The Cayman Islands government faces many challenges in maintaining its position as the main hedge fund domicile. Premier and Finance Minister McKeeva Bush believes there is political will to do this.

“The Cayman Islands is heading into a year of recovery, diversification and success across all sectors,” confidently stated Premier and finance minister McKeeva Bush (pictured left) in a conference speech in January. His optimistic mood reflects the general belief that the Cayman Islands has turned an important corner in its ability to control its own destiny.

“Over the next six months,” continued Bush, “my government will continue to introduce and implement measures that are designed to stimulate our economy. Through our proposed immigration reforms, new development initiatives and continued positive attitude, we will maintain and even enhance the Cayman’s Islands’ status as a world-class destination and investment hub.”

These plans include economic stimulus as well as proposed immigration reforms and development initiatives.

“While we have continued to demonstrate our strength, resilience and stability through a difficult economic climate, there are still tremendous opportunities ahead of us which we intend to make a reality. The Cayman Islands has boundless potential as an economic centre and we welcome the prospect of opening our infrastructure doors to enable further growth,’ he added.

Bush, the longest-serving member of the Legislative Assembly and referred to as the ‘Father of the House’, has ambitious plans for the future of the island state. A big chunk of its future will continue to be linked to the financial services sector.

“The Cayman Islands financial services sector is vital to our country’s economy and our experiences in building a globally recognised financial services sector over the past 50 years has afforded Cayman many economic benefits,” he told Hedge Funds Review. “We consider the financial services industry a tremendous asset to leverage, particularly as we look at the future of the Cayman Islands.”

A vital part of that figure lies with the hedge fund sector, a “significant driver of growth and specialisation”, according to Bush.

“The funds sector has helped solidify Cayman’s position in the global institutional investment community over the past 15 years. While the government does not break down revenue it receives from the financial services industry by sector, we do know that direct revenue from the financial services industry to government revenues is just below 40%.” That is a lot by any standard and although the government is keen to see further expansion it is also trying to wean itself off over-dependence for revenues on the sector. This could help spread the burden of revenue-taking as well as ease the pressure on the financial services sectors to produce increasing income for the government.

While some of the diversification projects, such as medical tourism and an ambitious programme to develop economic free trade zones as well as other ideas come to fruition, the government maintains its belief that the hedge fund industry over the longer term will continue to be important to the islands’ future.

“We have a strong legal and regulatory framework for hedge funds that the global markets have recognised,” says Bush. He underlines the fact the Cayman Islands have the largest proportion of hedge fund domiciles in the world. “We see significant opportunity for the Cayman Islands to fully assert our position in the global institutional investment sector by building on success in the hedge fund industry to include reinsurance, investment management and sovereign wealth funds, among other related products and services.”

His government, however, is unlikely to have an easy path to continue this development. Despite a closer working relationship with the private sector, the government faces continued attacks from onshore governments and organisations that continue to call the islands a tax haven. Like other offshore hedge fund jurisdictions it needs to find a way to come to terms with increased oversight and regulation of the industry without losing its reputation and business as a favoured location for hedge fund business.

When asked what Cayman’s reaction to US and European Union regulation of the hedge fund industry will be, Bush has a succinct answer. “Some of these policy proposals are still taking shape or have a long lead-time for implementation and many more policy proposals are still taking place as the G20 process and other similar global discussions continue,” he says.

“But that does not mean we as a jurisdiction can be complacent in keeping pace with anticipated changes in the regulatory arena. The Cayman Islands Monetary Authority [Cima] has been clear in stating that it believes more regulation is on the horizon. Whatever the case we need to be moving in lock-step with our competitors and the global markets,” notes Bush.

“We anticipate that the changing geopolitical situation, for example increased influence of emerging markets or traditional ones, will also likely have an impact on the financial services industry globally,” he adds.

Although some of the regulatory initiatives are still unclear, particularly the EU’s alternative investment fund managers (AIFM) directive, Bush is confident Cayman will be able to cope with the change while maintaining its premier position.

“While there are commercial realities that need to be considered in terms of keeping pace with expectations in the international markets, any legislative changes that we make as jurisdiction will be driven by our commitment to upholding international standards and ensuring the integrity of our legal and regulatory frameworks remain in tact,” he explains.

“Our approach is, therefore, focused on being part of the debate and discussion at the global level in the areas of law enforcement through our current chairmanship of the Caribbean Financial Action Task Force [CFATF], tax transparency through our work on the OECD global forum and membership on the peer review team and steering committee and regulation through Cima’s active participation in global organisations such as the International Organization of Securities Commissions [Iosco], as well as working groups within the Basel Committee and the International Association of Insurance Supervisors,” he declares.

He believes co-operation with international organisations as well as important individual countries is essential if Cayman is to maintain its position within the hedge fund industry. He points to Cayman’s co-operation in several areas including law enforcement, tax information exchange and regulation, all of which extend to the funds industry.

But being a small country means there are limited resources as well as problems having its voice heard in international forums. This does not stop Bush from pushing for recognition and acceptance of Cayman’s policies.

“Being a small country with a large financial services sector requires us to be efficient and targeted in terms of how we manage our reputation. This means that we must focus our time and resources on direct engagement with audiences and stakeholders who have influence and seek objective information,” he explains.

He believes the government is “significantly engaged” with international counterparts in all the right areas. In addition he says the government maintains a “robust international relations programme” based in part on keeping in close contact with countries he sees as major stakeholders: the US, UK and EU as well as emerging markets in Latin America, the Middle East and Asia. All of these countries or regions are or are expected to become major hedge fund centres.

Despite this engagement and a more proactive approach to promoting Cayman, criticism of the offshore financial centre continues. He admits the Cayman Islands is a target for “political messaging” but believes “reality is much different”.

Looking at the area of corporate governance, for example, he says Cayman is an ardent supporter of the mutual evaluation programmes from the international standard-setting bodies such as the Financial Action Task Force (FATF), Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF).

“We have undergone several third-party reviews of our regimes and they all validate the quality, stability and integrity of our legal and regulatory frameworks,” he points out. “In addition to the significant presence of international firms such as the big four audit firms, 40 of the world’s 50 largest banks and many well-known financial services firms with a presence in Cayman, the attractiveness of the Cayman Islands as a strategic business location has been validated through some recently announced projects,” he adds.

One such project is an initiative to establish a Cayman enterprise city that will be a free trade zone for international companies looking to take advantage of investment opportunities and focused on technology, research and academia, commerce and trade. “With an investment valued at over $500 million over the next eight years and the potential for over 5,000 highly skilled jobs, the benefits of this development extend beyond economic impact and into the development of our human capital,” he adds.

Bush believes there is “a significant opportunity” for synergies between Cayman enterprise city and the existing financial services sector particularly in areas such as talent and knowledge development for the jurisdiction. He believes the project will bring more opportunities for local and international workers to pursue careers in the islands.

“Technology as a key area of development for Cayman enterprise city also presents an opportunity for the financial services industry in terms of enhancing product and service delivery to international clients as well as Cayman’s capabilities in the business continuity area,” says Bush.

All these plans, however, are based on a sustainable government budget. Recent cashflow problems seem to be under control although there are some lingering concerns.

“The Cayman Islands government reinvests more than 20% of revenues collected from the financial services sector back into supporting regulation, international co-operation and other required and expected infrastructure for running a global financial services sector,” says Bush.

“Being a small country with a large, globally-recognised financial services sector requires significant resources and just as the private sector faces a compliance cost, so do we in government in terms of maintaining and anticipating changes to international standards,” he continues.

As a result the government has “undertaken significant measures” to manage finances and “ensure the country remains on stable footing”.

Bush and the local hedge fund community hope these measures coupled with other initiatives will be sufficient to put the islands on a sustained, solid economic footing and to help the government diversify its revenue sources bringing down the pressure on ­financial ­services.

Indications so far are positive with a small budget surplus forecast for this financial year, one year ahead of plan. Although the government still has some significant challenges in its relations with onshore countries, and in particular the EU, Bush is confident Cayman will continue to be a significant international financial centre and a major player in the hedge fund industry for many years to come.