Cayman Islands hedge fund reforms on-track

Date: Tuesday, March 27, 2012
Author: Alex Dunnin

Cayman Islands is extending the deadline for hedge fund operators to register their master funds, showing how delicate the balance is between improving financial regulation in the country, while not driving away hedge fund operators.

The reforms follow pressure from the OECD that the Cayman Islands clamp down on its hedge fund sector, with European governments arguing it promotes tax and compliance avoidance in the jurisdictions where the funds source their inflows.

Privileges enjoyed by the hedge fund sector in the Caribbean Island nation of 60,000 have seen it grow to be the world's number one centre for offshore hedge fund operations and the fifth largest banking centre with almost 300 banks operating there.

Making the reforms highly sensitive, however, is that the financial services sector drives an estimated 55% of the GDP and accounts for 40% of its employment.

"Cayman is now strengthening regulatory requirements by insisting that Cayman domiciled master funds register with the Cayman Islands Monetary Authority," said Alric Lindsay, principal with Buckingham Fund Services Ltd which operates in the island nation.

Lindsay say the new rules are not a surprise as regulators in other jurisdictions have made their own adjustments in light of recent hedge fund scandals, market crises and purported concerns over systemic and other risks.

"In Cayman, the pursuit of master fund registration can be understood because, in the typical master-feeder structure, investments are made at the master fund level. It therefore seems important that the Cayman master fund be regulated, along with any Cayman regulated feeder fund which invests in the Cayman master fund," he said.

Lindsay said the outstanding issues are whether the definition of a master fund needs to be modified and how much time fund operators will have to register their funds.

"Hopefully, with this approach, it will continue to be a leading jurisdiction and clients will increase their physical presence there," he said.