Cayman directorship affair misses the plot
Wednesday 23 November 2011
An alleged scandal about Cayman directors sitting on the boards of hundreds of companies overlooks the fact that investors just do not care, argues Anthony Travers, chairman of the Cayman Islands Stock Exchange, who blames the Irish financial sector for stirring up trouble.
What is clearly a domestic spat between frustrated Irish director service companies and their infinitely better organised and more sucessful Cayman counterparts, has apparently been elevated to the level of "offshore scandal" by the questionable intervention of Mr. Sam Jones of the Financial Times in his piece of 21 November.
But Mr Jones misses not merely the point but the plot. Investors in Cayman Islands hedge funds have a perfectly transparent structure, they know who their directors are, most importantly the fund managers or those having established the structure have agreed the price that is right for the function performed and all of this is subject to full disclosure in detailed offering documentation filed with the Cayman Islands regulator.
If an investor needs to know how many directorships are served by a Cayman Islands professional he need only ask. Any investor who really cared and who is important enough could make the point prior to investment and establish a satisfactory board.
The truth plain and simple is that investors do not care. What they care about is investment return from a well-organised and governed structure. Cayman Islands hedge funds bar statistically irrelevant exceptions meet those tests. This is the point that eludes the Financial Times.
Cayman Islands hedge fund structures, numbering some 9,750 with trillions of dollars of assets under management, run smoothly under their Cayman Islands directorships, provide audited accounts from reputable auditors, and are remarkably scandal free.
The most recent Cayman case, and they are few and far between, Weavering, highlights the folly of using non-Cayman Islands professionals as hedge fund directors, indeed Bear Stearns, mentioned in the Financial Times article, makes the case that independent directors provide a superior oversight function than do those affiliated with law firms or accountants.
The Weavering case also establishes, admirably, that English and Cayman Islands law (possibly not Irish) perfectly well entitles a director to delegate management function provided that he or she maintains a supervisory role to the best of his ability. The administrator administers, the fund manager trades, the accountants account and the auditors audit. If a crisis arises the advice to the board is tendered by batteries of lawyers.
A supervisory role is a function of proper organisation. It is understandable that Irish service provider companies like Carney and Hedge Fund Research given that they are limited by statute to the provision of 25 directors each may not understand the depth of organisational infrastructure required to manage hedge fund directorships running into the hundreds.
But the fact of the matter plain and simple is that these hedge funds run highly effectively. In the event of market crisis, new boards may be appointed but these events are rare and of greater interest to most investors is a cost effective management structure whilst the sailing is smooth. The typical investor assumes the risk of the fund managers performance.
The rest of the structure needs simply to be compliant with law and practice and, in the Cayman model, it is. The IMF and FSB reviews are testimony to the high standards of Cayman compliance and governance.
One can understand the motivation of the Irish private sector in leading this charge. It is frustrating to them that they have not been able to make inroads into the Cayman islands dominance of this hedge fund market and nor, notwithstanding the financial wizardry that seeks to bolt a hedge fund with 15 per cent volatility into a UCITS platform, are they likely to do so.
Particularly not given the advent of the European Alternative Investment Fund Directive. But of greater concern than the provision of directors to Cayman Islands hedge funds where the risk is accepted and understood by those structuring the fund, is the likely impact of market volatility on the Irish "hedge fund light" product.
It will require more than an independent director to insulate investors from the investment performance of these vehicles regardless of the number of directorships held by the directors of each.