Cayman Islands: Offshore Business Sectors
Investment Fund Management
This page was last updated on 28 June 2019.
The Cayman Islands are now one of the world's leading fund management centres due to the welcoming regime, well-constructed legislation, good reputation, and the presence of the Stock Exchange, whose regime is particularly well-suited to mutual funds.
Under the Mutual Fund Law 1996 (revised in 2007 and 2009), investment or mutual funds with more than 15 members must be individually licensed, or must be administered by licensed mutual fund administrators. Licences are issued by the governor in Executive Council ('ExCo') after scrutiny of the application by the Cayman Islands Monetary Authority (CIMA).
By the end of 2012, the number of active mutual funds regulated by the CIMA stood at 8,950 - down from 9,258 funds in 2011. In 2008, the number of registered funds in the Cayman Islands broke the 10,000 barrier, but by the end of the year the number of registered funds had dipped to 9,780 (comprising 9,231 registered funds; 510 administered funds and 129 licensed funds) as the hedge fund industry fell victim to the volatile world financial markets.
The Cayman Islands Stock Exchange (CSX) opened in July 1997 under the Stock Exchange Company Law 1996, specifically targeted at mutual funds and specialised debt securities (SPVs). Funds of funds and umbrella funds are both accepted, and there are no restrictions on investment policies. Funds can be established locally, or in a recognised jurisdiction, meaning the EU, the USA, Japan, Switzerland, Canada, and a number of other international offshore financial centres. Listing takes as little as one or two weeks. See Law of Offshore for details of listing requirements.
In March, 2006, offshore law firm Walkers said that collateralised debt obligations (CDOs) were being created at a record pace in the Cayman Islands, with $125 bn of transactions in 2005. Walkers said that more than 270 CDO transactions were established in the Cayman Islands in 2005; the number of CDOs issued in the Cayman Islands grew more than 100% in the two years previous to this.
One of the drivers for this growth was that CDOs were being used in more ways than ever before: as asset-backed securities, commercial- and residential-backed securities, balance sheet CDOs backed by pools of commercial loans, high-yield bonds, leveraged loans, and repackaged CDOs.
The Cayman Islands provides CDOs with a tax neutral jurisdiction, a sophisticated financial infrastructure that includes major banks and accounting firms, and therefore the ability to achieve measurable savings which, in turn, are passed along to investors.
Cayman legal firms were indeed in great demand from the issuers of structured finance securities during the first six months of 2006, underlining the Cayman Island's pre-eminence as a jurisdiction of choice for special purpose vehicles (SPVs) used in securitisation transactions.
According to UK data provider FactSet Global Filings, leading Cayman Islands law firms Maples and Calder and Walkers gave legal advice on 147 asset-backed securitisation (ABS) deals between January and June 2006.
Maples gave advice on a total of 111 deals and Walkers on a further 36 deals, while smaller contributions from Mourant du Feu & Jeune and Ogier pushed the total number higher still. This compares with the combined total of 92 from the three main Irish law firms of A&L Goodbody, Matheson Ormsby Prentice and McCann Fitzgerald.
The process of asset securitisation involves the sale of income-generating financial assets (such as loans, trade receivables and leases) by a company to a special purpose vehicle. The SPV, which might be a trust or a company, finances the purchase of these assets by the issue of bonds, which are secured by those assets.
Cayman law firms were also dominant in advising on collateralised deals during the first half of the year with Maples and Walkers advising on a combined 143 transactions compared, compared with 77 from the main Irish firms.
CDO issuance continued to balloon during 2007, with Cayman eventually responsible for 80% of the market; but when the sub-prime mortgage crisis hit late in the year, CDO issuance was an immediate casualty. Such recovery in issuance as took place in 2009 largely bypassed Cayman, with its strong US links. Long-term, the Islands' expertise in structured products will ensure that the business continues, but for the time being it is not the brightest star in the Cayman firmament.