More hedge fund growth expected

Date: Wednesday, July 30, 2008
Author: Karen Clark. Caymannetnews.com

Despite surpassing the much-anticipated 10,000 mark in hedge funds domiciled in the Cayman Islands, the number of these funds is expected to continue to rise, industry experts say.

Second-quarter figures from the Cayman Islands Monetary Authority (CIMA) show that at the end of June 2008 there were 10,037 funds regulated by the authority, compared to 9,681 at the end of March and 8,972 at the midpoint of 2007.

New CIMA Chairman Carlyle McLaughlin discussed the historic high with Cayman Net News on Monday, 28 July, his first working day as head of the regulatory body. “CIMA is proud to be a leader in the regulation” of hedge funds, he said, adding that good regulations have facilitated the increase of hedge funds domiciled in the Cayman Islands.

Mr McLaughlin added it was important to note the distinction between the terms “regulated” and “registered” both of which are used to describe hedge funds.

The term “registered” has a specific meaning under the Mutual Funds Law and was “only a portion of the types of funds we have”, he explained.

Mr McLaughlin said: “There are different classifications [of hedge funds] under the Mutual Funds Law - registered, administered and licensed.” He pointed out that regulated funds comprise all three categories.

“The real test is how many continue to operate,” he said, adding that even with regulations, some funds would fail. Mr McLaughlin referred to the failed Bear Stearns funds and pointed out that, when considered in the context of the number of successfully run funds, the loss was relatively small.
Nick Rogers, partner in the investment funds team at Walkers, commented on the growth of hedge funds in recent years.

“The rate of growth in the number of hedge funds being formed has been astounding over the past 10 years, as the market has developed from a small niche to now becoming part of the mainstream.”

He continued: “While growth in any financial product can be expected to slow as
it matures, the continued formation of funds in a difficult market environment suggests the hedge fund industry will continue to thrive.

“Furthermore, at present, pension funds around the world have only allocated a relatively small percentage of their total assets to hedge funds, which suggests there is significant scope for further expansion.”

Mr Rogers explained that a recent CIMA statistical report for the first time provided insight into the types of investment strategies adopted by Cayman Islands hedge funds. “This report showed that nearly 30 percent of funds applied a multi-strategy approach to investment, which uses diversification to reduce risk and attempts to provide positive returns in any market conditions,” the fund manager said.

Mr Rogers identified one of the factors leading to the growth of hedge funds over the past decade as “the ability of investment managers to adapt to changing market conditions and seek out new profitable strategies.

“It is often observed that hedge fund managers perform best when they separate themselves from the herd, and this sort of philosophy is likely to push managers to new markets, for example so-called ‘frontier funds’, which invest in pre-emerging market countries, and also new sectors of existing markets.”

Pointing to the continued buoyancy in the markets, he added, “While the more mainstream strategies [I’ve] mentioned are likely to remain among the most popular, the dynamism of the hedge fund industry means that new investment ideas will undoubtedly continue to emerge in the future.”

The Cayman Islands has approximately 80 percent of the world’s hedge funds and was the first offshore jurisdiction to establish specific laws for these investment vehicles.