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Cayman Islands’ calm continues

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There is no question that the effects of the sub-prime mortgage crisis have been felt in financial markets worldwide. Some markets experienced mere ripples; others faced a full-blown tsunami.

There is no question that the effects of the sub-prime mortgage crisis have been felt in financial markets worldwide. Some markets experienced mere ripples; others faced a full-blown tsunami. But for offshore hedge funds, the mature structure and venue in the Cayman Islands is a relative oasis of calm – and shows no sign of slowing down.

Coming off a slight weakening in net hedge fund registrations in the final quarter of 2006, there were predictions of a marginal decline in Cayman registrations in early 2007. Those prophecies have been unfulfilled and 2007 is on track to set yet another record.

Cayman passed the 9,000 mark for registered hedge funds, reaching a total of 9,384 as of September 30, 2007 – an all time high. And while the connectivity of the global marketplace is continuing to make the world a smaller place, there is every reason to believe that this historic trend will continue into 2008.

In the next few months data underlying these statistics will be released for the first time by the Cayman Islands Monetary Authority (CIMA) from its new E-Reporting system that became fully operational at the end of March. This system heralded the start of a new modern and digital era of hedge fund regulation in Cayman. All indications are that the initiative has been an outstanding success.

With a new electronic initiative, providing more information to track trends and key market indicators – as well as the fact that the sheer volume of hedge funds in the Cayman Islands allows managers to examine a variety of structures and make performance based adaptations – Cayman remains a venue of choice for hedge funds from around the world.

Indeed, there are a number of drivers for this choice. First, offshore jurisdictions like Cayman proudly provide a regulatory infrastructure that is best in class and balances regulators’ demands for stringent standards with the needs of fund managers to be successful on behalf of their investors.

Second, five years of steady growth has prepared CIMA to successfully absorb the increased hedge fund registration that is expected in the years to come – alleviating worries that the organization may not be able to cope with steady increases in volume. This scalability is a key differentiator for Cayman and one that is recognized globally.

Third, factors such as the multi-jurisdictional nature of most Cayman hedge funds, and the fact that most serve an elite client base, ensure that top-tier talent will continue to be attracted to Cayman’s financial services workforce.

And fourth, Cayman hedge funds are leading the way in sound governance models, either through internal or regulatory mandates, that provide for the strict sovereignty of independent directors – a trait that takes on added importance in an era of increased scrutiny.

While some financial professionals will be glad to see the end of 2007, Cayman hedge fund experts are largely viewing the year as an outstanding success. In fact, the mortgage debacle and its fallout have already spawned new hedge funds to take advantage of undervalued sub-prime assets. Hedge fund registrations, particularly in Cayman, are predicted to remain extremely strong.

Given what we now know, 2008 is shaping up to be a very good year.

Mark Lewis is a partner at Walkers and based in the Cayman Islands

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