8 Jun 2010
Now that there is a new Government in the UK perhaps it is a good time to remind Conservative ministers, despite the possible constraints of the realpolitik, of the common interest between the Cayman Islands and The City of London, Cayman Finance chairman Anthony Travers OBE writes.
The body which I chair, Cayman Finance, has been actively monitoring the European Union Alternative Investment Fund Directive for the past 12 months. Last year after we met with influential UK Conservative politicians it was agreed that the Directive is in neither of our interests.
It is regrettable that former Prime Minister Gordon Brown could have made the valid point after the financial crisis that Cayman operated a world leading system of anti money laundering legislation and had full tax transparency with the United States. Instead he chose when addressing the US Congress to ask the rhetorical question - would the world not be a safer place if jurisdictions like the Cayman Islands were outlawed?
In fact given that no financial institutions failed in the Cayman Islands during the crisis ,that Cayman had no Northern Rock ,no HBOS ,no Bear Sterns and no Lehman’s the correct answer to the question should have been - Actually no Mr Brown, rather the contrary.
But the problem with his transparent exercise in blame deflection was not simply the mischaracterization of the Cayman Islands. The problem was that in aligning with the rhetoric of the anti hedge fund, European-inspired protectionist sentiments and failing to recognize the importance of the $480 billion dollars of direct investment from Cayman funds into the City of London, Mr Brown was wrong footed when the true objective of the French and German attack manifested itself in the Directive.
And that objective was the City of London.
Cayman attracts hedge funds because it has relevant and attractive laws, a high standard of professional service, an effective Court system with ultimate appeal to the Privy Council and full IOSCO transparency. Having sensible judges a UK common law basis to your legal system and regulator to regulator disclosure matters.
Cayman has been and remains highly attractive as a tax transparent but tax neutral jurisdiction in which relevant structuring can be undertaken to pool funds invested from the international capital markets. Latest statistics from the Monetary Authority show the numbers of registered funds at around 9500 a drop of less than 4% since the peak of the market in 2007 although rate of growth which is now increasing has ,and understandably in a deleveraged world, tempered from the pre crisis levels.
A good deal of self promotion from European based centers has somewhat clouded the issues with regard to the Directive but it is by no means certain that the hedge fund industry will wish to attempt to operate the traditional fund structure from within the EU under the new constraints proposed (in whatever form results from the European Parliamentary reconciliation process).
Nor is it the case that the Cayman hedge fund product has ever had a cross border UCITS passport to market retail within the EU. The Cayman product is, and has always been, designed for institutional not retail consumption and Cayman regulation fits that construct. More critically, in its most extreme form, if that is what is enacted, the Directive will restrict EU based fund managers in terms of transparency disclosure, short selling and possibly remuneration, with the result that an EU based fund manager could not compete in terms of investment return with a non EU based fund manager.
So we may well be left with a more distinct fork now in the road .But what is certain is that in a global financial marketplace no institution that wants the investment return of a Cayman hedge fund needs to invest in it from an EU based bank account. Further it is by no means a foregone conclusion that protectionist legislation in Europe will be a negative for the Cayman hedge fund industry because one consequence may be that EU hedge fund managers seeking to maintain a competitive return will choose to leave the EU.
In that event, no doubt Switzerland would become a favored jurisdiction for an EU based fund manager to relocate within the proximity of Europe. But the relationship between the Cayman hedge fund and a Swiss(or Dubai or Singapore or Hong Kong) based fund manager would remain unimpaired as would the investment return of that hedge fund untrammeled by the EU investment restrictions.
No one should be in any doubt that the EU agenda here is motivated by French and German resentment of the success of the City of London but in seeking to exclude non EU funds and non EU fund managers, the EU may also be picking a fight with the United States, a point which Mr Geitner, the Treasury Secretary, has made clear since US fund managers may also be excluded.
As it stands given that there are still some 1,600 proposed amendments to be reconciled within the European Union legislative process, Cayman Finance has not yet been able to formulate a specific response. Indeed, Mr Matthew Jones of the London Alternative Investment Management Association commented at the Cayman Finance Inaugural Summit last week that it was too soon to do so a given the ongoing fluidity in the European proposals.
Protectionist legislation this extreme, motivated by a political and not a true regulatory agenda, seems inconsistent with the global political accords suggested by recent statements of certain G20 politicians and very often has a quite unintended consequence .But rumors of the demise of the Cayman Islands may prove to be greatly exaggerated.
In all of this it should be remembered that Europe is the third most relevant jurisdiction for onward investment by Cayman fund products and at the height of the market in 2007 ranked with only 13% of assets under management. It may well be that Cayman will develop an alternative regulatory regime that will provide a hedge fund lite product that operates within fortress Europe but outside of the EU in the global marketplace the traditional Cayman product will retain its tried and tested virtues.
The body which I chair, Cayman Finance, has been actively monitoring the European Union Alternative Investment Fund Directive for the past 12 months. Last year after we met with influential UK Conservative politicians it was agreed that the Directive is in neither of our interests.
It is regrettable that former Prime Minister Gordon Brown could have made the valid point after the financial crisis that Cayman operated a world leading system of anti money laundering legislation and had full tax transparency with the United States. Instead he chose when addressing the US Congress to ask the rhetorical question - would the world not be a safer place if jurisdictions like the Cayman Islands were outlawed?
In fact given that no financial institutions failed in the Cayman Islands during the crisis ,that Cayman had no Northern Rock ,no HBOS ,no Bear Sterns and no Lehman’s the correct answer to the question should have been - Actually no Mr Brown, rather the contrary.
But the problem with his transparent exercise in blame deflection was not simply the mischaracterization of the Cayman Islands. The problem was that in aligning with the rhetoric of the anti hedge fund, European-inspired protectionist sentiments and failing to recognize the importance of the $480 billion dollars of direct investment from Cayman funds into the City of London, Mr Brown was wrong footed when the true objective of the French and German attack manifested itself in the Directive.
And that objective was the City of London.
Cayman attracts hedge funds because it has relevant and attractive laws, a high standard of professional service, an effective Court system with ultimate appeal to the Privy Council and full IOSCO transparency. Having sensible judges a UK common law basis to your legal system and regulator to regulator disclosure matters.
Cayman has been and remains highly attractive as a tax transparent but tax neutral jurisdiction in which relevant structuring can be undertaken to pool funds invested from the international capital markets. Latest statistics from the Monetary Authority show the numbers of registered funds at around 9500 a drop of less than 4% since the peak of the market in 2007 although rate of growth which is now increasing has ,and understandably in a deleveraged world, tempered from the pre crisis levels.
A good deal of self promotion from European based centers has somewhat clouded the issues with regard to the Directive but it is by no means certain that the hedge fund industry will wish to attempt to operate the traditional fund structure from within the EU under the new constraints proposed (in whatever form results from the European Parliamentary reconciliation process).
Nor is it the case that the Cayman hedge fund product has ever had a cross border UCITS passport to market retail within the EU. The Cayman product is, and has always been, designed for institutional not retail consumption and Cayman regulation fits that construct. More critically, in its most extreme form, if that is what is enacted, the Directive will restrict EU based fund managers in terms of transparency disclosure, short selling and possibly remuneration, with the result that an EU based fund manager could not compete in terms of investment return with a non EU based fund manager.
So we may well be left with a more distinct fork now in the road .But what is certain is that in a global financial marketplace no institution that wants the investment return of a Cayman hedge fund needs to invest in it from an EU based bank account. Further it is by no means a foregone conclusion that protectionist legislation in Europe will be a negative for the Cayman hedge fund industry because one consequence may be that EU hedge fund managers seeking to maintain a competitive return will choose to leave the EU.
In that event, no doubt Switzerland would become a favored jurisdiction for an EU based fund manager to relocate within the proximity of Europe. But the relationship between the Cayman hedge fund and a Swiss(or Dubai or Singapore or Hong Kong) based fund manager would remain unimpaired as would the investment return of that hedge fund untrammeled by the EU investment restrictions.
No one should be in any doubt that the EU agenda here is motivated by French and German resentment of the success of the City of London but in seeking to exclude non EU funds and non EU fund managers, the EU may also be picking a fight with the United States, a point which Mr Geitner, the Treasury Secretary, has made clear since US fund managers may also be excluded.
As it stands given that there are still some 1,600 proposed amendments to be reconciled within the European Union legislative process, Cayman Finance has not yet been able to formulate a specific response. Indeed, Mr Matthew Jones of the London Alternative Investment Management Association commented at the Cayman Finance Inaugural Summit last week that it was too soon to do so a given the ongoing fluidity in the European proposals.
Protectionist legislation this extreme, motivated by a political and not a true regulatory agenda, seems inconsistent with the global political accords suggested by recent statements of certain G20 politicians and very often has a quite unintended consequence .But rumors of the demise of the Cayman Islands may prove to be greatly exaggerated.
In all of this it should be remembered that Europe is the third most relevant jurisdiction for onward investment by Cayman fund products and at the height of the market in 2007 ranked with only 13% of assets under management. It may well be that Cayman will develop an alternative regulatory regime that will provide a hedge fund lite product that operates within fortress Europe but outside of the EU in the global marketplace the traditional Cayman product will retain its tried and tested virtues.
