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View from the Cayman Trenches

Paul Scrivener, Partner and Jonathan Fitzgibbons, Partner
Solomon Harris
August 2011
 

All involved with Cayman’s hedge fund industry have ‘lived in interesting times’ over the past few years. What developments have there been and how do things stand now? Paul Scrivener and Jonathan Fitzgibbons give their insight ‘from the trenches’.

At the outset, it is important to put Cayman hedge funds in their global context. At the height of the 2008/2009 financial crisis, hedge funds were frequently mischaracterised by politicians in many of the G20 countries as the cause of the crisis, rather than the victim of it, so as to deflect attention away from clear inadequacies in regulatory oversight in their own countries. At the time, many wondered whether hedge funds would survive the negative publicity. However, as we, hopefully, begin to emerge from the worst recession in 80 years, hedge funds are demonstrating that they still have a major role to play in the global financial services industry. In February, it was reported that the Dow Jones Credit Suisse Hedge Fund Index showed hedge funds up 10.95 percent for 2010 after posting positive performance for 7 out of 12 months. In the final quarter of 2010, estimated inflows reached $8.5 billion, bringing overall inflows for the year to $22.6 billion, the largest annual inflow since 2007. For many years the Cayman Islands has been the overwhelming domicile of choice for hedge funds. Has anything changed?

Statistics from the Cayman Islands Monetary Authority (CIMA) at December 31, 2010 show 9,438 regulated funds. Taking into account the very slow growth in new fund formations during the time of the crisis, coupled with a very significant number of terminations, this figure is a very healthy one. It is important to remember that Cayman’s large number of closed-ended funds do not even feature in these numbers. The all-time high-water mark of Cayman regulated funds was 10,200 in 2008. In October 2010, CIMA reported that the yearly month-on-month average for new fund registrations was at 105 per month, demonstrating the continuing confidence among managers in the Cayman product and the general resilience of Cayman’s hedge fund industry. This growth reflects the new vitality in fund formation that we saw in the latter part of 2010 and this has continued in 2011.

Nevertheless, behind the statistics, no one connected with the industry in Cayman would suggest that it is simply business as usual again and that we are back to the heady days prior to the crisis. Funds now tend to have a much longer gestation period and, in many cases, the seed capital is much lower than used to be the case. The industry continues to evolve. The changes arise in a number of different ways.

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