US hedge funds contemplate going European
(Forbes): As something like normality has settled down among hedge fund managers on both sides of the pond in recent months, the question of where to find new investors (and new money) returns to its rightful place as a top concern for many US and UK-based firms. And in the face of regulatory lemons, a number of fund managers are making lemonade.
Category: World View
A hedge fund in simplest terms mean a pool of money from a group of investors that is managed by say one person called the investment manager. This investment manager is paid for managing the investment money and of course is expected to make a return (profit) for the investors.
Do not pay much attention to the word ‘hedge’ when referring to hedge funds. It means very little now. It used to mean having some protection against market fluctuations based on a certain investment in the fund.
It is true that hedge funds provide a large number of jobs in the Cayman Islands, maybe not directly but via other companies the provide a service to these hedge funds. Think of banks, accounting firms, law firms, fund administrators who all provide a service to a hedge fund. Any average Caymanian working for these type of companies are receiving a huge benefit. Having a job has economic benefits of course.
The risk of investing in a hedge fund can be significant but does not have to be. You can find very low risk or very high risk funds, but you do need to research a fund before investing to determine if the risk is acceptable.
From the Cayman Islands’ point of view we do want to make it as attractive as possible to have the funds serviced from here. More funds mean more jobs.
A hedge is basically a secondary investment to reduce or offset the risk in a primary investment. If your primary investment is a bank savings account the risk of inflation will erode the value of your investment over time. Stocks historically have "hedged" the risk of inflation, meaning that the rise in value of the stock will offset the loss of purchasing power of your savings account. A fund is simply a pooling of investments that, among other things, will provide an economy of scale advantage. You put your money together with others and buy many different stocks in larger more economic pieces and spread the risk. Hedge funds are pools of alternate, secondary investments and are usually riskier than the primary investments.
Hedge fund investors are typically and often specifically more seasoned high net worth investors who are more comfortable with the risks often associated with hedge funds. The average investor will not have the tolerance for the risk that a hedge fund can bring.
There is no direct benefit to an average Caymanian and these funds are not designed for average investors. The typical minimum investment in a hedge fund is $100k. The indirect benefit to the average Caymanian comes with the administration of the fund. Caymanian financial services firms and their employees that provide services to hedge funds derive the economic benefits from Cayman domiciled or serviced funds.
A decreasing inflow or outright outflow of hedge funds domiciled here leads to less jobs in the servicing sector with a direct effect on the average Caymanian working in that sector and subsequently to Cayman’s economy.
I’ll take a shot at it, being a layman myself this is how I understand it.
A traditional Hedge Fund was a hedge against typical investments. It was used to make a bet that was often against the primary investments, often with large potential gains, so that if the primary investment tanked the hedge fund made the bucks back. They grew into what they seem to be called alternative investments because they use strategies that make higher returns than boring old typical investments. They aren’t for the feint of heart, widows, or orphans. They also attract large investments because of the potential gains and the strategies of the sophisitcated investors like pension funds.
The benefit to the average Caymanian is actually a pretty long list which is primarily economic. I would guess that 30% (40%?) of the jobs in the financial sector are, or were, around supporting the Hedge Fund industry. If anyone actually has real information please share, it would be good to know. I have a good number of friends that make a very good living doing what amounts to bookeeping for them. Then you can count the dollars moving though our local banks, those also create jobs and banks that are profitable and stable. That equates to that whole jobs thing again, as well as making it possible for lots of people to have mortgages, which means we get nice homes, shiny cars, and boats to go fishing at Rum Point in. Those banks then lend money to small businesses to become bigger businesses, like Tortuga. I wonder if anyone remembers a time when a bank with a branch here was only open on Tuesday and Wednesday?
Hope this clears up some of the benefits.
In layman’s terms, what is a hedge fund?
And how do hedge funds benefit average Caymanians?
What are the economic benefits?
I’m not sure why, but so far the responses to your question have ignored the most direct contribution of the hedge fund industry, the initial and annual fees associated with being registered here. Off the top of my head I believe there are some 9000 funds registered, with initial registration fees of I think CI$2500, so that’s $22,500,000 in upfront fees. Annual fees run $3000, so that’s another $27,000,000 a year. Add in fees payable by mutual fund administrators and work permit fees and I suspect the annual fee contribution of the fund industry is in the $35-$40m range. Maybe more. Believe me, an average Caymanian would miss this contribution to government’s coffers were it to disappear.
Very true. However, the numbers that go through the service companies say via payrolls are significant more. It of course does not go directly to government but to the people of Cayman where the money is spent on housing, food and other essentials, all very important components of a working economy.