In this Q&A with Chris Duggan, VP of Dart Enterprises, Cayman Alternative Investment Summit (CAIS) asks why the Cayman Islands is so popular with the alternative investment management industry.
The Cayman Islands is the world’s fifth largest financial center and home to over 11,000 regulated funds, making it a top offshore destination for hedge fund managers. In the following Q&A, Chris Duggan, VP of Dart Enterprises, explores what makes the Cayman Islands so popular with these firms and how managers can take advantage of the Cayman business environment. (For more, see: How Tech is Changing Alternative Investments.)
1. What is it about the regulatory and legal structure of the Cayman Islands that fund managers find so appealing?
The legal and regulatory structures in Cayman are designed to facilitate growth and enterprise. The Cayman government and its leading financial regulator, the Cayman Islands Monetary Authority (CIMA), are known for working with the industry to maintain a flexible business environment.
For investors looking to incorporate in Cayman for the first time, the Cayman government has made it particularly easy to register new entities on the islands. According to a 2016 report by the Walkers law firm, a Cayman Islands company can be incorporated in less than two days, as long as it meets the requirement of having at least one director and one shareholder. While this does not include the preparation of formation documents beforehand, which may take up to a few weeks, this efficient regulatory environment allows new businesses to thrive.
2. What recent steps have been taken to ensure the Cayman Islands remain an attractive choice for managers?
The Cayman government has proved to be highly responsive to the needs of existing fund managers. For example, in response to client demand, in July 2016 Cayman became one of the only offshore jurisdictions to offer an LLC business structure, the “Cayman LLC,” in order to better meet the needs of U.S. private equity and hedge fund managers. According to industry publication Hedgeweek, this vehicle allows U.S. managers a familiar legal option, with added flexibility and cost effectiveness. (For more, see: How Hedge Funds Can Do More for Charitable Causes.)
Cayman has also been very adaptive to the needs of European investors and managers. CIMA has been closely working with the European Securities and Markets Authority (ESMA) over the past year to extend the Alternative Investment Fund Managers Directive (AIFMD) passport to the Cayman Islands, which would greatly ease the Cayman Islands’ ability to market and manage funds throughout the European Union. According to Hedgeweek’s 2017 Cayman Islands report, alignment of Cayman policy with the AIFMD regime is nearly complete, with recent updates made to the Cayman Mutual Fund Law in December 2016 and the law expected to come into full force later this year.
3. What other advantages should investors and managers be aware of when it comes to doing business in the Cayman Islands?
In addition to the government’s adaptive regulatory structure, investors can take comfort in the fact that Cayman, as a British overseas territory, has high levels of political and economic stability. This is largely thanks to a well-developed legal and court system based on English common law, mirroring the legal structures in many developed nations. The results speak for themselves—in 2016 Cayman enjoyed 3% GDP growth with just a 5.6% unemployment rate, and holds an Aa3 stable credit rating from Moody’s.
One of the greatest advantages of doing business in Cayman is that the territory doesn’t tax the income or capital gains of investment funds or their investors, nor the transfer taxes on the transfer of interests in investment funds. This is particularly attractive for fund managers working with international investors or U.S. tax-exempt investors, many of whom have come to expect offshore tax benefits. Naturally, this benefit does not include taxes enforced by an investor’s home country upon redemption of funds, a process that the Cayman Islands has made increasingly transparent in recent years.
The Cayman Islands also boasts a deep talent pool featuring countless alternative investment firms and service providers. In fact, 47 of the world’s top 50 banks have a presence in Cayman, as do all of the leading global accounting firms and law firms. Fund managers can take advantage of expert attorneys, fund administrators, trust companies and insurance firms, with close access to everything they need to run their business. (For more, see: What Should Investors Expect From Markets in 2017?)