Page 15

Cayman Funds 2016

are fi nding that when we get an enquiry, it has often been sent to multiple jurisdictions. They are seeking the best combination of price and effective oversight. All the additional reporting requirements such as the US Foreign Account Tax Compliance Act (FATCA) and the technology required for that have made things more expensive for emerging managers. You see very few $5 million funds these days—the starting point seems to be between $50 million and $100 million. Previously we didn’t need a formal compliance department—now it is one of our larger departments. It is diffi cult for start-ups. Large managers are doing well and are spinning out new products but for your ex-bank trader wanting to set up a $5 million fund, they really have to think twice now. Lock: Managers are also being squeezed at both ends, their startup and ongoing costs of operation are higher but the fees that investors are willing to pay are also frequently lower, particularly the management fee that the market will allow them to charge. We’re just not seeing the standard 2/20 in fees, it’s more like 1.4/18. Investors might be OK with a performance fee, rewarding performance and sharing the upside with the manager, but they’re not as happy simply to pay the 2 percent management fee. With FATCA now implemented, what regulatory requirements are worrying the industry? Duncan Nicol: Last year was the fi rst for FATCA in terms of international cooperation requirements and reporting. Cayman has one of the largest reporting regimes in the world for FATCA, with 28,000 fi nancial institutions. The fi rst round of reporting happened last year. It was a massive undertaking but it was completed successfully, mainly due to very good compliance rates across all industries here. CAYMAN FUNDS | 2016 15 Cayman’s response to these challenges is important. Cayman Finance is looking at some potential solutions around fees. A large proportion of our funds have assets under management of less than $100 million and increasingly are unable to afford these operating costs. For example, if you are in Brazil and your currency has devalued by 40 percent the basic regulatory fees in Cayman in dollar terms are very expensive. We have been talking to Cayman Finance about building a smaller manager regime with a product that recognises the global challenges. It is not about any shortcomings in Cayman but about adapting to headwinds and what is happening in the wider world for the sake of the jurisdiction. Alan Milgate: There is a real opportunity for us to prove ourselves in Cayman. We need to ensure that people always have a great experience when they operate here. Even if they wind down a fund, that should be a very professional experience because they will be back. When things turn again in their favour, they will return. That is exactly what happened in 2008 and they returned in droves. Ruddick: Cayman is the domicile of choice and that position in the market is ours to lose. We have a great regulatory framework that is fl exible and balanced, but with the continuous increase in fees eventually there will be a breaking point. A scale of fees giving breaks to new managers should be considered as the smaller managers are becoming more fee-sensitive. Scott: Cayman Finance is very committed to working with associations and government to develop these ideas. This demonstrates how our industry is able to come together and share ideas to establish a successful path forward. We look forward to more discussions around this. Panton: The ministry has had some initial discussions about this but nothing formal yet. We need to ensure that we maintain our country’s fi nancial stability while also protecting and preserving the industry. I agree that we need to address what are some signifi cant challenges and ensure that we are competitive but we also need to ensure we consistently offer a great service and delivery. We are working with Cayman Finance on the development of projects to ensure we offer a service that is second to none. If we can also consider an approach that would support new or smaller funds through reduced fees and that can help funds grow from smaller to bigger players and become loyal users of the jurisdiction, we will consider that. Leanne Golding: As a service provider—whether you are an administrator or acting as a fi duciary—we would also like to consider a fee scale that encourages smaller funds and allows them to grow. It is a great idea but you need to take certain key things into account. If it is a lower fee scale, does that mean they get a bare bones service? When would they switch to a higher rate and how do you justify that to your legacy clients? The same issues apply from a regulatory perspective. In fact, it is often the smaller funds that are more risky and require more oversight and guidance. It is a question of fi nding the right balance. Leo Kassam: We do offer certain fee structures to help clients through the launch phase. We also look at other services we can offer around their core requirements to help new managers with their operations since they may not have the infrastructure yet. Launch sizes these days tend to be a lot smaller so it tends to be even more of a challenge from a profi tability standpoint. It can be a hard balance as it is true that smaller clients can be more needy and often require more of a tailored approach. Rick Gorter: We deal with very sophisticated clients who actively shop around jurisdictions based on the regulatory regime and price. When a fund can be administered in other jurisdictions, they will consider those alternatives. We are seeing an inversion effect now where offshore regulation is actually more onerous than onshore regulation and some funds are going onshore instead. Emerging managers in particular are very sensitive to price and we “Government acts at a more technical level but we need support from industry and even from investors as ambassadors.” Michelle Bahadur


Cayman Funds 2016
To see the actual publication please follow the link above