Funds and Investors Benefit from 2008 Experience

Markets rebounded in April

This article first appeared in the Cayman Compass.

The parallels to the 2008 crisis are evident. In March, both the losses and the hedge funds’ performance dispersion were almost exactly like 11 years ago. Investors pulled $33 billion from the industry in the first quarter of this year. It was the second-largest three-month outflow since the second quarter of 2009 when that figure hit $42 billion.

Amid the radically changed investment climate, fund directors had to address the consequences arising from a decline in liquidity and answer questions about the preparedness of funds for operating during lockdown measures.

“Several of the conversations that we had back in 2008 have resurfaced – conversations around liquidity, the ability to meet redemption requests and the viability of business continuity,” said Allison Nolan, founder of governance services provider Athena.

Nolan is seeing a slight lag in market volatility generally affecting fund performance in many strategies right now and, like many, she expects to see increased turbulence in the coming months.

However, institutional investors are less reactive than they were during the 2008 crisis, Nolan said.

During the dramatic market decline in early March there was less of a run on liquidity and more of a realisation that the disruption in world trade had also created new investment opportunities.

Redemption requests are lower than in the last crisis and, following the rollercoaster performance of equity markets in April, the funds industry appears to be rebounding more quickly.

In combination, this makes a repeat less likely of the aggressive rate of asset outflows witnessed during the 2008 financial crisis.


Having outperformed the equity markets for the first time after years of lacklustre returns, the industry is now looking to thrive again in more volatile markets.

In April, hedge funds regained some of their March losses. Data provider Eurekahedge reported that about 78.9% of funds posted positive returns in April and 10.6% of hedge fund managers in its database generated double-digit returns during the first four months of the year.

Hedge Fund Research, another data provider, said hedge funds saw the strongest monthly gain in over 10 years in April, as managers navigated historic volatility in oil and commodity markets and positioned for the reopening of global economies. Equity hedge, event-driven, energy and basic materials, and activist-focussed hedge fund strategies all drove gains across the sector.

Kenneth J. Heinz, president of Hedge Fund Research, said, “It is likely that the state of macroeconomic trading and investing will remain volatile and fluid in coming months, creating dynamic opportunities for managers to generate outperformance through the remainder of the year.”

Despite historic gains in April, hedge funds remain in negative territory so far in 2020. The Eurekahegde Hedge Fund Index, for instance, is down 7.16%.

Funds, investors helped by 2008 lessons

Nolan said many finance professionals have benefited from the experience of the 2008 crisis.

“Fund managers took many lessons from the 2008 crisis and this is evident in fund documentation today with the resurgence of soft lock-up and gating provisions, which disappeared for a short time after 2008, but slowly regained acceptance in the years that followed.”

Although nothing has fundamentally changed as a result of the market volatility, Nolan believes the latest crisis will test experience and oversight skills of directors.

“It is imperative for independent directors to be asking appropriate questions and to be testing underlying assumptions. Conversations with managers today include discussions around the assessment of short-and-long term risks, liquidity management, cybersecurity, business continuity, contingency plans and communications with investors.”

These are not new topics of discussion for independent directors, but the conversations with managers are occurring more frequently in the current situation.

“In addition, we are working with managers to identify key areas that they need to consider when determining the impact of COVID-19 on their business and on the results, financial position and disclosures in the financial statements of the funds,” she added.

Fund formations

While hedge fund formations, an important part of Cayman’s financial services industry, hit a low last year, the market turbulence of recent months should provide fertile ground for start-up funds and new investment ideas.

The hurdles for launching a fund are, however, higher today than they were in the past. Compliance, regulations and greater demand for transparency generally have increased the cost of running a fund.

In the first quarter of this year the total number of Cayman funds under the supervision of the Cayman Islands Monetary Authority declined from 10,857 at the end of 2019 to 10,505.

Still, Sabrina Foster, a director at Athena, is confident that there will be new fund formations in the third and fourth quarter of this year. “We have already seen much interest coming from strategies that thrive in unstable times.”

Foster said CIMA is continuing to see a good volume of new fund registrations, which, coupled with registrations flowing from the change in the Mutual Funds Law removing the exemption for a limited number of investor funds, should result in a decent flow of fund registrations for the first half of the year.

These amendments of the Mutual Funds Law and the introduction of the Private Funds Law, forcing private funds to register with CIMA, have not come as a surprise to stakeholders.

Foster noted managers and investors have seen an overall increase in the regulation of alternative investment vehicles and, more recently, private funds in many key jurisdictions around the world.

“The supervisory framework which has been in place for open-ended funds, will in my view, increase investor confidence and keep Cayman well placed as a leading jurisdiction for investment funds.”

She said the timing of the implementation of the new law had been a topic of conversation with managers but overall the new regime was seen as positive for Cayman and investors, especially given the global move for increased regulation and transparency in the sector.