Fund Services(Cayman). “A lot of the résumés on my deskare from competing jurisdictions, some fromaccountants with good experience at otheradministration shops, and the pile is growingdaily. It far exceeds the number of positionswe have, which is not the case in otherlocations such as Dublin, New York andToronto or, we hear, with some of ourcompetitors.”

Stainrod’s colleague Colleen Montain,global head of business development andclient relationships for hedge funds,acknowledges that having other offices inthe same time zone is helpful both to helpcope with overflow business, and for ajurisdiction in the heart of the hurricane beltlike Cayman, as a business continuity facility.Contrary to a widespread belief abroad, theislands’ business has not beenfundamentally damaged by its experience inSeptember 2004, when Hurricane Ivan left



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internationally and locally. Call us on 345 949 4655 today or

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The hedge fund services business at CaymanNational Corporation is part of the group’sinternational financial services (IFS) businessdivision, which also includes trust andcorporate, securities and operationsdepartments. While the IFS division operatesautonomously from the retail banking operationand will move this year to its own officeswithin the prestigious new Camana Baydevelopment, the fund services departmenthas been undergoing its own evolution.

Established in 1994, Cayman National’s fundbusiness has historically been focused on twolarge clients, whose strong growth over theyears has led to a steady increase in assetsunder administration. However, two years ago– at a time of change in strategic direction forthe group as a whole – efforts were launchedfurther to develop the business and ensurethat it is equipped with the right systems andstaff it needs for sustainable long-term growth.

One decision was to break with the ideathat net asset valuations can be calculatedby newly-recruited school-leavers and freshgraduates supervised by qualifiedaccountants, a model adopted by manyDublin administrators that service Caymanfunds. By contrast, Cayman National’s generalapproach is that both calculation and reviewof NAVs are carried out by accountants withinternationally recognised accountingdesignations. Although there is an obviouscost attached to recruiting CAs or CPAs, thebenefit is increased understanding of eachclient and their valuation.

The business also chose an IT systemsuited to its client base and its size: MFact,a system used by many leading offshoreadministrators, along with MShare andMPartner, shareholder servicing applicationsfrom the same software house, GlobalInvestment Systems. These industry-leadingsystems are shared with the Cayman

National administration operation in the Isleof Man, which has its own client base and isalso positioned to act as a disaster recoveryfacility for the Cayman business if needed.

Meanwhile, the growth of the fundservices department has resulted in aseparation of the fund accounting andshareholder servicing functions, in order tobuild teams with specialist expertise in suchdiffering areas as accounting for hard-to-value securities and due diligencerequirements for subscriptions andredemptions. This is backed up with thefinancial and organisational resources of theparent group and access to shared functionssuch as compliance and internal audit.

Thanks in part to the robustness of theglobal hedge fund market, this reorganisationhas not been at the expense of substantialbusiness growth, even without a significantactive marketing effort. Over the past year thenumber of fund clients has increased bynearly 30 per cent, while assets underadministration have grown from aroundUSD3bn in late 2005 to more than USD4.75bn.

However, it’s important to resist thetemptation to take on business, as too manyadministrators do, before they have the staffand infrastructure to cope. Cayman National isfortunate that its high profile within theterritory, and confidence that it will be aroundfor the long term, have given it an advantagein recruiting well-qualified Caymanians,enabling it to avoid the delays and constraintsassociated with hiring employees from abroad.

This period of development has left thebusiness well placed for the future, with asolid infrastructure and highly stableworkforce. In particular, while many largeradministrators are turning away smaller fundsand start-ups, Cayman National can nowoffer highly competitive minimum fee levelswithout any compromise on service quality. ■

C AY M A N N AT I O N A L


Building a business for the long term

By Christopher Lumsden

Christopher Lumsden is headof fund services at CaymanNational Corporation

Grand Cayman’s infrastructure badlydamaged, mainly through flooding.

“Anyone who operated in this jurisdictioneven before 2004 was conscious of thehurricane threat and planned for itaccordingly,” Montain says. “Every businesshere has had a complete and thoroughtesting of their business continuity planning,and had the opportunity to tweak areas thatdidn’t work as they ought to have done.There’s a risk of catastrophe in anyjurisdiction, as we’ve seen over the past fewyears, and other jurisdictions may not takethat risk as seriously as Caribbean islandsdo.

“What we saw in Cayman in 2004 and iseven more true today is that all the majoradministrators here are global players withoffices elsewhere, and can quite seamlesslypick up operations in different offices aroundthe world on an almost uninterrupted basis.All businesses have gone more global overthe past couple of years, and it’s especiallytrue of the hedge fund industry.”

In 2004, UBS switched its Cayman work toits Bahamas office for a week, after whichthe office was up and running with thepower back on. Notes Montain: “Caymanfinished 2004 with more fund and companyregistrations and incorporations than a yearearlier.” And since then, she says, thetechnological infrastructure has improved:“You no longer have to take a briefcase fullof back-up tapes on the plane – now youjust switch over the systems automatically.”

As in other jurisdictions, one of the trendsdescribed by administrators large and smallis the trend for well-established serviceproviders to focus their attention on largerfund managers, leaving a gap in the marketthat is often filled by new start-upbusinesses. Says Montain: “Cayman offers afull range of services for different types andsizes of funds and strategies. If you’ve got aUSD10m fund, you can still find anadministrator here, although the establishedplayers would regards that fund as too smallto take on.”

“Most of the bigger administrators areselective in the work they take,” Agemiansays. “There’s a great deal of work out there,so there’s room for small boutiqueoperations to come in and do some of it.Some of the smaller funds may want full

administration, but it’s hard for them to getUBS, Fortis or Goldman to take them on asclients.”

It’s a poignant dilemma for Admiral, whicha few years ago was keen to take on thesmallest start-ups but now, with nearly 70staff, more than 250 funds and USD28bnunder administration, is faced with a differentbusiness model. Says Watson: “Ourinvestment in Advent Geneva puts us in aspace where we’re competing more directlywith the large banks, like UBS, Fortis andGoldman. Thanks to our model of hiringqualified accountants we’ve been able toconsistently demonstrate to the industry thatwe provide a high level of service, andbecause of that we’re now attracting a moreestablished clientele.

He acknowledges that Admiral will have tolook increasingly hard-headedly at smaller



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Following the merger with WSmiths on the 1st February 2007,the group has a presence in nine jurisdictions around the worldemploying over 600 staff, providing advice on all aspects ofBVI, Cayman, Guernsey and Jersey law and associatedfiduciary services.

We have long established relationships with many of the world’s leading international financial institutions, professionaladvisers and regulatory bodies, are consistently highly rated in independent research studies and regularly lead offshoreleague tables.

We offer clients the strength in depth to handle the largest, most demanding and complex offshore transactions and wepride ourselves on being able to provide expert, efficient andcost effective legal and fiduciary services across all time zones.

For further details on Ogier’s excellence offshore, please visit:www.ogier.com

British Virgin Islands • Cayman Islands • Guernsey • Hong KongIreland • Jersey • London • Montevideo • New Zealand

Hedge funds are a key practice area forOgier and other leading Cayman law firms,one in which the islands’ legal practitionershave built up considerable expertise. Thevolume of work has been driven by surgingmarket demand, in part down to the need fora global rethink about retirement provisionand lower returns from other asset classes,including fixed-income securities andequities. In this environment, hedge fundsoffer much greater flexibility to find returnsanywhere they can while protecting thedownside, an additional tool that traditionalfunds lack.

Cayman has become the world’s mostimportant hedge fund domicile because of theease with which funds can be set up and itslight regulatory touch. A great deal of theregulatory function is achieved indirectly, byrequiring the appointment of third-party serviceproviders such as administrators and auditorsto provide independent checks and balancesto the operation of a fund. This allows theregulator, the Cayman Islands MonetaryAuthority, to regulate hedge funds effectivelywithout requiring a massive infrastructure orinterfering in funds’ operations.

CIMA has recognised that light touchregulation is appropriate only for a market ofsophisticated investors, and Cayman’sregulatory system has been tailoredaccordingly, with higher levels of supervisionin force for vehicles with lower investmentthresholds than the new minimum ofUSD100,000 set out in the recentamendments to the Mutual Fund Law.

These factors have attracted a growingvolume of hedge funds and other alternativeinvestment vehicles to Cayman, and thereare no signs of that inflow slowing. While thelegislative environment can always potentiallybe improved, the authorities have a goodrecord of adapting Cayman’s law to the

needs of the financial services industry.To handle these increasing volumes of

business, service providers, from lawyers toaccountants and administrators, must callupon increased numbers of top-levelprofessionals in order to offer the level ofservice required by international clients. Ithelps that Cayman is an attractive livingenvironment and offers a developedinfrastructure that appeals to industryprofessionals from all over the world.

That appeal is more than just sun andbeach. Far from being a legal backwater,Cayman offers high-quality, cutting-edgeinternational work that spans the globe andcan represent career development even forlawyers with top firms in centres such asNew York, London, Toronto or Sydney. Inaddition, foreign lawyers can becomepartners of Cayman firms, whereas in certainother offshore centres the rules onownership of law firms are much morerestrictive, making it more difficult for them toattract the top legal talent.

Alongside the range of Cayman law firmsthat offer a very high level of knowledge andservice to hedge funds are around 90licensed administration firms, which are alsorepositories of industry expertise, and a poolof experienced auditors.

In addition, Cayman-domiciled funds canfind local directors for hedge funds from apool of expert individuals, not only to satisfytax requirements – to ensure that a funddoes not become tax-resident in anothercountry or to permit the deferral of tax byinvestment managers – but as an importantsafeguard to investors. This service, offeredby Ogier through a local subsidiary, is justone aspect of the professionalism that, incombination with the light regulatory regime,has made Cayman the hedge fundjurisdiction of choice. ■

O G I E R


Light regulatory touchsets a global standard

By Giorgio Subiotto

Giorgio Subiotto is a partnerwith Ogier in the CaymanIslands

would-be clients. “Everyone is struggling withresource management,” he says. “In thisbusiness it takes almost the same resourcesto administer a USD10m fund as a USD100mfund, but of course the fees are one-tenth asmuch.

“When we were smaller we started withthe start-ups and grew with them, but thenumbers have grown to such a large extentthat the model no longer works because ofthe cost of the infrastructure you have tobuild to support the business – on systems,on new management layers. One client westarted with had USD20m in their offshorearm, and they’re now a USD4bn group. Tobe involved with that kind of growth is great,but they are a one in a million client, and wecan’t continue to gamble on that.”

With around USD4.75bn in assets,Cayman National’s administration business isstill small and nimble enough to offer anaffordable service to start-up funds. Sayshead of fund services Christopher Lumsden:“Because we are where we are in themarket, we’re a relatively affordable serviceprovider for start-ups.

“Many of the big administrators have suchhigh minimum fees relative to asset basefees that for a start-up it would have amaterial effect on their performance – crucialfor new entrants to the industry trying tobuild a track record to help them gatherassets. For a traditional hedge fund thatdeals monthly rather than daily, the minimumfee charged by some of the bigger shopsaround the island will be three or four timesour minimum fee.”

At the other end of the scale are fundmanagers with institutional-style corporatestructures that have the resources to put inplace arms-length back office facilities,according to Greg Bennett, a director ofButterfield Fund Services (Cayman) withresponsibility for business development andclient relations. This type of client, whosenumbers are on the increase, is looking toadministrators to carry out agreed-uponprocedures to verify the accuracy of theirinternal functions on behalf of the investors.

Says Bennett: “If an investment managerhas a fully-functional back office that’ssegregated from their trading group, there’snot a lot of value that is provided byduplicating their financial records. But there

is value in having someone independent ofthe investment manager looking at theirmonthly numbers, verifying the existence ofthe securities and revaluing the portfolioindependently.”

The same demand from investors forgreater independent scrutiny of fundoperations is also helping to push managersof master-feeder structures, whose offshorevehicles will be serviced by a third-partyadministrator but whose US onshore vehiclesmay still be administered in-house, to reviewtheir processes.

“As the US regulatory environmentchanges, and people become more aware offailures like Bayou, self-administration isincreasingly seen as a red flag by onshoreinvestors,” Bennett adds. “The managers arecoming around to the concept and askingwhether they should be delegating theironshore administration and the NAVcalculation to a third party. Although doing theonshore accounting work and keeping thebooks and records may be of benefit, the realvalue that we bring is in our independence, tothe benefit of investors in the fund.” ■



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Documents

Mar 2007 Cayman Hedge Fund Services 2007 - ETF Express · hedge fund. Many smaller and start-up funds are comfortable working with a niche administrator on their own level. At the