shutterstock/Olivier Le Moal
Together with the seismic changes we are seeing on the global geopolitical landscape, the COVID-19 pandemic has exacerbated the current dislocation in global markets, driving volatility to levels that have been absent for the last decade.
These are theoretically ideal conditions for active managers of hedge funds and those close-ended structures with “dry powder”.
From an administrator’s perspective, the focus will be ensuring our clients can capitalise on investment opportunities and risk management. We do this by taking care of our clients’ infrastructure and operations, including minimising the impact of global and local regulatory changes.
Since the establishment of the EU’s non-cooperative tax jurisdiction list, the Cayman Islands government has adopted more than 15 legislative changes, in line with the EU’s criteria. In April 2019, the EU confirmed that the Cayman Islands had satisfied its economic substance requirements, with the exception of economic substance for collective investment vehicles (CIVs).
Although the OECD’s findings on the Cayman Islands economic substance legislation were positive—we were evaluated in June 2019 as “not harmful” (the highest positive rating possible) by the OECD’s Forum on Harmful Tax Practices—Cayman still implemented EU-specific reforms to address its concerns regarding CIVs. As a result, the Cayman Islands government passed the Private Funds Law and the Mutual Funds (Amendment) Law on February 7, 2020.
What this means
Now that the legislation has been implemented, we have turned our focus to understanding what this means for our clients. We believe this is an opportunity for fund administrators, particularly those with a physical presence in the Cayman Islands.
We have seen an increasing appetite for close-ended structures (referred to as “private funds” in legislation) to engage administrators for their fund structures, and often their management vehicles too, as the complexity of their fund corporate structures increases.
Combined with expanding transparency demands by institutional investors and regulators, the benefits of the technology and deep expertise an administrator provides is a compelling argument. In essence, the best administrators serve as a clearing house for complexity.
Private funds using an auditor, administrator and independent fiduciaries will have no concerns about the new Cayman Islands regulations. Even funds that choose not to go down this route have plenty of options, as the legislation allows them the flexibility to do what is most appropriate for their structure.
While anything new is always met with a certain amount of anxiety during the implementation phase, we believe the Cayman Islands is still the best place to launch your fund vehicles.
Not only regulation
These opportunities are driven not only by regulation. The recent global geopolitical turmoil reminds us why we have international financial centres: to facilitate the free flow of financial capital.
International financial centres’ success is predicated on their ability to provide political and legal stability. That is arguably more important now than it has ever been. As home to approximately 70 percent of global hedge, private equity, and venture capital funds, the Cayman Islands are well positioned to provide inward investing, financing, and liquidity into economies, just as they did after the 2008 global credit crisis.
Locally, the Cayman Islands Fund Administrators Association (CIFAA) has been more active than ever. It has participated in all funds-related working groups with the government and the Cayman Islands Monetary Authority, providing detailed feedback on legislative and regulation changes. It has doubled the number of participants (and frequency) of its fund administration course, and it has expanded its support of the National Workforce Development Agency Color Accounting course, continuing to provide scholarships to the Central Law Training Certificate and Diploma in Fund Administration.
In 2020 CIFAA has welcomed a number of new members, and expects a continued expansion of its members, and the services those members offer in the Cayman Islands.
To facilitate this CIFAA is working with the government to make Cayman as easy to work in as it is to launch a fund in. The talent available locally is only going to expand, and its members hope to utilise that resource.
Cayman Islands Fund Administrators Association. www.cifaa.org.ky
CIFAA, Coronavirus, Hedge funds, Investment, Risk Management, Tax, Cayman Islands