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Cayman sets new mark with more than 10,000 registered funds

The Cayman Islands have passed the milestone of 10,000 investment funds registered in the jurisdiction, with 10,037 funds recorded by the financial industry regulator, the Cayman Islands M

The Cayman Islands have passed the milestone of 10,000 investment funds registered in the jurisdiction, with 10,037 funds recorded by the financial industry regulator, the Cayman Islands Monetary Authority, at the end of June.

The latest figure, up from 9,681 at the end of March and 8,972 in mid-2007, represents a net annual growth rate of 12 per cent for Cayman-registered vehicles, virtually all of which are hedge funds.

The total does not include many Cayman-domiciled private equity funds, which tend not to adopt a regulated structure. This landmark for the jurisdiction comes at a time when new launches have been reportedly slowing as a result of the deterioration in global markets following the sub-prime meltdown and the onset of the credit crunch.

‘This is yet another round of impressive statistics from CIMA,’ says Mark Lewis, a senior investment funds partner at Cayman-headquartered international law firm Walkers. ‘The 10,000 barrier has been breached as hedge funds continue to be formed in the Cayman Islands, which remains the clear jurisdiction of choice for investment managers and their advisers around the world.

‘Business remains active and the volatility which has impacted world markets as a result of the credit crisis, and the relatively weak valuations of many securities, has provided hedge fund managers with great opportunities to create alpha after a number of years of relatively flat returns. Hedge funds have also provided the market with much-needed liquidity, which has been especially beneficial amid the current tight lending conditions.’

The continued growth in net hedge fund registrations is also partly explained by the absence of a significant spike in fund terminations. While there has certainly been a slight increase in shutdowns over the past 12 months, Walkers notes, funds are not closing at an unprecedented rate.

‘There have been some forced closures, but in the cases where funds are struggling, the managers we work with are being proactive by placing hard-to-value securities in side-pockets, suspending redemptions and imposing gates,’ says investment funds partner Nick Rogers. ‘Such measures may enable a fund in distress to ride out the storm or to wind down its affairs in an orderly manner.’

‘In the Cayman Islands the key drivers behind the actions being taken are the need to treat all investors equitably and to act in the best interests of the fund, and this provides a firm foundation for protecting market participants and preserving value.’

Among the new funds that have been established in the Cayman Islands, strategies such as distressed debt and special opportunities presented by the widespread markdown in asset prices continue to feature strongly.

‘There has also been significant ongoing activity in emerging markets and commodities,’ Rogers says. ‘The convergence of these two hot asset classes has been particularly interesting.’

Walkers says the factors behind Cayman’s attractiveness as a domicile for hedge funds include a stable economic and political climate, a close relationship between the public and private sectors and the presence of the leading professional services firms. The firm also argues that the jurisdiction’s regulatory standards in the areas of transparency and know-your-client due diligence surpass those in many leading onshore international financial centres.

The introduction of an electronic reporting system for funds by Cima two years ago has broadened the range of publicly available information about the fund industry in Cayman. The authority’s first Investments Statistical Digest released last month provides aggregate data on 5,052 funds including their financial position, structure, investment strategies, subscription activity, fund administration and investment management services.

At the end of 2006 the funds surveyed had aggregate net assets under management of USD1.39trn and gross assets of USD2.32trn. The largest share of net assets was managed from New York (USD388bn, or 28 percent), followed by London-based managers with USD250bn or 18 percent) in net assets managed from that jurisdiction.

Cayman was the primary location for the provision of administration services to the funds. Local administrators provided registrar and transfer agency services to USD606bn in assets and net asset value calculation to USD434bn, although those totals may have been inflated by administration work booked in Cayman but in practice outsourced to other jurisdictions.

Ireland, reckoned to be the largest jurisdiction for hedge fund administration outside the US, directly provided registrar and transfer agency services to Cayman funds with net assets of USD364bn and net asset value calculation to funds with assets of USD346bn.

Cima also recorded that almost two-thirds of the reporting funds required an initial subscription of USD500,000 or higher. Fifty percent of the funds had a master/feeder structure and the two most popular investment strategies, perhaps predictably, were multistrategy and long/short equity.

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