When two hedge funds managed by Bear Stearns, the fifth-biggest US investment bank, went bust in July, it proved that hedge funds could fail and led to yet more navel-gazing in financial circles.
When two hedge funds managed by Bear Stearns, the fifth-biggest US investment bank, went bust in July, it proved that hedge funds could fail and led to yet more navel-gazing in financial circles.
At first, the news seemed worst for executives at Bear Stearns, some of whom quickly lost their jobs. But as time went on, the fallout from the collapse spread to Cayman, where the funds were registered. Indeed, the Cayman element began to overshadow everything else about the story in the international media.
A request by Bear Stearns to liquidate the funds' remaining assets in Cayman and also to seek protection from investor lawsuits here drew scorn in the US media, with some commentators decrying Cayman's supposedly fund manager-friendly courts.
But such negative publicity was undeserved.
It is hardly unusual to liquidate the funds here, since it is the global convention for insolvency proceedings to be conducted in a failed company's place of domicile. Moreover, Cayman's insolvency regime is just as "friendly" to investors as managers.
All the same, when a US judge denied Bear Stearns' request for bankruptcy protection on 30 August, pending an appeal, the ruling was welcomed by some offshore critics.
Notwithstanding the occasional failures, hedge funds remain the investment "vehicle" of choice for many pension plans and wealthy individuals. Over US$1.5 trillion is invested in the more than 10,000 funds worldwide, most of which are registered in Grand Cayman, taking advantage of local tax breaks and other advantages.
Of the roughly 9,000 Cayman funds, about one-third are administered locally; indeed, Cayman is not only the biggest market for registering hedge funds, but is also the second-biggest for administering them (behind Dublin).
But this trend has been on the decline. More and more investment managers, based in "onshore" countries like the US and the UK, want the funds to be administered in onshore centres too, for a variety of reasons ranging from a desire to place administrators closer to investors to the relatively high cost of doing business in offshore centres.
The irony of the Bear Stearns case is that there is a real possibility that this trend towards more onshore fund administration might now be reversed.
The judge refused to allow bankruptcy protection for the Bear Stearns funds since the only connection they had to Cayman was that their names were on our Registry of Companies - this meant the funds failed a legal test allowing the bankruptcy proceedings to be conducted here. One intriguing thought is whether the judge may have reached a different conclusion if the funds had been administered here.
The fallout from the Bear Stearns case is still being felt and analysed. The underlying cause of the failures - the managers' exposure to defaulted 'subprime' mortgages - will lead to soul-searching among many investment managers worldwide, but had nothing to do with Cayman or its regulations. And since it is only one case, its wider implications should not be exaggerated.
But rather than posing a particular problem to Cayman's hedge funds industry, it might, just might, prove to have been a boon for our fund administrators