As fund administrators slim down operations, questions are being raised over the long-term viability of the service in Cayman.

Fund administrators in Cayman are facing a variety of challenges. Many have shed staff as a consequence of the overall loss of assets under administration (AUA). Others have moved significant parts of their Cayman operations to lower cost, onshore locations where staff is plentiful and unlikely to need work permits.

The overall effect should be one of a service industry in decline. However, not all is lost. Two new fund administrators have recently opened operations in Cayman. Trinity Fund Administration with much fanfare opened its office run by Brad Cowdroy, now responsible for marketing the company in North America.

Although Trinity Fund Administration is a niche administrator and its Cayman presence will consist at the start of only one employee, premier McKeeva Bush used the occasion to stress his government’s commitment to boosting the financial services sector and in particular the hedge funds industry.

According to John McCann, managing director at Trinity based in Dublin, there were several reasons for the move to Cayman. He says the company was looking at expanding to the jurisdiction for some time.

“It was a natural evolution. Our prime motivation was in relation to the North American market. We saw a sea change there post-Madoff,” says McCann. He believes having a presence in Cayman will help Trinity to attract more business from the US, particularly onshore funds looking for independent third party administration services.

“We are starting small. It won’t always be a one-man office but we need to establish ourselves first, begin marketing. We want to build up our presence as we expand our client base,” explains McCann.

The other new entrant, HedgeServ, starts with a relatively substantial operation, culled from staff that left Butterfield Fulcrum following its merger.

The Cayman operation, which complements Dublin and New York, is headed by Greg Bennett, formerly managing director responsible for business development and client relations at Butterfield Fulcrum. He officially takes over the post in July.

The Cayman location adds to HedgeServ’s existing presence in New York and Dublin. The office will provide full fund administration and middle office services to both hedge funds and funds of hedge funds (FoHFs) with AUA of $36 billion.

According to one of the founders, Jim Kelly, HedgeServ is hoping to be able to build a substantial business in Cayman.

He believes Cayman is particularly well suited to help the company grow business in South America as well as North America.

Kelly confirms the decision to open in Cayman was driven by the talent available. With Cayman, Kelly says the company can give 24/7 coverage out of its New York office combined with Ireland.

Balanced against these new entrants are a host of more established fund administrators almost all of which have seen assets under administration plummet and have shed staff through a mixture of redundancies, natural attrition, outsourcing or moving operations to other locations.

The net effect has been a drop in the numbers of staff working in fund administration.

This substantial decrease in employment numbers over a relatively short space of time has done more than anything to push the government into paying attention to its investment and immigration policies.

Despite some changes to the policies governing work permits, many are still unhappy with the high cost of operating in Cayman.

Spectrum Global Fund Administration’s Wayne Ross says he is pessimistic. He says the government’s changes to immigration policy were “a little too late”. “Fund administrators have decided to leave. They are not coming back. That will affect the next generation of fund administrators,” he says.

Over the last two years, Ross says he has seen the same trends: Cayman is getting more expensive and places fund administrators at a cost disadvantage.

“We can add value and experience but we lose out when it comes to cost comparisons of domiciles. The government keeps raising fees. On the one hand it is easy to get permits, but the costs have risen by 100% in some areas. Last year, my licence fee was doubled,” he complains, noting that other costs related to property leases and rental fees have also risen. His advice to the government in order to reverse the drain of administrators is to “not keep putting all the tax increases on the ex-pat shoulders and to broaden the tax revenue base.”

A different view is given by Admiral’s managing director Canover Watson. Although his company also saw a significant decline in AUA, he saw an opportunity to “take a step back and look at our business model, processes and systems and to invest heavily in technology.”

Admiral has been working with Paladyne to install technology that will make the company’s systems more efficient around processing and as automated and streamlined processes.

“We have been able to improve the quality of the reports we can do, too,” notes Watson. Admiral has also broadened its middle office infrastructure and is now able to offer more valued-added services to clients including daily P&L.

“Over the last 12 months institutional investors have been looking for third party service providers that are more hands on in terms of the services they provide and the system capability to be able to provide daily processes so that they do not rely totally on the investment manager,” he notes.

Because of its investment in technology, Watson says Admiral is closer to real time straight through processing. The company has also invested in its own proprietary system, known as Avatar. Web reporting, transfer agency and other functions have been integrated with Advent Geneva.

“You can’t remain highly competitive as a fund administrator without technology. Every institutional investor wants to know and see far more when they carry out due diligence. They want to know what systems and controls we use, that we have SAS 70,” he adds.

Watson says Admiral is committed to developing its staff in Cayman. Over the first part of the year, Admiral has been hiring more staff. “As the industry turns and starts to grow, we will be well positioned to be one of the administrators of choice,” he declares.

Watson is optimistic about the prospects of 2010 and beyond. “February was the first month where we saw healthy flows of new subscriptions of $200 million,” he says, adding, “In the last 18 months it was all negative outflows. So it is likely this positive flow is a good indicator. I am confident of a positive return, although it will take the industry some time to recover and it may never get back to its glory days.”

Padraig Hoare, global head of risk management at Admiral, believes Cayman is addressing some of the problems that have impacted fund administrators.

“To compete with other jurisdictions, it needs to address labour and costs. Ireland or Halifax both have a larger population and lower costs. If the price is higher in Cayman, you are going to see less activity. Some administrators are reconsidering and relocating some or most of their operations outside Cayman,” Hoare notes.

Nevertheless, he believes the premier is committed to revamping some of the rules and making the jurisdiction more business friendly, giving more security of term to those employees on the island and widening the tax base.

“The one fear is that Cayman will become similar to the British Virgin Islands and become a name plate jurisdiction, not a meat and potatoes kind of place. Cayman has done a good job over the last 20 years.

“It has stumbled a bit over the past years and not done enough to attract and retain business which has gone to other jurisdictions. The long-term demand prospects are good but we need more work, more complex work, done here,” concludes Hoare.

Watson adds: “Cayman is facing some tough decisions. The government needs to embrace policies that attract more business and people. They need to do the right things in order to move forward. There is a window of opportunity to get the right mix. It needs to stop being complacent and get back to the basics that made us successful.”

A different perspective comes from Christopher Mulhern, chief operating officer at Butterfield Fulcrum. His problems, however, are a bit closer to home.

The merger of Butterfield and Fulcrum was not universally successful. Some senior individuals in the Cayman office had trouble “buying into the model” say Mulhern. This was not a problem the company had in other jurisdictions. The result was several senior resignations and the departure of the sales department.

Mulhern stresses that Butterfield Fulcrum is committed to staying in Cayman. The company has moved some work to Halifax, Waterloo, Dublin and Bangalore. Staff levels in Cayman have dropped by 40%-50%.

Nevertheless, he says to be effective a fund administrator needs to be based in the jurisdiction. The real challenge the company faces is melding together the two companies and operating a single technology platform.

Like others, Butterfield Fulcrum saw AUA drop. Mulhern is not sure when the company will get back to pre-merger AUA but believes it is on track for significant improvement this year.

Mulhern confirms the company has seen new launches increasing, although the size of the funds is much smaller at start up than previously seen.

The company is also branching out, trying to attract more funds of hedge fund clients as well as managed accounts business.

Managed accounts have been given another boost with the launch by Butterfield Fulcrum of the first managed account platform offered by a fund administrator in February.

The platform, known as Altinus, will provide segregated and co-mingled managed accounts with a common set of tools for operations, administration and risk monitoring.

The platform offers complete portfolio level transparency and is capable of providing daily reconciliations, profit and loss and risk reporting. Investors will also be able to monitor daily performance against investor guidelines.

Mulhern expects to attract new clients from the Far East and particularly from Hong Kong and Singapore. He believes the structures Cayman offers will be attractive to emerging mangers from Asia.

Another fund administrator that has declared its intention of staying in Cayman is UBS Fund Services. According to Darren Stainrod, managing director, the company will see a slow recovery.

Over the last 12-18 months Stainrod admits there has been a move by some competitors to large rparts of their administration processes onshore. He points to the immigration laws, costs and the ability to attract the right people to Cayman as some of the reasons for the departures.

However, most of the business for UBS comes from the funds of hedge funds sector and he believes Cayman remains an attractive location from which to administer these funds. Despite the fact there were higher levels of FoHF liquidations than in the single manager side of the business, he is confident in a post-Madoff era that the company will pick up new business.

He sees the trend to outsource administration to third parties as a positive development. This was common for offshore business but he is now seeing more opportunities onshore in the US to pick up new work.

He believes FoHFs as well as single manager funds will be attracted to UBS. He thinks funds as well as their investors are looking for strong counterparties. UBS’s strong balance sheet and ability to act as a custodian are further plus points for the administrator.

Stainrod thinks the industry is now seeing a level of complexity and technology that is unprecedented. The adoption of new technologies particularly for FoHFs is central to the industry. He believes the demand for transparency and risk management from investors will continue to drive this area for some time.

Another long-term fund administrator operating in Cayman is State Street. Its business there began in 1992. Gary Enos, executive vice president,  says post 2008 administrators are re-assessing all jurisdictions.

Traditionally, State Street employs a lot of locals in its Cayman operation. Only 10% of its workforce is expatriate. It performs oversight and trust company functions in Cayman including accounting and valuation, administration and custody.

Staffing levels have not changed much over 2008-09 and the company says it enjoys “stable” employment.

Like Butterfield Fulcrum, State Street believes managed accounts are becoming more prevalent. While these structures have been around for a long time, the same problems with them remain namely cost and efficiency.

State Street says it has confidence in Cayman. It believes the fact that the jurisdiction avoided any types of scandals and concerns will be a great comfort to investors but, like many others, believes the island needs to “raise its voice” to counter negative information.

Warren Keens, managing director of Close Fund Services, says 2009 was “an interesting year” and says 2010 has started slowly although he is beginning to see a trickle of fund launches. The company has been able to pick up a few clients, some of which came from larger fund administrators when they fell below the minimum level for servicing.

Keens says Close has a flexible approach and believes it has an increasingly competitive offering. He says the company did not fare too badly over the downturn.

The 30% fall in AUA seen by most administrators was a lot less at Close, Keens confirms. He believes the company has benefited from a flight to quality.

He attributes the success of the fund administration business to the approach Close takes with its clients. Keens says it works closely with clients, something that was particularly useful during the crisis, helping clients work through any issues.

For 2010 he is looking to attract more business from the US and like many other administrators has his eye on the outsourcing of administration by onshore managers.