Rumours of our demise are greatly exaggerated
Published in Offshore Investment, June 23, 2010
Whilst the taxpaying public and corporations in many G20 jurisdictions are battling the effects of their increased taxation, in fact international capital is starting flow once again; hedge fund returns are up-ticking. Against this backdrop, it is useful to take a hard statistical look at how Cayman's financial services industry has fared through the crisis.
One of the easiest figures to get a handle on is the number zero - the total number of banks and financial institutions that failed in the Cayman Islands during this latest financial crisis. Perhaps Gordon Brown and Alistair Darling were simply badly briefed, but there is no statistical basis for the suggestion that instability exists within the Cayman Islands' regulatory regime and their criticisms of it were ill-founded.
No doubt, without the the power to print money like their UK and US counterparts, the Cayman regulatory authorities are simply not in a position to bail out private enterprise, and therefore require a more risk-averse and prudent set of operating guidelines to be practiced by the Cayman banking sector. If we allow the facts to get in the way of the negative PR for just a moment, we find the strength of the Cayman banking industry well evidenced by deposits and interbank bookings, now tracking at USD1.8 trillion which is slightly behind the peak of USD1.9 trillion recorded in September 2007, but up 3.75% from the same period in 2009 and still at healthy overall figure considering that there have been zero depositor losses.
Registered investment funds fell from 9,870 at December 2008 at the end of the first quarter of 2010, but figures are still well ahead of the 8,751 funds registered in 2007. A new growth trend is evidenced - 2010 figures show 147 new fund authorisations and only 58 terminations. This compares quite favourably to the 106 authorisations and 39 terminations in January 2008 and is on target with the natural attrition trends experienced in the healthier market periods of years past.
These Cayman Islands fund statistics are surprisingly being used by some, who doubtless believe their own PR, to suggest major outflows of fund business are occurring from Cayman. In fact the drop is around 5% and after the worst financial crisis in a century this seems more like a sign of a strong fundamental belief in the jurisdiction. And where did the 5% go?
There is no evidence they went anywhere other than into liquidation as a result of poor investment return and certainly not to Dublin, where we make a like-for-like comparison, we find that Irish domiciled funds fell from 5,025 to 4,627 from December 2008 to December 2009, which is more than double the Cayman decrease. IT must also be pointed out that the Irish fund listings fell from 1.605 to 1,270 during this same period, which is a loss of greater than 20% and is consistent with the general malaise affecting the Irish economy.
In the insurance division, the story is brighter yet with the Cayman Islands Monetary Authority (CIMA) reporting the 2009 number of total insurance companies (including both domestic and international insurers) at 815 which is up 10 from the year ending 2008 and 22 over the 2007 total of 793. Captives specifically have experiences gains over this period, rising to 780 at the end of 2009 from 765 in 2007.
The assets held in the captive insurance industry have risen from USD36.8 billion in 2008 to USD44.7 at the end of 2009, an 18% increase. By contrast, the largest jurisdiction for the captive insurance industry, Bermuda reports 1.140 captives holding USD84 billion in assets, which is down from their 2007 report of 1,149 captives holding USD88.8 billion in assets. Cayman the second largest domicile for captives, continues to gain ground against its major competitor.
Overall, these numbers are strong and prove the resilience of Cayman's financial services industry and suggest that Cayman structures are essential to the global flow of capital - a key tho economic recovery everywhere. The question that has not yet been asked, given the strength of the capital flows through Cayman, is the extent to which the protectionist elements of both the HIRE Act 2010 in the US and the European Funds Directive will have the unintended consequence of drying up the flow of funds from Cayman to the US and Europe at a time when the funding requirements of both are increasing not decreasing.
The more logical consequence of the most recent iteration of the European Funds Directive is that rather than Cayman hedge funds wishing to move to the EU, fund managers who wish to continue to run a hedge fund properly must move out of the EU.
The recession has not completely leapfrogged the Cayman Islands, transactional volumes have decreased and assets under management decreased to 1,698 trillion (As at 31 December 2008). The business community as a whole has had to downsize accordingly. Streamlining into leaner operations is to be expected as part of a normal business cycle and so too government must downsize public sector expenditure.
That being said, in what has hopefully been the most trying financial period our generation will have to face, the Cayman product has shown extraordinary fortitude, exhibiting both strong demand and staying power.
