The current state of flux in the hedge fund industry and an exploration of Cayman’s strategic approach going forward.
There is no escape from the impact of the global financial crisis and, like the rest of the world, Cayman has started to feel its full force during the past year.
Its impact on the hedge fund industry, and in particular offshore jurisdictions, has brought the issue of how best to protect and further capitalise on Cayman’s financial industry to the fore. While the Cayman hedge fund product is robust and continues to thrive in this punishing environment, our fund administration industry is wilting under the pressure. Locally, a perfect storm of a deteriorating economy, increased taxation, an unpopular rollover policy and dynamic global competition has pushed Cayman’s fund administration industry to the tipping point. For a number of years administrators have been shifting resources beyond Cayman’s shores. Even home-grown administrators have felt the need to diversify overseas to fulfil their duties to their stakeholders. The next strategic decisions could determine the fate of the jurisdiction for decades to come. A careful and innovative approach needs to be sought to ensure that Cayman naturally continues to be an attractive location for fund administration investment to ensure its standing as a leading offshore financial centre.
The introduction of the controversial rollover policy in 2004 was certainly the catalyst for administrators to think beyond Cayman. While the goals of the rollover policy were worthy, its implementation has been disastrous for the fund administration industry and resulted in the loss of many high-value jobs. The unintended consequences of the rollover policy has only deepened Cayman’s economic woes and hampered our ability to recover from the current global crisis. Fund administration investors now avoid Cayman because of the uncertainty created by the rollover policy and are instead investing into jurisdictions with less restrictions and more certainty. There is clear evidence that shows fund administration is moving away from Cayman, including our own indigenous administrators. Recently, Goldman Sachs, Admiral, Maples Finance, UBS, CITCO and HSBC have all moved fund administration jobs out of Cayman. Rather than protecting local jobs and ensuring opportunities for Caymanians, the rollover has merely taken them away. These decisions are not simply about cost. After all, the jurisdictions they moved to all existed at the time that they made an earlier decision to invest in Cayman. It is not purely a question of why these jurisdictions are now attractive, but rather why is Cayman now unattractive? Just like Bahamas’ folly four decades ago triggered Cayman’s rise to prominence as an offshore financial centre, Cayman must now be cautious to ensure history does not repeat itself.
The situation has been further compounded by the recent budget revenue measures introduced by government, including hikes in work permit fees – up to 200 per cent in some instances – all increasing the cost of doing business in Cayman. Walkers is one of the most recent firms to announce layoffs, citing not only the global economic downturn but the increasing cost of doing business in Cayman as a cause.
Internationally, the collapse of the global economy, the aggressive stance of the G20 summit held in London in April towards offshore financial centres, the unpopular EU AIFM Directive and high-profile incidences– such as the Galleon scandal – has created an industry in flux. Hedge fund managers are now eyeing up new domiciles in which to set up business and Cayman must implement innovative policies and offer attractive incentives to ensure we stay at the forefront of their minds and continue to be viewed as an attractive place to do business. While other jurisdictions – such as Switzerland, Ireland, Canada and new emerging markets in Asia – are taking advantage of the current situation, the draconian rollover policy and the increasing costs of doing business continue to hamper the ability of our industry to respond competitively. Now is the time for Cayman to re-evaluate its strategies and positioning to entice some of these opportunities to Cayman and the signs are encouraging.
There have recently been promises of renewed government efforts to protect Cayman’s financial industry as Premier McKeeva Bush aims to reset Cayman’s relationship within the international business community and restore a sense of certainty and calm to doing business in Cayman. A recent pitch by Mr Bush to members of key players of the financial sector in London was aimed at encouraging them to switch the City for Cayman. London is currently witnessing a steady stream of hedge funds exiting the city in anticipation of the proposed 50 per cent tax rate for top earners. Incentives offered by Cayman’s government include significant immigration changes, such as dedicated employees within the immigration department to expedite work permit applications and investor relations officers to help key financial experts relocate. The incentives also include exemptions from standard term limits for work permits for senior leaders of financial services firms under the current key employee programme. Three to five year work permits for professional staff and accredited investors, as well as a guarantee not to increase work permit fees for four years for permits under the new programme are also being mooted. A proposed amendment to immigration legislation would also offer a 25-year direct investment certificate for investors with a net-worth of CI$5 million who have invested CI$2 million in the Cayman Islands, entitling the holder to work within the business in which they invested in and residence for family members. These are all laudable positive developments, but there is certainly stiff competition.
Canada is currently being seen as an attractive alternative to traditional offshore financial centres. The country has seen steady growth in its hedge fund industry over the past few years, which has flourished thanks to favourable costs, an educated work force, strong public sector support and government tax incentives. While the hedge fund industry in Canada is still relatively small, with fewer hedge funds and fewer assets than major financial centres, its recent growth and Cayman’s decline should set alarm bells ringing. Competition is also strong from Asia. For example in 2009, Singapore announced a new tax incentive to encourage fund managers. The city-state also offers low operating costs and the fiscal and reputational protection of G20 sovereignty. Singapore’s pro-business environment, solid infrastructure and government support further enhance it as a strong competitor.
Despite the downturn in Cayman’s hedge fund industry there is no escaping the fact that we still excel but need to redouble our efforts to continue our success. Cayman continues to position itself as a well regulated, transparent and cooperative financial centre, and its tax neutral environment, first-class professional service providers and a recognised and respected legal system will help to ensure Cayman remains attractive to the global financial industry. Our recent recognition by IOSCO and OECD are further signs of Cayman’s growing excellence in the global financial community, but these advantages will prove meaningless without sound local policies. For our own economical survival, we need to adopt sensible local policies to allow our financial industry to easily invest resources, employ top talent and further facilitate innovation to keep pace with our ever growing competitors. Five years of decline is long enough to recognise which policies are holding us back and failing to facilitate economic growth. We do not have any longer to wait.