Despite the ongoing housing crisis in the US, the credit crunch, and the general slowing of the American economy the number of hedge fund terminations in the most recent financial year has been only slightly higher than last year.
Caroline Williams, a partner at Walkers told Cayman Net News: “It is interesting that the number of hedge fund terminations in the last financial year is only slightly higher than in the previous 12 months.
“In some cases where funds have run into difficulties, the hedge fund manager has employed certain techniques to try and weather the storm and continue trading, such as imposing gates, which limit the amount of redemptions that can be made, or by creating side pockets in which the illiquid or hard-to-value securities are placed.
“Overall, for both investors and hedge fund managers, the winding up and dissolution of a hedge fund is very much a last resort and as such these situations are quite rare. Investors prefer to avoid having the fund wound up and dissolved, because they realise that there is less chance that they will have their benefits maximised.”
According to most industry sources, the Cayman Islands are home to roughly 80 percent of the world’s hedge funds with the local industry surpassing the 10,000-fund benchmark at the end of June.
The next most popular location is British Virgin Islands (BVI), which has fewer than 3,000, then Bermuda, followed by Dublin, the Island of Jersey, and the Bahamas, all of which host between 800 and 1,300 hedge funds.
Ms Williams said: “There are many reasons which explain the popularity of this jurisdiction with fund promoters from all over the world, such as the well-regarded legal and regulatory system, and the flexible and efficient corporate environment.
“It’s interesting that while the industry in the Cayman Islands continues to expand, with net new registrations rising at a rate of some 12 percent per year according to CIMA (Cayman Islands Monetary Authority), there have been reported falls in the number of launches onshore in places such as the UK and the US.”
With the hotly contested US presidential election less than 60 days away, the Congress has recently been wagging its finger at the hedge fund industry in general and at Cayman in particular. In fact, however, investors in a hedge fund must pay tax on their investments in their home country. Hedge funds are only designed for institutional investors or high net worth individuals; the minimum initial investment for most hedge funds is US$100,000.
“The US election is unlikely to have a significant impact on the hedge fund industry, although there is a possibility that there could be some changes in how US tax exempt investors must operate,” Ms Williams said.
“It’s a popular misconception in the US that the country is missing out on tax revenue due to money being invested in Cayman hedge funds.
“In fact, tax-paying US investors are not allowed to invest in Cayman Islands hedge funds. It is only tax-exempt US investors, such as pension funds, universities and foundations, that invest in Cayman Islands hedge funds.”
The increase in hedge funds having problems with liquidity led to the formation of the Distressed Funds Group. The Group offers an integrated approach of combining funds, insolvency, and litigation experts as a helpful offering for its clients establishing either new funds, or those liquidating current funds.
According to Walkers partner Sandie Corbett, the concept has been generally well received. “It seems that our Distressed Funds Group has been embraced by the industry. Our goal is to help our clients navigate through difficult situations,” she said.
“The [Distressed Funds] Group operates behind the scenes, so rather than people calling up specifically to speak to the Group, we have been able to direct existing clients to [it] in cases where the client is dealing with problems which the Group is uniquely suited to dealing with,” she said.
“The advantage for our clients is that we are able to pull a team together quickly to deal with the specific issues that the client is faced with; so this improves the level of service we are able to provide to clients.”
Walkers also maintains Distressed Funds Groups in its Jersey and BVI offices. “Our Groups there are very similar in make up to the Cayman office,” said Ms Corbett, “with all the teams having attorneys drawn from both the corporate and the litigation departments, including an insolvency specialist.”
Ms Corbett added that while the Distressed Funds Group does not deal with new funds, it does work with established funds, which get into difficulties, “perhaps where there is a flood of redemption requests, or if the assets it holds are illiquid. However, the Distressed Funds Group is often consulted to provide advice to new funds.
“This advice will usually relate to such issues as how the fund’s articles can be tailored so as to provide mechanisms for dealing with the problems distressed funds are now facing in a more effective manner, in the event that the fund becomes distressed in the future.”