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Colin MacKay of the Alternative Investment Management Association, Cayman, offers his perspective on the latest developments and performance of the alternative investment sector in Cayman.
Every year when we aim to provide an overall commentary on the alternative management industry in and serviced from Cayman, there is a tendency to look back to the main themes which have emerged over the preceding year and, looking forward, to where we see the industry going in the coming year. Over recent years, this has led us to highlight the pressures on capital-raising, performance delivery and strategy diversification but the recurring theme year on year has been the development of the regulatory environment in which the industry operates.
With respect to capital raising and performance, we have the benefit this year of the International Organisation of Securities Commissions (IOSCO) Report on the Fourth IOSCO Hedge Fund Survey which was published in November 2017. The report confirms that, based upon survey responses, assets under management within hedge funds increased in the 24 months preceding the September 2016 data point by 24 percent to $3.2 trillion.
The report also confirms that Cayman is the domicile for 53 percent of those assets, a percentage which is largely unchanged over that two-year period. Additionally, the report highlights the continuing dominance of US investment managers in net asset value terms with more than 76 percent of assets managed in the US, as compared to relatively limited capital aggregation by European and Asian-based asset managers.
At the same time, the Cayman Islands Monetary Authority (CIMA) reported a further stabilisation in the total number of registered funds domiciled in Cayman with a small year-on-year reduction in the number of such funds but a general trend of new funds matching pace with older funds terminating. Given that many of the residual structures put in place for illiquid investment work out after 2007/8 have reached their natural end of life in recent years, the fact that yearly registrations of new funds are matching the annual terminations is a very encouraging sign.
While the capital-raising environment has improved and performance returns have risen with increased market opportunities and strategy diversification, including a growing exposure to private equity-style investment portfolios, the evolution of the regulatory environment has every probability of having the greatest impact on the industry over the short to medium term.
As anyone working within the alternative investment industry will recognise, the pace and scope of statutory and regulatory initiatives grows on an almost weekly basis. With that growth comes a developing alignment of reporting obligations with regulators increasingly seeking the same or similar information in relation to managers, as well as their managed funds and accounts.
The burden has presented significant challenges for investment managers in terms of collecting and collating data to be able to meet the reporting obligations and to then stay on top of multijurisdictional requirements. Of course, outsourcing the data management and reporting may provide one solution but when it comes to the reporting with respect to the manager itself (forms PF and ADV, for example) that has to be dealt with internally which increases operating costs and administrative burdens.
In the end, we’ve identified various barriers to entry for new managers over recent years and the developing regulatory environment resulting in increased costs of operation at the inception of a new manager’s business has been a significant consideration.
During 2017, Cayman underwent a Carribbean Financial Action Task Force (CFATF) jurisdictional review which focused on the structure and content of the Cayman anti-money laundering (AML) regime, the effectiveness of the laws and regulations in place to empower CIMA and the Financial Reporting Authority to perform their roles as regulator and investigative authority, respectively. Earlier in the year, the Cayman Islands government spent a considerable amount of time working through amendments and improvements to the AML regime with a combination of legislative and regulatory changes, together with updates to the industry guidance notes which assist in the interpretation and practical application of that regime.
The changes implemented demonstrate the developing alignment across jurisdictions with increasing consistency in terms of data which must be gathered and maintained on investors, investments and fund operations and the scope of reporting obligations which then follow. It is reasonable to assume that, with global initiatives promoted by the Organisation for Economic Co-operation and Development and FATF/CFATF, for example, this alignment will continue. The hope remains that this alignment will evolve into a global standard for data and reporting which will simplify the multijurisdictional reporting and compliance which is such a practical headache today.
In the meantime, as you will read in this year’s report, the industry’s Cayman-based infrastructure continues to strengthen with active dialogue among industry professionals, the Cayman Islands government and CIMA. This creates a perfect environment for innovation in structuring, investment strategy, asset class exposure, service support and data management, all of which are critical to the future success of the industry. With asset growth continuing, performance returns strengthening and more new managers entering the industry with new investment ideas, the future remains exceptionally bright.
Colin MacKay is chairman of the Alternative Investment Management Association, Cayman. He can be contacted at:
Alternative investment, management, Cayman, perspective