A court ruling in the US following the collapse of two Cayman-registered hedge funds could lead to more funds being administered from Cayman, potentially stimulating growth in a key sector of the economy, the Cayman Observer reports.
Despite the recent bankruptcy of two funds managed by US investment bank Bear Stearns might be seen negatively for the global funds management industry, a subsequent court decision might be a positive move locally if it drives new demand for Cayman-based fund administration, the Observer reports.
Of the more than 10,000 hedge funds worldwide, as many as 9,000 are registered in the Cayman Islands, bringing license fees to the Cayman Islands Monetary Authority and revenues to local law firms and others that provide corporate services to fund managers.
In addition, a further team of experts is responsible for administering the funds including filing the fund’s accounts, complying with securities regulations and distributing performance reports to investors.
Experts say it is this sector that may be positively affected by the fallout from the Bear Stearns funds collapse.
The two funds plummeted in June amid a sharp fall in prices for risky mortgage-backed securities, particularly those, like the two Bear funds, backed by so-called subprime loans to less credit-worthy borrowers. Their collapse led to the resignation last month of Bear co-president Warren Spector as well as a bout of soul-searching within the global funds industry, which had previously enjoyed a prolonged period of growth and success, the Observer says.
While allowing the liquidation proceedings in Cayman to begin, a bankruptcy court judge in the US last week denied an application by Bear Stearns for legal protection from the fund’s investors, saying that the funds failed to satisfy the requirement that they had a “place of operations where the debtor carries out non-transitory economic activity”.
The judge that denied an application by Bear Sterns for legal protections from the fund’s administrator said that Bear may have gained legal protection if it had employed administrators in Cayman, rather than handling the administration in the US.
Butterfield Bank’s John Lewis of the Cayman Islands Fund Administrators Association told the Observer it was difficult to say with any certainty whether Bear could have won lawsuit protection if it had employed a Cayman administrator, though it was a possibility.
He says he and the rest of the local funds industry were following the developments in the Bear case closely.
“This ruling could have far-reaching implications,” he says. “It could reverse a trend for fund administration to increasingly be carried out ‘onshore’, but equally, it could lead to US-based managers reducing their investments in the offshore market. We just don’t really know at this stage, but the industry is hopeful that it might lead to more work in Cayman.”
Most funds registered in Cayman are administered elsewhere, often in the US or UK.
Although exact statistics will not be available until CIMA’s “e-reporting” initiative for funds is fully rolled out next year, estimates suggest that “only” about 30% of locally-registered hedge funds are also administered there.