Asset Management Intelligence - November 2015 - Cayman and Ireland – The Domiciles of Choice for U.S. Hedge Fund Managers
EisnerAmper Cayman recently joined the EisnerAmper Global Network as a founding member.
To mark this occasion we invited Ben Leung, Managing Partner of EisnerAmper Cayman, and Ray Kelly, Head of Funds in EisnerAmper Ireland, to discuss why U.S. hedge fund managers continue to view Ireland and Cayman as the domiciles of choice for their fund products.
They were joined in this discussion by John D’Agostino of DMS New York and Conor MacGuinness of DMS Dublin. For the last decade, DMS Offshore has been the recognized leader in fund governance. That expertise is now augmented by a comprehensive range of complementary services, making DMS an authentic one-stop shop for navigating the world of offshore investing and understanding the challenges faced by U.S. managers in choosing an appropriate domicile for their fund products.
Q1: It has been a difficult period for hedge funds since the financial crisis. How has this impacted the number of fund managers establishing funds in Cayman and Ireland?
Conor MacGuinness: Investor demand for European products and the strong brand image of these funds, particularly Undertakings for Collective Investment in Transferable Securities (“UCITS”) and more recently Alternative Investment Funds (“AIFs”), has kept demand for Irish products growing in recent years. While performance of funds and outflows in the form of redemptions were an issue in Europe and elsewhere, investors continue to value the benefits of investor protection they obtain through the regulations in place on both the fund and the investment managers in the European context.
Ray Kelly: The statistics produced by the Central Bank of Ireland support Conor’s view that Ireland, as a regulated fund domicile, has benefited from investors’ increased focus on regulatory protection. Since the low of 2009 the total number of Irish domiciled funds, including both UCITS and AIFs, has increased from 4,627 to 5,999 as of July 2015, with a related increase in net assets from €748billion to €1,896 billion.
Ben Leung: Despite the Cayman Islands being one of the leaders in the offshore mutual funds industry, it was not shielded from the effects of the financial crisis in 2008. During the period 2007 to 2015, Cayman Islands Monetary Authority (“CIMA”) registered mutual funds moved from 9,231 (2008) to 7,795 (2015).
However activity is recovering in recent years with 1,891 registered master funds in 2012 increasing to 2,773 by June 30, 2015.The latest CIMA statistics show net asset values of regulated funds near the 2007 levels at $2,127 trillion.
John D’Agostino: Cayman will continue to benefit from its historical position as a globally respected offshore fund domicile, aided by its evolving oversight that is keeping up with the shift in global regulations. The number of fund managers setting up in Cayman will, by consequence, ebb and flow with the overall number of fund launches globally. Ireland’s success appears to be a function of its strong competitive positioning relative to other EU domicile options. It is clear Dublin wants to be the location of choice for managers who have a focus on the EEA, and in that respect it is doing a great job.
Q2: What are the main reasons that Ireland and Cayman continue to be leading fund domiciles for U.S. Managers?
CMG: There are considerable commercial and cultural similarities between Ireland and the U.S. With a shared language and a shared service culture, along with many of the leading financial service providers operating on both sides of the Atlantic, operating an Irish domiciled fund is easily within reach for U.S. managers and Ireland offers a compelling domicile for this.
BL: The Cayman Islands has always been the jurisdiction of choice for U.S. investment managers because of the following reasons: speed and simplicity of establishing entities; a tax neutral jurisdiction; a significant number of international tax information exchange agreements; a fully developed business law based on the English legal system backed with a professional infrastructure and reputation; compliance with international anti-money laundering and other financial regulatory standards; geographical location and time zone; and multiple structures allowed backed by law, which allows the investment manager options to work with their strategy.
JD: Simplicity and clarity is a key requirement in any manager’s assessment of a suitable domicile. U.S. managers have built an understanding of the Cayman Islands’ fund regime and the benefits outlined by Ben over many years of operating there.
From an Irish perspective, the Central Bank of Ireland’s approach towards regulation is relatively streamlined; the recent ICAV innovation shows a commitment to creating and maintaining attractive fund structures; and communication with the industry around regulatory expectations and best practices (in the form of guidance notes) is frequent. All this removes a major risk factor – uncertainty – and makes Dublin a strong risk adjusted choice for domicile.
Q3: With the avalanche of regulatory changes since the financial crisis, what has been the single biggest challenge for U.S. managers establishing Cayman or Irish funds?
CMG: European funds have a different regulatory profile for those more used to the onshore U.S. or Cayman environment and U.S. managers need to familiarize themselves with the twin pillars of European funds, UCITS and AIFMD. For example, UCITS has comprehensive guidance on the structure and limits of the fund itself, while AIFMD has little or no limits on fund structure, but has considerable requirements on the governance of the manager. Relying on the expertise of local partners has been the common solution to such familiarity issues and has kept the Irish industry busy in recent years.
RK: Just picking up on Conor’s point regarding AIFMD’s impact on the manager, one of the more controversial aspects for our U.S. clients of the AIFMD is the extension of the remuneration requirements to delegates of the Alternative Investment Fund Manager (“AIFM”). Without getting too technical, the U.S. is not currently deemed to have in place equivalent regulatory requirements as to remuneration meaning that a U.S. manager appointed to provide investment advisory services to an AIF may be required to comply with the AIFMD’s remuneration requirements. There are solutions available but it is certainly a point that we have seen exercising U.S. managers when establishing a presence in Ireland.
BL: As of 2010, United States federal law requires U.S. persons to have yearly reports of their accounts and their non-U.S. financial accounts. The law also requires all non-U.S. financial institutions to search records of suspected persons for reporting their assets and identities. The Cayman Islands has in place an intergovernmental agreement with the United States which requires Cayman funds to disclose information regarding investors whose accounts may be considered “reportable accounts” under the Foreign Account Tax Compliance Act (“FATCA”). Reportable accounts are financial accounts where the account holder is either a ‘specified U.S. person’ or is a non-U.S. entity that is the controlling persons of which include one or more specified U.S. persons. In 2015, the Cayman Islands opened the Automatic Exchange of Information Portal for funds to register and notify the Cayman Islands of their status.
JD: While the regulatory environment has become more complex, ultimately these are solvable problems. The barrier to adoption for U.S. managers is driven primarily from concern that these costs/efforts will not lead to a proportional increase in non-U.S. assets – or at least enough to warrant the increased disclosures, including remuneration as Ray mentioned earlier. There is evidence that EEA fund flows are increasing, and that these investors prefer investing in fully compliant structures. This will drive U.S. managers to look past the short term friction in setting up these offshore (Cayman/Ireland) funds and towards the long term benefits of having registered, compliant vehicles with which they can access a growing body of investor interest in the EEA and elsewhere.
Q4: What growth opportunities and challenges does the next 12 months hold for U.S. hedge fund managers considering establishing Cayman or Irish funds?
BL: The Cayman Islands is still the world leader as a hedge fund domicile and has been for some time. All the reasons for its success referred to earlier remain. It is a tried and tested jurisdiction and an easy sell for investors who do not need the “product” explained to them. As the world becomes more complicated, this may become more important to investors as a reliable option.
CMG: With investor appetite for various fund types improving in Europe compared to recent years, opportunities for capital raising continue to reveal themselves. Many U.S. managers are now emerging from the regulatory paralysis of recent years and looking to UCITS and AIFMD products to access these opportunities.
Some regulatory uncertainty remains in relation to the European Securities and Markets Authority’s (“ESMA”) work on the availability of the marketing passport to non-EU AIFMS and non-EU AIFs. Currently the pan-European marketing passport is only available to EU AIFs and EU AIFMS and ESMA are assessing the suitability of certain non-EU countries obtaining such a passport. With no clear date for such a marketing passport to many countries, particularly to U.S. managers with Cayman funds, managers are choosing between the waiting game or proceeding with setting up a European fund for European distribution.
JD: Managers hoping for a rollback in global regulation, or at least definitive clarity, in the next 12 months will be disappointed. Ultimately, expansion decisions will need to be made in somewhat of an information void. Managers will need to assess their strategy’s attractiveness to global investors and make a decision to create a compliant structure for them to invest as well the appropriate marketing outreach in order to access global capital. Given the diminished supply of U.S. managers offering funds globally due to the regulatory restrictions, managers that take this decisive action may find a more interested market than they remember from years back.
RK: U.S. managers looking to access the global capital opportunities now emerging need to consider the requirements of their target investors. For some investors, an Irish AIF or UCITS will be the right fit given their distribution capabilities and regulatory wrapper while for other investors the Cayman Fund continues to work well. For larger managers who can support the costs involved I expect that we will continue to see the development of parallel Cayman and Irish funds to satisfy the different requirements within their investor base.
Asset Management Intelligence - November 2015
- Alternative Investment Industry Outlook for the Remainder of 2015 and Next Year
- Is Your Annual Compliance Program Review Becoming Too Routine?
- New York State and New York City Issue New Guidance Regarding Investment Capital Identification Procedures
- Cayman and Ireland – The Domiciles of Choice for U.S. Hedge Fund Managers
- The Good Client