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Cayman Funds 2016

“Institutional investors recognise all this and, after copious due diligence, take comfort that the Cayman Islands investment funds in which they invest are established under internationally 60 CAYMAN FUNDS | 2016 Henry Smith is a partner in the Investment Funds Group of Maples and Calder worldwide, an AIMA global council member and a director of Cayman Finance. He can be contacted at: henry.smith@maplesandcalder.com Russell Burt is a principal of Marbury Fund Services (Cayman) serving as an independent fund director. He is a board member of AIMA Cayman. He can be contacted at: russell@marbury.ky recognised legal principles.” index funds if they want to do that. Hedge funds provide alternative investment opportunities and hedged, risk-adjusted and less volatile returns. In fact, according to a recent AIMA survey, hedge funds fi nished 2015 up 2.42 percent, beating equities and bonds on an absolute and riskadjusted basis. Long/short funds may underperform a long-only index in a bull market as they have to pay for the hedges. Over the longer periods hedge funds have been proven to outperform many asset classes on a risk-adjusted basis. Long-only focused index investing carries signifi cant performance risk and volatility. Regulation and compliance: it is wrong for the media to say that hedge funds lack proper regulation and do not comply with the rules. That is simply not true. The vast majority of hedge fund managers are now regulated. Hedge funds domiciled in the Cayman Islands are also regulated. In addition, service providers around the hedge funds— investment managers, custodians, prime brokers, fund administrators and Cayman Islands independent directors—are often subject to regulation. Collectively, the hedge fund industry has already invested more than $3 billion on compliance and an AIMA/MFA/KPMG survey found that individually hedge funds spend anywhere from 5 percent to upwards of 10 percent of their operating costs on compliance. Governance in the hedge fund space continues to improve and a large majority of hedge funds now have independent directors on their boards. Transparency: those who allege that hedge funds are secretive or nontransparent and based in offshore tax havens for nefarious purposes, ignore some salient facts. Hedge funds can be limited considerably by securities laws from divulging much information to the media on marketing. The reality is they must make numerous informational reports to their investors and regulators in the US and the EU, for example, by fi ling regularly Form PF and Annex IV information. The identity of investors in Cayman is reported to international tax authorities such as the US Internal Revenue Service under the Foreign Account Tax Compliance Act (FATCA) and more widely under the Common Reporting Standard (CRS). David Cameron, UK prime minister, in September 2013 said “I will make this point: I do not think it is fair any longer to refer to any of the overseas territories or Crown dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems. It is very important that our focus should now shift to those territories and countries that really are tax havens. The Crown dependencies and overseas territories, which matter so much—quite rightly—to the British people and members have taken the necessary action and should get the backing for it.” Tax neutrality: the Cayman Islands remains the leading tax-neutral fund domicile. This means that Cayman does not impose any “additional” layers of taxation upon the investors in a fund. It is important to understand the importance of the word “additional”. The investors still pay their relevant taxes, but not a duplicative level which would otherwise be imposed. On a simple level, investors have a choice how to invest. They may purchase stocks, bonds, etc, directly or via a collective investment fund. The preference to use a fund vehicle stems from Modern Portfolio Theory (MPT) and the benefi ts of diversifi cation along with gaining access to the skills of the portfolio manager to generate alpha. Funds are an extremely cost-effi cient way to build a diversifi ed portfolio. Using a tax-neutral fund ensures that taxation is correctly levelled on the investments made and by investors in their own jurisdictions on investment income and capital gains, ie, having a fund established in a tax-neutral jurisdiction ensures that a third layer of tax is not created. The Cayman Islands government is often commended by the likes of the International Monetary Fund, the Financial Stability Board, the Financial Action Task Force and other governments for the way the Cayman Islands has promoted good governance and adopted international initiatives on anti-money laundering/know your customer (AML/KYC) and implemented good cooperation with international regulators (for example, in relation to the EU Alternative Investment Fund Managers Directive), as well as committing to and implementing tax transparency initiatives such as FATCA and CRS. The Cayman Islands’ AML/KYC laws are rated as good as those of many major OECD members. The 2013 Phase 2 Peer Review Report by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes gave the Cayman Islands the same rating as that given to the UK and the US. Institutional investors recognise all this and, after copious due diligence, take comfort that the Cayman Islands investment funds in which they invest are established under internationally recognised legal principles which protect their rights and have been successfully tried and tested through even the most severe of fi nancial crises. Conclusion These are a few examples of how the industry might address the current PR concerns and misconceptions. It’s important we continue to educate policymakers so that global regulation and tax policy is both workable and proportionate, avoiding unnecessary costs on institutional investors and the exclusion of pension funds from the world’s best alternative investment funds. Thousands of jobs in the industry and the wellbeing of millions of pensioners depend upon it. This article represents the views of the authors alone and not Maples and Calder or Marbury Fund Services (Cayman). It is intended to provide only general information for the clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.


Cayman Funds 2016
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