Recent chatter about making hedge funds with a physical presence in the United States register with U.S. regulators is making waves in the Cayman Islands, according to the online Financial Times.
The Caribbean archipelago has a reputation as a paradise for vacationers and hedge funds alike, due to fund-friendly laws that allow hedge funds to open shop relatively quickly and that take an buyer-beware attitude to regulation.
Since the 1993 passage of the Mutual Funds Law, fund managers have used the less bureaucratic laws of the Cayman Islands to get a head start on competitors. Today, the Cayman Islands are home to 500 bank and trust companies and more than 8,000 hedge and mutual funds.
Besides less red tape, the Cayman Islands charge no direct tax on funds. Funds can apply for a 20-year tax waiver, and apply to extend their tax-exempt status later.
Some worry that much of the business will be washed away if the U.S. Securities and Exchange Commission passes a rule requiring any hedge fund with a presence in the U.S. to register here.
“If regulators in the U.S. and Europe are trying to protect the investor, they’ve got to understand that very little investment management is handled in Cayman,” said Mark Lewis, a senior partner who specialized in hedge funds at law firm Walkers Global. “And if regulators are concerned about protection, they need look no further than their own jurisdictions.”
The influx of institutional dollars into hedge funds may also pressure many managers to move to more closely regulated jurisdictions.
Bryan Hunter, partner at Cayman-based legal and administrative service provider Appleby Hunter Bailhache and one of eight directors of the Cayman Islands Financial Services Association, sees institutional money as no threat at all. “They are familiar with the jurisdiction, familiar with the regime, and they know that is it in accordance with international standards,” said Hunter. “The prospect of institutional investors not feeling comfortable with this regime is remote,” he said.
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