Cayman funds face volatility

(CNS): Head of the Investments and Securities Division at the Cayman Islands Monetary Authority (CIMA), Yolanda McCoy has said that some 340 local funds have been impacted by the problems with Lehman Brothers, Merrill Lynch, and AIG. Speaking at a special conference held in New York, she said that fund terminations in Cayman were running at an average of 50 per month.

Speaking at ‘Fighting the Tape’, organized by local legal firm Walkers, McCoy said the total number of hedge fund registrations in the Cayman Islands is still running ahead of the same period in 2007, with 1,441 new authorisations up until September 2008 compared with 1,407 during the same period in 2007. During the month of October, there were 85 new fund authorisations processed with an additional 25 pending.

"The true impact of the US credit crisis will not be tangible for many months to come," she added and confirmed that to date CIMA was aware of a total of 340 Cayman funds that had been impacted by the problems with Lehman Brothers, Merrill Lynch, and AIG, with more than 200 of those affected by issues with Lehman. Fund terminations are still "extremely low," running at an average of 50 per month.

"While we expect terminations to rise, the current situation will not paralyse the Cayman fund industry," McCoy said.The conference was designed to examine the predictions for what the alternative investment funds industry can expect in the months ahead and provide insights on distressed funds.

According to a Walkers’ release, some 200 financial experts attended and discussed the volatile hedge fund market and looked toward a new era of hedge fund regulation, greater flexibility, and broader discretion for fund managers, and continued growth in many of the world’s key economies.

Among the first speakers, Walkers partners Nick Rogers and Ingrid Pierce examined the manager’s perspective with regard to distressed hedge funds. With so many attendees from the asset management community dealing with issues related to significant redemption requests and illiquidity, this presentation became a focal point of the seminar. They outlined an innovative solution that Walkers has developed with US counsel to create the effect of a side pocket, which attracted significant interest from attendees.

"The principal advantage of the ‘synthetic side pocket’ is that it relies on the use of mechanics that are permitted by and disclosed to investors in the fund’s offering documents," Rogers explained.

George Hall, founder and president of the Clinton Group Hall, gave his personal views on the financial crisis and what the market might see under President-elect Barack Obama. He said he hoped the new President would make good choices when selecting his Treasury Secretary and a leader for the SEC and he noted that the US government’s initial offer to purchase "toxic assets" through the Troubled Asset Relief Program (TARP) was not presented very well, according to Mr. Hall, who said there is no such thing as a toxic asset, only atoxic price.

Guy Locke, senior partner of Walkers’ Insolvency Group, and Scott Lennon, senior vice president at Walkers Fund Services, looked at distressed funds from their perspectives. Locke discussed some of the issues – and opportunities – related to insolvency, while Lennon spoke from his position as independent director to investment funds.  "When a fund is in distress, the investors take comfort in knowing that the board of directors is comprised of persons with the requisite background and experience to deal with the crisis," he said.

Professor Rosensweig closed the seminar with insights into the investment opportunities presented by this current stage in the cycle, shifting the focus from New York and London to emerging markets such as Brazil, Russia, China, the Middle East and India as the next growth engine for the global and US economy in terms of jobs, capital, and other areas.

"The world adds 100 people every 42 seconds," Professor Rosensweig said, "and 98% of that population growth is in the emerging markets.” Pointing to the expectation of long-term continued economic expansion in these regions, Professor Rosensweig said this massive population growth, combined with a move out of poverty in these regions, presents real future opportunities for investors.

"I thought it was an excellent seminar and very timely," said David Vaughan, partner at Dechert. "There was a great balance between the very technical and the important big picture issues. The presentations were very well done, and the two hours flew by."

Held on 6 November at the Sheraton Hotel and Towers on Seventh Avenue in New York, the session – "Fighting the Tape" – was the first of the ‘Walkers Fundamentals’ series, designed to bring discussions of key financial issues to the investment capitals of the world.

"It was extremely satisfying to receive such an overwhelming response from both the New York business and global investment communities," said Mark Lewis, senior investment funds partner at Walkers, who opened the seminar. "It was standing room only and we received a great response from the major law firms, who were keen to find out more about the innovative solutions to hedge fund problems that we are facing on a daily basis with distressed hedge funds."

Walkers will further develop its ‘Fundamentals’ series of events, with plans in place for a seminar from the Management and Finance groups at Walkers in the first quarter of 2009 and further hedge fund events in London and Hong Kong over the next 12 months.