Caymans Sees Strong Hedge Fund Growth

Paul Das

12 January 2006

Last year was another record year for the registration of hedge funds in the Cayman Islands, according to global offshore law firm, Walkers. Private equity transactions that have closed in the last 12 months are also at a record high according to the firm. The drivers for last year’s spectacular performance were the inclusion of more global segments, particularly Asian and the Middle East, and the growing demand for higher returns from both institutional and high net worth investors. For the first nine months of 2005, the Cayman Islands Monetary Authority reported that more than 960 funds have been formed, with an increase of 361 funds in the third quarter of 2005, a 15 per cent increase over the same time period in 2004. In 2004, itself a record year, 1,405 new hedge funds were formed in Cayman during the entire year. The level of assets invested in hedge funds around the world rose in 2005, largely as the result of pension fund assets that were invested into alternative investments vehicles, especially in Japan. More than $2.5 billion in pension funds were invested in alternative vehicles in Japan in the first nine months of 2005, primarily through hedge funds domiciled in the Cayman Islands. Importantly, pension funds are also driving new hedge fund structures, including the use of side letters, a type of special arrangement for select fund contributors. "Side letters are often needed to allow a pension fund to invest in a hedge fund without violating the terms of the pension fund's charter documents or the provisions of ERISA," Mark Lewis, Senior Investment Funds Partner for Walkers, said. "Driving this trend is a significant increase in the funds allocated to the alternative investment sector in all jurisdictions from Japan and Dubai to the UK and the BVI," he added. Like hedge funds, private equity funds also saw a steep increase in activity in 2005 for a wide range of reasons, and in a variety of jurisdictions. "Private equity funds and hedge funds seem to be moving closer in terms of structure and strategy. We anticipate seeing even more of this and we are actively working for our clients on a number of these 'hybrid' funds which will be launched early this year," Iain McMurdo, an Investment Funds partner for Walkers, said.