The Cayman Islands, the Caribbean offshore financial center that is now home to many of the world's hedge funds, will not tighten regulations on the booming industry until the rest of the world does, a senior official said.
Once regularly branded a haven for tax cheats by critics as it developed into the world's fifth-largest financial center, officials are aware of the risk to the British territory's reputation if one of the hedge funds collapsed, said Timothy Ridley, chairman of the Cayman Islands Monetary Authority.
However, Mr. Ridley said it did not have the resources to draw up global rules for hedge funds. Nor did it want to undermine its attractions as a domicile, or give rival financial centers an advantage by making its regulations more burdensome than elsewhere, he said.
"I think that it would be premature for us to do anything because learning is still going on," Mr. Ridley told Reuters at a conference here hosted by Offshore Alert, adding that the impact of hedge funds on world financial stability was not yet clearly understood.
"I think it would be counterproductive for Cayman to move ahead of the curve. Our goal is to be right there with everybody else. We don't want to be behind and we don't want to be ahead as international standards evolve. Our goal is to be right there as far as we can," he said.
The collapse of Amaranth Advisors LLC, which lost $6.4 billion betting on the natural gas market, has stoked a debate about greater regulation for the $1.5 trillion hedge fund industry. It is often unclear how hedge funds determine their valuations or exposure to risk and some European officials have called for greater transparency.
Although their trading operations are managed elsewhere, around 8,500 of the world's 9,000-plus hedge funds are now domiciled in the Cayman Islands, which ranks among the top financial centers in terms of assets under management by locally registered institutions.
Mr. Ridley said international regulations on hedge funds would have to be spearheaded by the main players: the United States, Britain and Europe. "Most of the risk is in New York, Tokyo and London. Those hedge funds are not dealing in Cayman," Mr. Ridley said.
Mr. Ridley said the Cayman authorities are always concerned that the U.S. Congress could blame offshore financial centers for any perceived problems with hedge funds, but that had to be weighed against the territory's financial interests. "I think reputational risk is obviously very high in the mind of the Cayman government and obviously of the Monetary Authority," he said.
"But you have to balance that and say, 'We recognize that heated criticism will be made.' [But] you just have to be comfortable in your own mind that you've set your level at the appropriate level that meets what you consider to be international standards."
By Michael Christie -
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