Changed Dynamics of Hedge Fund Industry Shown in Cayman Data

By Simon Kerr, Publisher of Hedge Fund Insight


The Cayman Islands Monetary Authority produces regular statistics on the numbers of active financial businesses in its jurisdiction. Offshore banking and reinsurance are significant to the Cayman Islands, but the Cayman Islands are also home to more offshore hedge funds (Cayman Island Mutual Funds) than any other domicile.

Over the last five years since the Credit Crunch the number of hedge funds (Cayman Islands Mutual Funds) registered in the Cayman Islands has dropped by a small percentage each year, equivalent to  an 11% decline from the 2008 peak of 9,231. This is shown in the Table below, which also reflects a decline in the number of administrators authorised to operate in the Cayman Islands on scale similar to the fall in Mutual Funds (hedge funds).

Source: Cayman Islands Monetary Authority

The long-term trend in the hedge fund industry for the largest funds to take an increasing share of the AUM, and for the large hedge fund management groups to take an increasing share of all new capital raised whether by new or seasoned funds.  Net new fund formation in the hedge fund industry is at a low level, and has been since the end of 2008. The first half of this year has showed more of the same – it is very hard for new and small hedge funds to get commercial traction because most of the allocators to hedge funds are conservative in their fund choices.

The Cayman Islands hedge fund data reflects the state of the offshore industry, which is marginally shrinking in the numbers of funds, even if the aggregate assets across offshore hedge funds have grown for each of the last four years.  Whilst not dramatic, there has been a minor acceleration in the net closure rate of offshore hedge funds in the last four years, and the impact on the wider industry, amongst the service industry for hedge funds and their managers, is mirrored in the fall in the number of  “Full Mutual Fund Administrators” in the Cayman Islands. That is there is no statistical fluke in this data  – there is a clear trend in the primary data (for falling numbers of hedge funds), supported by secondary data with the same directional trend (fewer administrators).

The absolute growth in numbers of hedge funds, has occurred in onshore hedge funds,  particularly in regulated funds (such as UCITS III funds in Europe), and in onshore funds beyond Europe.  But growth has also occurred in fund formats which take the place of more traditionally structured (offshore) hedge funds – so institutional investors have shown a strong preference for funds of one investor, and managed accounts, and platforms of managed accounts.

The conclusion is that quite a lot, though not all, of the offshore hedge fund industry is still under pressure over four years after the low in hedge fund assets.