Losing business to Cayman

HedgeWeek is reporting that Bermuda has lost a number of hedge funds to the Cayman Islands because of their compliance with the EU's Savings Tax Directive:

Not only are the vast majority of Cayman funds not affected by the directive, but the jurisdiction is starting to attract funds previously domiciled in Bermuda and the Bahamas because of the tax certainty provided by its agreement with the EU. Because neither of the other territories signed up to the directive, the status of their funds is unclear...

The outflow of Bermuda funds to Cayman amounts to 25 funds with net assets of USD5.7bn, according to the Bermuda Monetary Authority. According to Paul Scrivener, a partner with law firm Solomon Harris, Cayman’s advantage stems principally from the way Switzerland has implemented the directive.

“Switzerland’s rules as to how the directive is applied mean it is far easier for Swiss banks to invest in jurisdictions that are subject to the directive,” he says.

Comments

[Tiger Bay on 17.01.06 at 08:51]

By comparison to the Cayman Islands, Bermuda is home to big government and bureacracy.

But we have hills. So there.

[Pitts Bay on 17.01.06 at 13:42]

While the EUSD and the way that Switzerland has applied its home rules is clearly a relevent factor, do not discount the effect the independence debate has had on the funds industry.

As I understand it, the Swiss Home Rules issue has been solved - got to give credit to the public AND private sector there - but there are many issues that affect whether new business comes to Bermuda (and stays) and certainty is one of the biggest. Until we can let people know where we will be in 5 - 10 years, the people establishing these structures will look to jurisdictions where there is certainty and stability.

The big problem is that is much easier to retain business than to win it back. Once all the onshore advisers have "Cayman on the mind", it takes 10 times the amount of effort (and time) to get them to even consider Bermuda again.

[Combat Banker on 17.01.06 at 14:28]

Pitts, has the issue realy been solved? I am not an expert on tax laws by any stretch, but I thought there was still a difference in the way Bermuda & Cayman had negotiated their inclusions. Someone here mentioned to me Bermuda had, at a later hour, negotiated an exemption from scrutiny, while Cayman was included in scrutiny, but exempted from tax?????? Anyone know the answer to this?
Either way it was my understanding that Cayman came out ahead.

[Combat Banker on 17.01.06 at 14:34]

Check out this story.

Important quote is as follows:

“Switzerland’s rules as to how the directive is applied mean that it is far easier for Swiss banks to invest in jurisdictions that are subject to the directive,” explains Mr. Scrivener. “This is because the concessions agreed by the Cayman Islands with the EU take hedge funds in particular outside the scope of the directive and therefore remove significant burdens on the Swiss banks under the Swiss rules.”

Mr. Scrivener goes on: “Since Swiss banks are major investors in offshore hedge funds, the Swiss rules have led to many Bermudan and some Bahamian funds being left with no option but to relocate to Cayman, resulting in a steady stream of redomicilations that has kept both CIMA and the Cayman law firms busy since the summer.”

ie Ironically it's Bermuda's exemption from the tax directive that is driving the business away!!

[Njegos on 17.01.06 at 14:42]

Combat Banker:

It is really a reporting issue. Cayman Islands, through its licensed administrators, will seek to ensure that all interest income accruing to EU domicilied investors is reported to the EU tax authorities. There is no tax implications for the funds themselves.

The truth of the matter is that, re-domiciliations (what a word) aside, the Bermuda hedge fund industry has been losing out to Cayman for years thanks to cost, bureaucracy and the BMA's justifiable concern about the background/quality of offshore investment managers. It's hard to believe that only 10 years ago, Cayman was viewed as a somewhat "dodgy" jurisdiction.

Re-insurance, on the other hand, is growing by leaps and bounds. Looks like specialisation within the financial services sector is the name of the game.

[Njegos on 17.01.06 at 14:50]

ie Ironically it's Bermuda's exemption from the tax directive that is driving the business away!!

When it come to hedge funds, we should just copy whatever Cayman does. They seem to have got the model right. Let others do the heavy lifting!

[Combat Banker on 17.01.06 at 15:02]

Thanks for that Njegos.

And yeah a finding a niche (reinsurance in this case) and beating everybody else at it is a good strategy for a jurisdiction of this size. However, as an insurance centre, we all know the risk of a lack of diversification. Especially as this illustrates how one small change in a law somewhere can quickly handicap an entire industry.

[Njegos on 17.01.06 at 15:46]

Indeed. Alot of imagination and creativity will be required to stay ahead of the competition.

[Murmur on 17.01.06 at 17:03]

Before commenting you need to know the true agenda underlying the EUSD. That is, dominating small jurisdictions and forcing them to give up business to the high-tax (and fiscally irresponsible) jurisdictions. The EU wants to be able to press a button and get the personal banking history of every European who does business in Bermuda or any offshore jurisdiction. This is pretty bad for business in the long run.

[Njegos on 17.01.06 at 17:52]

The EU wants to be able to press a button and get the personal banking history of every European who does business in Bermuda or any offshore jurisdiction. This is pretty bad for business in the long run.

And probably quite upsetting for alot 2-faced EU politicians with portfolios filled to the brim with juicy tax-efficient hedge fund investments.

[SmokingGun on 17.01.06 at 18:11]

"investments" - Njegos

As in bribes, pay-offs and embezzlements.?

Bermuda's been on a high for so long that now it's suffering from the symptoms of withdrawal. We'd better find a fix soon. As in a clear vote of "no" on independence.

[Bandit on 18.01.06 at 05:56]

Bermuda suffering symptoms of withdrawal.... Hedge funds going to Cayman...Withdrawal

HAHAHAHAHAHAHAHAHAHA!!!!!!!!

Nice one!!!!

On a more serious note the comments about Europe wanting a piece of the action should be very worrying to all countries. The biggest problem is that prior to the implementation of the EUSTD, the FBI, CIA, MI5 etc. knew where the likes of Bin Laden, etc. kept his money. Apparently, it has been moved from tax efficient accounts in respected jurisdictions, and the whereabouts are now unknow.

[Fourth Estate on 18.01.06 at 09:00]

Cayman has an increasing number of tourism air arrivals, driven by the post-Ivan rebuilding and the opening of new resorts such as: http://www.ritzcarlton.com/resorts/grand_cayman/default.html