Last month, Gam started to wind-up its unconstrained absolute return bond fund range (ARBF), concluding a tumultuous month for the asset manager which began with suspension for star manager Tim Haywood, as reported by FSA sister publication Portfolio Adviser.
While the Swiss firm said it expects each of the nine funds within the ARBF range to make first repayments as of September, perhaps most telling is the difference between what investors of the Ucits and Cayman versions will get.
Between 74% and 87% of the money invested in Luxembourg- and Irish-domiciled Ucits funds will be returned. This compares with the 60% to 66% to be returned to investors in the Cayman master fund and associated Cayman and Australia feeder funds, according to the report.
Not specifically commenting on the Gam situation, MoFo’s Nelms, who is based in Hong Kong, told FSA that less regulated funds, such as Cayman hedge funds, may have a more difficult time liquidating their assets.
“A Cayman fund may have made some investments that the Ucits fund was not able to access, and those are probably the investments that caused the most trouble upon liquidation,” he said. “That is one factor that could cause a Ucits fund to return more capital quickly in a liquidation scenario.”
Why have both versions?
Some managers may opt for both a Cayman version and a Ucits version of a strategy. However, both structures may have slight differences and are targeted to different investors, according to Nelms.
For example, Ucits funds are specifically designed for retail investors. “Therefore, there are a lot of limitations in terms of how those Ucits funds can operate, including what they are allowed to invest in.”
On the flipside, Cayman funds are allowed to have broader strategies, which enables them to invest in less liquid investments.
“Many Cayman funds are structured as hedge funds, available only to wealthy [and] sophisticated investors. For that reason, many Cayman funds do not have the types of limitations seen in Ucits [funds].”
Being able to invest in some investments that are not allowed with a Ucits structure can be advantageous to a fund manager. In a bullish market, for instance, risky investments could reap great returns, Nelms said.
But given Ucits funds can reach the wider retail investor base, a manager may want this version.
“In order to get around the limitations of some of those investments, a Ucits fund will enter a synthetic investment that is designed to have the same result as the Cayman fund,” he said, adding those investments are done with a solvent counterparty.
Cayman demand waning
The demand for Cayman Islands-domiciled fund has been waning. In Hong Kong, for example, the number of Cayman funds dropped 31.7% to 41 at the end of June 2018 from the previous year, according to the Securities and Futures Commission’s second quarterly report.
Assets also fell 21.5% – the biggest decline among all fund structures in Hong Kong – to $8.8bn during the same period.
A similar trend is being seen in Europe too, according to Andrew Gordon, Hong Kong-based managing director for Asia at RBC Investor and Treasury Services.
Within the alternatives space, Gordon believes European-based institutional investors preferred to invest in locally-domiciled funds, such as those in Luxembourg or Dublin, partly driven by regulation.
“Over the past few years, the Alternative Investment Fund Managers Directive, which has been implemented in Europe, has restricted the ability of managers with funds that are domiciled outside of Europe to sell those in Europe.”
Gordon said Luxembourg- and Dublin-domiciled alternatives funds have seen significant inflows, not just from Europe but globally.
Gordon explained both jurisdictions have become more competitive against the Cayman Islands, and have imposed more transparency and investor protection measures. Luxembourg also introduced in 2016 the Reserved Alternative Investment Fund structure, which has made authorisation of alternative funds quicker and cheaper than establishing them in the Cayman Islands.
“For both regulatory and appearance reasons, some investors prefer to invest in an onshore jurisdiction that is more heavily regulated, such as Luxembourg or Ireland, or even the US,” said Nelms at MoFo.
However, he acknowledged that the Cayman Islands has been working diligently towards a stronger regulatory regime.
