As COVID-19 arrives in the Cayman Islands, MATTHEW FEARGRIEVE explains why the presence of the coronavirus in the world’s largest offshore financial centre puts US$7 TRILLION of assets at operational risk.

Health authorities in the Cayman Islands have announced that there are eight reported cases of COVID-19 in the Cayman Islands, and there has so far been one death. These numbers are expected to increase dramatically as the pandemic ravages the world. a 68-year old man had died of the virus.

At time of writing (27 March 2020), the Cayman government has placed the islands into 24-hour lockdown for five days, outlawed all assemblies of more than fifty persons, and closed its doors to the outside world. The islands’ main newspaper, the Cayman Compass, was (somewhat worryingly) reporting only two weeks ago on the unseasonably large number of people presenting with ”‘flu-like symptoms”. Health authorities may well be having to face the possibility that COVID-19 might have been present in the Cayman Islands for some weeks, even months, already.

Cayman Islands Funds Industry

The news that the virus has arrived in the Cayman Islands and claimed its first casualty will only add to the woes of fund managers worldwide, in whose Cayman-domiciled investment vehicles an estimated US$6.9 trillions of assets are under management. This figure, the only official one currently available, is taken from the 2018 Investments Statistical Digest of the Cayman Islands Monetary Authority (CIMA), the jurisdiction’s financial regulator, which publication also tells us that these assets were held in 9,323 open-ended investment funds registered with CIMA.

These headline figures - US$6.9 trillions of assets under management in 9,323 registered funds - are both likely now to be higher, given historical annual increases recorded since the 1980s by CIMA, and in light of the long-running bull market that was only recently killed off by the pandemic. More significantly, only open-ended (liquid) investment vehicles are required to be registered with the Cayman regulator. Closed-ended vehicles (such as private equity funds) are under no such requirement, and whilst there are accordingly no official statistics for the asset levels in such entities, their value is believed to run into billions of dollars. Notwithstanding this, US$6.9 trillions of assets in registered funds alone make the Cayman Islands currently the largest centre of foreign assets under management.

There are, however, some other numbers which, although tiny in comparison, have now taken on a sinister and worrying significance in the wake of the virus’ arrival in the Cayman Islands.

Cayman Islands Population

Another official publication, the 2018 Compendium of Statistics, produced by the Economics and Statistics Office of the Cayman Islands (ESO), provides the most up-to-date official population and census figures in the three islands that comprise the Cayman Islands: Grand Cayman, whose largest centre George Town is home to the country’s financial services industry; Cayman Brac, and Little Cayman.

The ESO population figures for 2018 tell us that the Cayman Islands had a total population of some 65,000 people, of whom 4,425 were employed in the country’s financial services industry. Unsurprisingly for the 100 square-mile British Overseas Territory, financial services is the country’s biggest employer, with most offices being in George Town on Grand Cayman, the largest of the three islands with a population of some 34,000. These figures are for 2018, and are expected to be somewhat higher today.

But the ESO statistics make clear one salient fact: that the Cayman Islands’ US$7 trillion asset management industry is serviced by a group of people which in number would be easily contained on several floors of the average Canary Wharf tower block. Nearly all of these 4,000-odd people live on an island that is 76 square miles in size; the same surface area as a city the size of Glasgow. Nearly all of these people work in George Town; all 10 square miles of it.

Knowing what we do about the reach and speed with which COVID-19 propagates itself- and, more worryingly, knowing what we do not yet know about the mortality rates that the virus could inflict- this concentration of a small group of financial services personnel on a small island, 1,500 miles distant from the shores of the US, becomes of distinct concern.

Operational Risk to US$7trn+ of Assets

Indicative mortality rates provided by the World Health Organization are somewhat generalized and turn on a host of clinical, geographic and demographic variables. The base number being talked about is 3.5%, but authorities acknowledge the potential for this to be considerably higher. Consider the number of workers currently in self-isolation or who have yet to manifest symptoms; there are not yet any official statistics for what proportion is represented here of the working population of each affected country. It has been suggested that around 30% of China’s workforce is not operative. The numbers are a guessing-game, but it does not take a leap of imagination to see the risk that the virus poses to a small, concentrated group of people living on a small island, with limited infrastructure and resources, and a restricted capacity for obtaining help from beyond its borders.

It remains to be seen how the virus will impact the workforce in the Cayman Islands, in terms of mortal and economic cost. But at present it has to be said that there is a serious operational risk to more than US$7 trillions of assets managed in Cayman-domiciled investment vehicles. We know from the ESO figures that there are around 4,000 people who service these entities. Introduce COVID-19 into this population and in a short space of time there is not enough personnel to carry on the essential daily maintenance of them. As yet, there has been no indication from the islands’ financial services bodies or its government of any crisis management plan. Given the size of the islands, their extreme geographical isolation and their small population (with the skilled sector thereof being even smaller), it is difficult to see how the world’s largest centre of offshore assets could possibly carry on as normal were the virus to take hold.

Management companies (there are around 140 resident in the Cayman Islands, with real infrastructure and skilled personnel); cash and custodian services (there are some 200 banks and trust companies in the Cayman Islands, themselves holding around US$1.8 trillion, or 7% of global banking assets); fund administration and valuations (there are around 90 fund administrators in the Cayman Islands); oversight of the fund’s management by non-executive directors (there are scores of them in the Cayman Islands); provision of basic registered office functionality; and supervision by the financial regulator itself. ALL of these functions, and more besides, will fall by the wayside if the virus fulfils its disruptive potential.

This presents a clear and present operational risk for all managers of investment vehicles domiciled in the Cayman Islands.

MATTHEW FEARGRIEVE is an investment management consultant. You can read more of his blogs on how coronavirus will impact the asset management industry here: https://matthewfeargrieve.wordpress.com/2020/03/12/matthew-feargrieve-coronavirus-how-will-hedge-fund-managers-in-switzerland-respond/