Q&A: CIMA Head Voices Concerns Over ‘Retailization’ Of Hedge Funds

Sep 8 2006 | 12:00am ET

Much has been written about whether or not U.S. hedge funds should be regulated, but U.S. regulators aren’t the only ones with oversight responsibilities. The Cayman Islands Monetary Authority currently regulates just over 7,900 funds, and approximately 90% of them are classified as hedge funds, with many of these managers based in the U.S. Gary Linford, head of the Investments and Securities Division of CIMA, explains to FINalternatives how the Caymans regulates hedge funds and why he is concerned about ‘retailization’ of private investment vehicles.

What do you think of the Securities and Exchange Commission’s hedge fund registration rule being overturned? Do you think U.S. legislators should push for greater regulation?

We are not in a position to tell U.S. legislators and U.S. regulators what’s best for them, but we do believe that [SEC] Chairman [Christopher] Cox has put forward a logical balance whereby protections are put in place for retail investors, while institutional investors and those who service them are able to take a more risk-based approach.

Has the SEC and/or U.S. lawmakers approached CIMA for advice or information about how your agency regulates hedge funds?

We have an excellent working relationship with the SEC. We’d also like to think that as the Cayman Islands has had a legal and regulatory framework for hedge funds since 1993 we could be a source of knowledge on hedge fund issues. But, to date, we have not been asked to provide our input by any onshore regulator or by any of the international standard setters that are repeatedly heard to express concern on the impact of hedge funds on international financial markets.

Do you work with other regulatory agencies, and if so, how closely do you collaborate and what sort of information do you share?

CIMA maintains various [memorandums of understanding] and cooperation channels with the global regulatory community that facilitate working relationships with our overseas counterparts. In previous years, and on our own initiative, the Investment and Securities Division of CIMA met with the SEC, the [U.K. Financial Services Authority] and [Ireland and Hong Kong’s Financial Services Commissions] to brief each regulator on our approach to hedge fund regulation, to explain the nature of our fund industry and to express our desire to co-operate in the exchange of information where Cayman hedge funds are alleged to have abused insider information or been involved in market manipulation or some other inappropriate action that might prejudice investors.

U.S. legislators say they are concerned over the increase in the ‘retailization’ of hedge funds. Do you really see this happening?

We see very little retail business attracted to the Cayman Islands. While it is not within our regulatory mandate to dictate to industry the sort of business the Cayman Islands should seek to attract, CIMA is clearly able to maintain a leaner organization when 99% of new funds that we authorize fall within the non-public or institutional category. . . .We have very few investor complaints about our lighter regulatory oversight of non-public funds, possibly reflecting the acceptance by most investors of their own due diligence responsibility.

CIMA is concerned about calls by certain jurisdictions for the "retailization" of hedge funds. In particular, where regulators approve retail fund-of-hedge-funds structures that subsequently invest in our offshore hedge funds and then, when the offshore hedge fund, aimed at professional investors, triggers certain provisions within the offering document that might be prejudicial to retail investors, the onshore regulator pushes CIMA to intervene on the retail fund’s behalf.

If regulators want to promote retail hedge fund structures, they should not attempt to impose the same rules-based prescriptive framework applicable to their retail hedge funds on offshore hedge funds structured for the professional/institutional investor.

What are the biggest trends you see in the hedge fund arena? What are some of the biggest challenges for regulators in the coming years?

There are sufficient opportunities and threats in the near term that warrant our attention. Many of the issues are outside our control, such as changes in tax legislation in foreign countries that might have an extra-territorial reach on the fund or its investment manager. While asset allocation to the hedge fund sector should continue increasing, led by institutional money, there is likely to be further consolidation of both managers and administrators and with this trend, increased concentration of the business in fewer offshore centers.

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