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Offshore Funds

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Philip Graham
Philip Graham
  • Philip Graham

  • Partner
  • British Virgin Islands
Lewis Chong
Lewis Chong
  • Lewis Chong

  • Partner
  • Vancouver
Ian Gobin
Ian Gobin
  • Ian Gobin

  • Partner
  • Cayman Islands
Marc Parrott
Marc Parrott
  • Marc Parrott

  • Partner
  • Hong Kong
Fiona Chandler
Fiona Chandler
  • Fiona Chandler

  • Counsel
  • London
George Weston
George Weston
  • George Weston

  • Counsel
  • British Virgin Islands
Marco Martins
Marco Martins
  • Marco Martins

  • Partner
  • Cayman Islands

Hedgefund Woes, Crypto Challenges and Substance Abuse

It’s the time of year for the international media to focus on the highs and lows of performance being reported by investment managers to their investors.

GAM are down close to 80% for 2018, Schroders and BlackRock also delivered significant losses. According to the FT, only 16 hedge funds were able to deliver positive returns before fees in 2018 from a universe of 450 monitored by HBSC’s alternative investment group. They go onto say that all alternative managers experienced widespread difficulties caused by the declining stock markets globally and the rising US interest rates. Other data from eVestment indicated that the hedge fund industry registered its third worst year on record.

Interestingly, it was actually a lot of the established names with billions of dollars in assets that proved to be the stellar performers of 2018. Bridgewater Associates posted a 14.6% gain, Wellington is expected to be up more than 9 percent in the year, while its global equities fund generated returns of nearly 6 percent and D.E. Shaw will return an impressive 11.2 percent. Those who invested in quant funds also fared better. Multi-strategy funds were also able to beat the S&P 500 by a slightly lower margin, Millennium Management gaining almost 5 percent for example.

On the other side of the coin, equities-oriented funds will generally be disappointed by losses that even surpassed that of the S&P 500, which was down about 6.7 percent last year.

On a more macro level, some describe the hedge fund industry as being at saturation point with over $3 trillion in assets under management and as is always the case, performance is absolutely key to the future of our industry. We have yet to see the wholesale departures by hedge fund investors that we saw a few years ago, but it’s early days as investors contemplate the 2018 performance figures. Growth in recent years has come from performance, with only a modest amount of new capital coming into the space. A very slow growth for the industry is expected in 2019 with most new assets invested in hedge funds being reallocations of capital redeemed from other managers.

At Harneys, we generally saw more investment funds being set-up in 2018 than closing down, even when we factor in the closure of those funds set-up early in 2017 to invest in digital assets. I would expect this to continue in 2019.

If performance is the number one issue, fees are in second place. I’m sure we’ll see continued pressure on fees and more quirky ways to re-align the investor and manager and at the same time keep the manager incentivised.

On the digital asset side of the business, there was certainly a much needed cooling of the market, compared to 2017. Crypto has certainly had a challenging year - that being a gross understatement. But let’s not confuse the pricing issues with the digital asset projects which have been launched in 2018 and which will no doubt continue to launch in 2019, which are either stable coins or other security tokens or those having a pure utility or payment function, many of which are incredibly well thought out and structured. And as the ICO begins to lose popularity, up rises the STO in its place.

Only time will tell whether these new structures are successful in the eyes of those holding them. This market is still very much in its early stages and the global dominance of the Cayman Islands and the British Virgin Islands in the investment funds worlds has really helped these jurisdictions when it comes to attracting global, smaller public and private digital asset projects. The Cayman Islands and the BVI remain the offshore jurisdictions of choice for global promoters of digital asset projects. Some other jurisdictions have made a play, but save for Switzerland, when you look under the hood, there are issues. Where other jurisdictions have jumped-in and adopted often unworkable new laws and failed to understand the space, albeit with good intentions, we expect that in 2019 both of our key jurisdictions will amend their existing laws to further align themselves with this new industry in a favourable way to further encourage global promoters of digital asset projects to the Cayman Islands and the BVI.

We also undoubtedly now see more seasoned and experienced promoters of digital asset projects. They are generally better informed of what’s required from them from an international securities compliance perspective and the agreed global standard as to AML/KYC. As investment managers have adopted cultures of compliance, so too have promoters of digital asset projects - many now know what it means to be a fiduciary of third party monies/crypto. We’re seeing more service providers offering a wider and deeper variety of services to digital asset projects, ranging from coin provenance and distribution services to insurance and AML/KYC services at initial launch as well as secondary trading reporting solutions on token holders. This remains an incredibly interesting space and I’m sure 2019 will see even more evolutionary strides and innovation as well as more interest from institutional investors as they explore the investment opportunities of digital asset projects.

In other news, “economic substance” is going to be the buzz phrase for 2019 as users of international offshore centres and their professional service providers grapple with these new laws and eagerly await the regulations and guidance notes from their regulators, the Cayman Islands and the BVI are no exceptions. My colleague Philip Graham will be blogging about this before the end of the month, but personally I am an optimist and view this as a massive opportunity which will further cement the Cayman Islands and the BVI as the premier global offshore jurisdictions.

2019 is already shaping-up to be an interesting year – Trump. Walls. US Government shutdown. Recession/correction/downturn? The levels of corporate debt. Trade wars. Hard Brexit/Delay/UK election? A UK Corbyn Government (GoT - winter has come….)? Populisum in Europe.

It’s not all bad news though - Liverpool are top of the premiership! That said, when an elephant climbs a tree, nobody knows how it got there, but everybody is waiting for it to fall! Happy New Year!

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