Cayman Islands Remains Key Hedge Fund Jurisdiction

by Amanda Banks, Tax-News.com, London

15 September 2006

The Cayman Islands Monetary Authority has announced that the number of hedge funds registered in the jurisdiction has passed the 8,000 mark.

The figure represents an increase of more than 2,000 hedge funds registered in the Cayman Islands since the start of 2005. More than 1,000 new hedge funds were authorized in the first half of 2006 alone - a record for any six-month reporting period in the jurisdiction.

Hedge funds are attracted to the Cayman Islands by its low taxes, a sophisticated financial infrastructure that includes major banks and accounting firms, and the ability to achieve measurable savings which, in turn, are passed along to investors. About 80% of the world's hedge funds are thought to be registered in the Caymans.

According to Walkers, the international offshore law firm, the global surge in hedge funds is the result of a range of factors, including non-traditional applications of hedge funds and increased interest in emerging markets.

"Despite an increased focus on regulations by governing bodies such as the Securities and Exchange Commission (SEC) in the US and the Financial Services Authority (FSA) in the UK, the hedge fund market continues to thrive," Mark Lewis, a Senior Investment Funds Partner for Walkers, observed.

"Hedge fund managers are finding new ways to apply their skills and strategies. The lines are beginning to blur between hedge funds and private equity funds, with more similar structures and applications being used by both types of managers. In addition, the recent US Pension Protection Act 2006 will reduce the number of investment funds that need to operate in compliance with ERISA regulations and will open up additional investment opportunities for employee benefit plans that were previously precluded from investing in hedge funds," he added.

According to Hedge Fund Research, Inc. (HFR), the hedge fund industry attracted US$42.1 billion in new money in the second quarter of 2006 alone, bringing total industry assets under management to US$1.225 trillion. This influx is the biggest quarterly jump in new funds since HFR started tracking in 2003.

In addition to the increase in global strategies being employed, Walkers says that the demographic of the investors who are attracted to the hedge funds is also becoming more global, with investment managers and financial institutions less dependent on investors from the United States and EU countries.

"We continue to see strong hedge fund interest globally from investors in Asia and the Middle East, as well as US and UK institutions," Jonathan Tonge, Investment Funds Group Managing Partner for Walkers, noted.

"The number of hedge funds being terminated has also risen, but with a steady increase in new hedge fund registrations, the termination to new fund registration ratio remains at 1:3. These changes in fund status reflect the maturity of the market where investors are not prepared to tolerate extended periods of poor performance, and variables that impact hedge fund investment such as the recent changes to the US Pension Protection Act and increased costs of regulation and compliance. However, the rate of growth still far outpaces terminations," he concluded.

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