Jarrod Farley is a partner at Carey
Olsen. He can be contacted at:
to alternatives in
search of higher
yields has been
an aging US
Equally, the MF Law provided a straightforward and easily
understood regulatory regime for hedge funds. The MF Law regulated
only open-ended funds, and contained a regime for institutional
funds that allowed for quick and easy registration, while containing
proportionate and effective ongoing safeguards.
It was one thing to legislate attractive statutes, but the keys to their
success lay in the sophistication of the existing Cayman service
providers, built off the back of servicing the international banking
industry for several decades and the stable constitutional and legal
environment of a British dependency.
As Cayman’s fund industry has matured, these advantages have
become even more important. Cayman is home to around 800
resident lawyers, every major international accounting firm, a cottage
industry of fund fiduciary service providers (independent directors
and trustees) and corporate services providers, as well as an array of
Since 2009, Cayman’s courts have had a specialist Financial Services
Division offering high quality judges with experience handling
complex commercial cases, whose judgments have helped move the
industry forward more generally. A prime example is the first instance
judgment on a breach of duties by the directors of Weavering Macro
Fixed Income Fund Limited, providing invaluable practical guidance on
the specific duties of Cayman fund directors.
CIMA has also driven a focus on good corporate governance by fund
directors, issuing guidance on the subject generally as well as specific
aspects, such as outsourcing and anti-money laundering compliance.
While proximity to the US made Cayman an obvious choice for US
managers looking to raise an offshore fund, it was the volume and
sophistication of the available expertise that helped Cayman outgrow
its regional competitors. At a certain point, critical mass and herd
mentality made it seem odd for a US manager to look elsewhere
without good reason.
More than two decades of working alongside fund professionals
in the US and elsewhere have built deep relationships, and a decade
of implementing the various international initiatives referred to above
has built a level of specialist expertise that would be difficult for
any newcomer to replicate.
Total investment in alternative assets globally rose from $1 trillion in
1999 to $7 trillion in 2014, and is expected to hit $13 trillion by 2020.
This represents an increase from 2.3 percent of the global investment
market in 2000 to 5.2 percent by the end of 2017. With Cayman funds
(representing around 70 percent of alternative funds), dominated by
US managers, investors and assets, the strongest forces driving this
trend and accordingly the growth of the Cayman fund industry, must
have come from the US.
The long-term driver behind increased allocations to alternatives
in search of higher yields has been pension funds confronted with
an aging US population and funding shortfalls (particularly within
the defined benefit schemes of state pension plans). Since the
global financial crisis all US institutional investors have also needed
to compensate for low yields in traditional low-risk fixed-income
There is no reason to believe these forces will abate any time
soon, and may be exacerbated by a global economic slowdown as
equity capital markets cool off. Escalating US federal debt provides
a massive disincentive to end the loose monetary policy of the
past decade, while the US Census Bureau predicts that the aging
of the US population will continue. In 2016, 49.2 million Americans
(15 percent of the population) were over 65; by 2030 this is
predicted to reach 73.1 million (21 percent) and by 2060, 94.7 million
With alternative assets still representing only a small fraction of
global investment activity, and ongoing pressures on US pension
funds and other US institutions to seek higher yields in alternatives,
there is every reason to believe the resurgent Cayman funds industry
will continue its impressive growth of the past two decades for many
years to come.
50 CAYMAN FUNDS | 2019
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