They Cayman they stayed! Caribbean hedge fund center should be new destination for proper FX firms

There is nothing like an endless anti-business communist style lockdown to stifle all international interests in a geopolitical region.

Throughout history, curtailing of personal and economic freedoms, wars and dictatorial aspirations have always been factors which have decimated interest in developing business.

When Mao arrived in China, the Confucian philosophy and flagrant entrepreneurism was replaced by an over-reaching and Orwellian government. When Lenin reached maturity in St Petersburg, the decadence of the Romanov dynasty gave way to gray and austere communism, minimalist personal lifestyle and an apathy which pervaded the psyche of over 100 million citizens who became comrades and received the same from the state whether they worked hard or not.

Nicolas Maduro has followed the lead of his predecessor in Venezuela, once one of the most empowering nations on earth, in decimating the lives and businesses of the entire population.

Add to this the restrictions on daily liberties and movement, and you have complete divestment.

Today, totalitarianism of the same type masquerades under a very thin but cleverly devised veil of public health, and previously free market western nations are emulating the dark days of the pre-Cold War east.

Nobody is allowed into their offices, share prices of large companies in the region are floundering, unemployment and state dependence is rocketing and no new investment is possible.

For this reason, and many others, the Cayman Islands should be looked upon as a new and important venue for good quality FX and multi-asset electronic trading companies.

Before anyone begins to wonder whether a bump on the head has taken place, it is worth considering that the Cayman Islands is not St Vincent and the Grenadines. It is not the British Virgin Islands and it certainly is not the Seychelles.

Cayman Islands is a British subject in the Carribbean, and is relatively akin to Luxembourg or Zurich in its financial markets structure, demographic and earnings potential.

This morning in Britain, home to the world’s largest capital markets center – London – the government began to roll out its draconian Colditz-style hotel isolation program for anyone entering the country, whether a citizen or not. This comes after almost one year of utterly totalitarian lockdowns, and represents the ramping up of a single-issue state by a government with a single policy: lockdowns.

The new system will involve visitors to the United Kingdom for any purpose including business to be immediately sent to a hotel of the government’s choice where they will be fed airline-style food three times a day and not allowed to leave the room which will be policed by security guards. Thirty days later, each individual being subjected to this will receive an invoice for up to £1500 to pay for it. It is as though the clock has been rewound by 80 years and Central European tyrants of the 1930s are now resurfacing.

Britain’s government has released a list of thirty nations from which any arriving passenger by train, boat or aircraft will be forced into these conditions, all of which are equally lockdown-obsessed nations in Southern Africa, South America and Europe.

There is no mention of the Caribbean. This means that investment managers can strike important relationships with British-run hedge funds in the Cayman Islands and provide them as a managed service to retail FX investors, thus upping the game considerably and not being hampered by restrictions which may be impinging their existing business.

What is worth considering is that if these professionals exist, and brokers which are far more technologically savvy than hedge fund managers can get in on the action and gain funds with good assets under management that are far more stable than retail FX lead acquisition for small value/low lifetime value, it is definitely an easy sector for FX firms to move into.

Where would you set up? Recently, FinanceFeeds participated in an FX hedge fund conference in which the subject of setting up a ready-to-go hedge fund was discusssed. Among the experienced professionals, the audience unanimously considered Cayman Islands as the most attractive region to set up a hedge fund by 48% under an umbrella, closely followed by the United Kingdom, with 30% of the audience going that way.

Now with Cayman a free country and UK not, this is a very important statistic to take note of.

Sam Bratchie, of Ifina Group, based in England, has a background in investment management spanning 35 years, starting his career at a 1.5 billion pound family office, who now offers a full fund solution, in which 90% of his clients are startups, providing a bespoke service, then continued the discussion, looking at the Cayman Islands, one of the most popular regions historically for funds.

Mr Bratchie explained to FinanceFeeds  “Cayman is our main jurisdiction for funds even though we are FCA regulated. We specialize in startups, $15 million or less. These are the guys who are often managing their own money, or managing managed accounts and they want to move to hedge funds. We only deal with private or professional funds, we don’t do any retail, and they all recognize the Cayman funds ethos.”

“Also, the regulatory regime in Cayman has tightened up due to pressure from the EU and OECD, they’ve had to harmonize more with the EU fund solutions. We have a platform in Malta, however Cayman seems to be the chosen jurisdiction for most of our clients, and it is fully regulated, fully audited and is growing as a chosen region from our perspective” said Mr Bratchie.

“There are no secrets anymore, everything now has to be balanced and in terms of startups, we see Cayman as the preferred region for startups” said Mr Bratchie.

a consultant to the hedge fund industry, set up his first hedge fund in 1997, and had two hedge fund managers in London, before expanding to Switzerland. He built the infrastructure for Gotex. He then became CEO of Credit Suisse hedge fund portfolio in Channel Islands, began the discussion, his expertise on structure and strategy in setting up hedge funds being instrumental to this discussion.

“For me, I come from the manager side and have set up funds in all the major jurisdictions, and the overriding decision is to figure out what they want. I cannot just build a fund and say here it is, come and get it!” said Clive Snowdon of Draycliffe Ltd

“Cayman is well understood by investors, so that is the norm. If you are not doing Cayman, why are you not doing Cayman? That’s the way I look at it. If you start with this premise, there may be funds in Europe that like European funds, or they like the way the European model is more explicit in how you have to manage your funds. I don’t think that makes it any better, it is just a matter of preference for those who like the explicit control model” said Mr Snowdon.

“If you market to a specific region, look carefully where your investors are. If they’re in Switzerland, that’s not in the EU, and if in Britain, that won’t be in the EU for much longer too, so it’s important to look what you need to service these clients” he said.

“You could start in Cayman, and then if you get clients that want Europe, you add a European fund, simple really. I think it should be kept simple, Cayman is the default. When I was setting up funds over the years, I could do unit trust for distribution into Japan, or a Delaware feeder to bring URESO money in, it all depends on what the investors want and what cash they are bringing in” said Mr Snowdon.

“All the European providers have good products and good regulation, they’re all my friends however I think Cayman remains the default place to start” he concluded.

“To deliver, you need someone who understands who all the investment managers are doing. If you come from a bank and used to be a trader, you know a good ops guy who can do the operational stuff, but the investors are not buying into those skills in settlement, you need to understand how to best service the investment that is being made. If you are an FX manager setting up an FX fund, that is a tricky asset class, so someone has to understand the investment part to put that together” said Mark Shaw of Wildgen.

“You need a portfolio management system, and investors are not looking for you to run a fund from a spreadsheet. That portfolio has to capture what your managers understand, they may have come from a bank, and need to put in their trades and you need to understand their view. Their view and that technology will link to all their third parties, and the first stage of risk is seeing your portfolio and knowing the value of it” he said.

“Applying risk, concentration limits and control of information from investments is vital. Wrapping it all otgether is governance. I don’t think of governance of checking on investors in Cayman, it is more how your business is run, your product governance and interaction with third parties, and asset security governance so you don’t lose assets due to not being on top of it” said Mr Shaw.

These are all attributes that FX executives know well.

Low tax rates have led to it being used as a tax haven for corporations; there are 100,000 companies registered in the Cayman Islands, more than the population itself, rather like in Luxembourg.

With an average income of around KYD$47,000 (about US$56,000), Caymanians have the highest standard of living in the Caribbean. According to the CIA World Factbook, the Cayman Islands GDP per capita is the 41st highest in the world, but the CIA’s data for Cayman dates to 2004 and is likely to be lower than present-day value.

The territory is considered a major world offshore financial haven for international businesses and wealthy individuals and has a large percentage of residents who are senior financial industry executives in trading and hedge funds.

With the free world having increasing restrictions placed on it, and the full remit of technology available for FX firms to attach to hedge funds via turnkey solutions, the island is your oyster.

The statistical demonstration that new hedge fund launches increased to the highest level in five quarters in Q3 2020, added to the new solutions which mean that brokerages can start a hedge fund for $50,000 using a turnkey solution should be food for thought.

Recently, FinanceFeeds attended the 2020 Hedge Fund Expo hosted by Advanced Markets, all the panellists and audience agreed that the cost of startup is around $50,000 which is approximately the same as starting an FX broker under an umbrella system.

What is worth considering is that if these professionals exist, and brokers which are far more technologically savvy than hedge fund managers can get in on the action and gain funds with good assets under management that are far more stable than retail FX lead acquisition for small value/low lifetime value, it is definitely an easy sector for FX firms to move into.