The Grass Isn’t Always Greener in the Emerald Isle

Fundamental to my work as an Associate Director at dms Management Ltd. is travelling to major financial centres to meet with investment managers of hedge fund clients.  On a recent trip to New York, I was especially looking forward to a visit with a well-known industry leader, a hedge fund manager with funds that had recently made the switch from Cayman to Ireland, and whose meeting had been arranged more than a month in advance.  As I sat in the reception area in preparation for the meeting, the CFO rushed out of his office and indicated that they had to cancel due to an urgent unexpected matter with one of the hedge funds now domiciled in Ireland. An unfortunately familiar headache these days, he lamented. Here was an investment manager who made the move to Ireland, to what was perceived to be greener pastures - only to learn it was not quite what he had bargained for.  I needed to find out why.

I had the opportunity to chat with him the following week, at which time he outlined why re-domiciling Cayman funds to Ireland is not always advantageous, and he was looking forward to returning to Cayman. I found his comments most interesting because the media is keen to report of the relatively few funds moving from Cayman to Ireland, but not yet on the radar is the round-trip ticket back.

The fight for a slice of the hedge fund pie

My client highlighted how the move to Ireland had been part of a greater interest in more proscriptively regulated products, as investors demand greater transparency and oversight in the wake of the financial crisis. Recently, the Irish government has aimed to capitalize on this growing trend, with investors lured by new legislation passed by the Irish government in late 2009, which aims to streamline the process by which funds in other locations, such as the Cayman Islands, can move to Dublin.  The new legislation speeds up the process by which funds can re-domicile, effectively eliminating the need to set up a new company.

While Ireland offers investor-friendly policies and tax credits however, it is a costly place to operate a fund, which costs ultimately hit investors’ pockets hard, the CFO said.

The return to Cayman

The CFO noted that funds domiciled in Ireland actually cost significantly more to operate than Cayman funds, with Ireland’s restrictive financial requirements only further compounding the issue.  Irish regulations require the appointment of an Irish domiciled custodian and administrator and that certain minimum administration activities be carried out in Ireland. Certain service providers, such as auditors, must also be Ireland-based. There must be locally appointed directors which can cost significantly more than directors based in other offshore centres. Furthermore, Ireland domiciled funds must be registered with the Financial Regulator.

Frustrated with Ireland’s more costly and limiting regime, my client yearned for the old days, simpler yet still efficiently controlled. He expressed the appeal of Cayman’s ability to offer investors a more flexible regime than many other jurisdictions, yet one that is still well regulated. Being based in New York, the investment manager lost time zone and cultural compatibility, and he expressed that the amount of time spent in maintaining the fund was starting to take its toll.

The Cayman Islands have long been recognized as an established ‘traditional’ offshore jurisdiction due to its flexibility, appropriate regulation and reasonable cost. Its legal system is grounded in UK law and the Cayman Islands offers a slew of readily-available professional and high-quality service providers, as well as a first-class infrastructure. Its positive investor perception and availability of listing on the Cayman Islands Stock Exchange, coupled with its convenient geographic location and time zone are further reasons he preferred Cayman. We were working on the same clock; working in unison.

Discussions regarding the proposed EU Alternative Investment Fund Managers Directive, once feared to be highly restrictive for offshore jurisdictions, are now also moving in Cayman’s favour. As reported in the Financial Times of London in July 2010, it is anticipated that under the Directive non-EU fund jurisdictions will be expected to meet four criteria in order to comply, which will include co-operation agreements between their regulators and those in the EU and not being blacklisted for failure to prevent money laundering or terrorist financing. The Cayman Islands would have little difficulty in fulfilling such criteria, it was further reported.

To be clear, Ireland provides an excellent base for many products, and its service providers are top rate. However, if you value flexibility coupled with effective regulation and pricing, and wish to maximize investor returns, then the grass may be greener in the Cayman Islands.