Legal firms, service providers and others explain why they think the Cayman Islands will continue to dominate as the preferred hedge fund domicile while meeting the challenges of increased regulation.

Roger Hanson, independent director, DMS Management
According to Hanson, Cayman needs to continue what it has been doing for the past 20 years: appropriate, relevant and flexible regulation based on commercial reality. “I think if we look at why the Cayman Islands has been successful over 20-30 years it is because of relevant regulation. That regulation has been acceptable to Iosco and the OECD and others, including the International Monetary Fund. That same light touch, relevant regulation is the way Cayman should continue. There is no reason to start imposing bureaucratic, unnecessary legislation that would stifle business without solving or adding any value.” His advice is to let “market forces take control of the situation”. For Hanson it is impractical to try to legislate for the due diligence of investors and Cayman should not try to be a policeman for the industry.

Jeremy Walton, partner, Appleby (Cayman)
Walton believes decisions being made in the Cayman courts are impacting and changing hedge fund documentation. “The fundamental messages coming out of the Cayman courts and indeed throughout the offshore world is one of emphasising the clarity of documentation,” he notes. “Contract is king is the fundamental message. The clearer the contract the more likely it is that the rights and obligations can be enforced in the event of a dispute.” That message found probably its best exposition in the Strategic Turnaround decision by the Privy Council in the UK. In this case an investor was unable to enforce his redemption rights against the fund that had suspended its redemptions. “There had been litigation in the Grand Court and the Court of Appeal and ultimately the Privy Council held that the investor was unable to enforce his redemption rights by virtue of the winding-up petition that he had brought. The company, the fund, by virtue of the provisions in its constitutional documents which made up the investment contract between the fund and the investor was entitled to suspend redemptions and to suspend redemption of the proceeds and so that particular investor was not able to go any further with that particular type of claim,” explains Walton. This and other cases have added to Cayman’s reputation as a fair and stable hedge fund jurisdiction. “What I think the decisions in the Cayman court have established is that well-drafted documents put together by sophisticated lawyers and accepted by sophisticated investors will be respected and upheld,” notes Walton. “The legal community here and the investor community that instructs us here have all learnt lessons about the imperfections of the documentation and about the ways of doing business in the past decade or so that we have all be quick to adapt. The documentation is much better now as a whole and the courts are routinely and regularly upholding those documents.”

Anthony Travers, chairman of Cayman Islands Stock Exchange and former chairman of Cayman Finance
 “I think Cayman has its own set of problems at the moment, largely driven by mistakes in immigration policy which drove fund administrators out of Cayman to other more convenient jurisdictions where costs were lower. I think Cayman needs to resolve those issues, turn the tide and develop a significant presence in fund management and fund administration, attracting real people,” says Travers. The notion that Cayman can survive on hedge fund incorporations while management and administration is elsewhere is subject to the law of diminishing return, he believes. “Cayman’s problems are largely internal in terms of properly reversing a tide generated by misplaced xenophobic immigration policies. If that doesn’t happen fast, I doubt the economic demands arising, the need for employment, and a rising population, can be coped with regardless of how many hedge funds domicile there. The establishment of a hedge fund in itself doesn’t mean substantial employment. You need the people that surround the hedge fund. That is a big challenge for Cayman. Serious professionals need to be brought to Cayman to improve substance. You need people there to employ people,” he states.

Tim Clipstone, partner, Harneys
“Cayman,” says Clipstone, “is in a very dominant position.” It occupies an important position for offshore funds and for hedge funds in general, with about 40% of all funds domiciled in the islands. “This clearly brings with it two things. One is a huge range of professionals here in Cayman and outside that understand the structures and provide managers and investors with a great deal of comfort that the funds will be administered correctly, properly set up, looked after, properly regulated. It also shows why Cayman’s simplicity and flexibility of structure is so popular with the industry,” continues Clipstone. “That’s the goal of the regime here: to allow proportionate and sensible corporate governance as required by the investors and disclosure of the strategy and the structures in the offering materials to an appropriate standard for the investors. Cayman provides a great deal of flexibility to investment managers to structure their funds in a way they want to and for investors to require structures to be put in place that think may be appropriate. There is no set of corporate governance requirements that are going to be imposed on them by a regulator. There is the flexibility the investor requires to use virtually any structure that they feel is appropriate.” To remain competitive, Clipstone does not believe Cayman needs to change much. “Cayman has a broad range of products, a very flexible regime. The products match the managers and investors needs very well and I think this has been borne out both before and during the financial crisis. The funds operated the way they were expected to operate and I think that will continue. There may be some regulatory pressure to change things and clearly that’s something Cayman I am sure will be very responsive to if needed.”

Mark Longbottom, associate director, Kinetic Partners (Cayman)
The perception is that Cayman is a good place to do business has not changed, says Longbottom. “The government has its feet firmly under the desk now and is continuing to negotiate tax treaties and taking steps in the right direction,” he notes. Although he as seen some tapering off of liquidations of funds, he expects the process to continue as funds in wind down are eventually struck off the Cayman register. But, he says, these will not be dramatic. He believes Cima remains “very receptive” and will “talk over things when issues arise. It is happy to sit and listen when and where there are issues. So I think in this respect it is a very happy situation with practitioners appreciated for their close relationship with and understanding of funds. Cima is doing a great job in the areas where it has authority. It is nice to see it taking a proactive interest in funds,” he concludes.
Roderick Palmer, partner and head of global investment funds group, Walkers
Palmer sees continued opportunities for Cayman. “There are opportunities for us in taking the development of the product even further and in light of increased regulation and registration requirements of onshore managers. This will be the next challenge: to regulate appropriately the Cayman products,” he notes. The fund structures have not changed as much as some may have predicted at the start of the financial crisis. “The fund structure have not changed and the onshore regulated managers are still using offshore products.” He believes Cayman will be “very receptive” to the opportunities to identify and grow in new markets, particularly in the Middle East and Asia where there are strong connections with the islands. “We need to take advantage of the opportunities in developing markets,” he reiterates. He believes local law firms established outside Cayman need to continue to promote the jurisdiction and be “financial ambassadors” for the jurisdiction.

Roisin Cater, independent director, Carne Global Financial Services (formerly with Ensign)
 “Cayman is often in the lead as a jurisdiction. If new aspects of the industry develop, it will be here,” says Cater. “We’ve had a cottage industry of independent directors for a long time but it has developed over the last few years, mainly investor led.” She thinks the trend towards more transparency and a more independent (majority) board for funds has been driven by institutional investors. “Post crash, I’m hoping investors are even more focused on the board. It is another check and balance on the investment manager, on what he is doing and that things are being followed correctly,” she continues. She predicts there will be further evolution of independent directors as a service provider. “This is the last service provider not regulated as a separate group. At the moment it is very much self-regulated,” she adds. Cater thinks it might be a good idea for a registry of Cima-approved directors to be made public. “This would be an easy win for Cima and quite easy to add a little regulation as the framework is there.”

Neal Lomax, managing partner, Mourant Ozannes
Lomax believes Cayman will continue build on the strength of its past success as a hedge fund jurisdiction. “We need to relay the message that Cayman funds are still favoured,” he says. “If you speak to managers in Hong Kong and other emerging markets no one talks of setting up an alternative investment fund anywhere else. That is an important message. We would not be committing to Camana Bay [building a new office block] if we did not have confidence in the jurisdiction.” Throughout the financial crisis Cayman has proven itself. The industry, government and regulator have been “very proactive in helping to change legislation” as well as in making sure Cayman had the necessary treaties and other seals of approval from various international organisations. “From the Cayman perspective we are positive. We are co-operating together to pull in one direction for Cayman,” he notes. Like others he expects to see more “mind and management” coming to Cayman in future, noting the government’s “massive push to encourage business” as well as different initiatives to help companies settle in Cayman. He says Premier McKeeva Bush is meeting the key people in other jurisdictions both on and offshore and making sure Cayman’s message goes out that the islands are open for business. Lomax also points to the fact that Cayman has achieved critical mass, having in place “very strong relationships in key regions like the US and the professional, quality people on the ground to support the industry”.

Paul Byles, managing director, Focus Consulting & Corporate Services and economic adviser to the Cayman government
Cayman, according to Byles, is trying to recover its balance in budget terms and in general on its approach to business and in particular financial services. He admits there are some signs of economic recovery but warns Cayman’s growth is also tied in part to that of its biggest market, the US. “We’re still fortunately known as the top hedge fund domicile. That has not changed and I would not expect that to change,” he comments. He believes no other jurisdiction has the administrators, lawyers, accountants and other professional infrastructure offered in Cayman. “This is still a competitive advantage,” he states. He expects to see investment managers setting up more substantial operations in Cayman in future. He believes the trend will be not just to have a fund domiciled in Cayman but also to base some of the work there. “We’re selling a brand,” he says. On the government’s attempts to tackle the budget deficit and bring more diversity to Cayman’s economy, Byes says he has seen significant movement in the reduction of the debt. He expects the government to move ahead with plans to privatise some public services, although this will take some time. “We have more time than the hype suggests,” he says. “The government has to move quickly, however, if we are to see significant restructuring of the government over the next three years. Privatisation of some services would bring huge ­benefits.”