Zombie funds are alive in the Cayman Islands and with the pressure firmly on the Cayman Islands Monetary Authority (CIMA) to clamp down and investigate a lot harder on the companies they licence to do business here in Cayman, perhaps they should investigate the zombies? How much longer will the still be kicking here? Perhaps we should kick them long and hard out of here?

Read on

Zombie funds

From Joslin Rhodes

Yes, there is such a thing and no you won’t have seen them on Dawn of the Dead [or even worse the Made in Cayman Islands movie “Zombie Driftwood]. They are very scary however when you see what effect they can have on your pension money.

To understand the significance of zombie funds we must first understand how a ‘living’ fund works. All pensions are invested in investment funds of some description which is essentially a pot of money run by a fund management team on behalf of multiple investors. Each fund will invest in certain types of assets as stated in its ‘brief’. This allows investors and advisers alike to understand the risks associated with the fund. For example a Latin American Stocks & Shares fund is going to be a lot more of a roller coaster ride than a UK fixed interest fund.

There are two main investment strategies that the fund managers will use for growing the fund. Going ‘long’ and going ‘short’. We are not going to go too deep into this at this point but if you want some more info on this then here is a helpful article. [It is at the bottom of the following related stories]

Going ‘long’ means that they will buy an asset (a company share for example), at what they believe is a good price and hold it for a period of time (long) with a view to selling it when it has risen in value and therefore make a profit. Dead easy.

Investment funds can have many millions of investors money in them and every day new investors will deposit money and existing investors will decide to cash in. This means there is always liquid money coming into, and going out of, the fund and a good fund will have more coming in than going out.

This means that all of the money in the fund can be invested in the long term assets which produce the growth and investors who want to leave the fund can be paid from the liquid money of new investors. The more of the fund that is invested in long term assets, the greater the potential return.

Imagine however that the fund belonged to an insurance company that no longer accepts new business. There are many of these around who couldn’t survive as an ongoing entity when regulations were tightened but have many billions under management from existing policyholders, possibly under a high charging structure.

The managers of these funds have no new money coming in, only money going out from investors who are leaving. This means that a significant proportion of the pot needs to be retained in easy access, and therefore lower producing, assets such as cash in order to fund the withdrawals. Additionally, the level of withdrawals are likely to be higher than a normal fund because investors are easily persuaded to leave as they become aware of the situation. It becomes a self fulfilling prophesy.

That is why they are called zombie funds because they are run pretty much on auto pilot. Another consideration is that a normal fund must try very hard to produce good investment returns in order to attract new investors. A zombie fund has no new investors, nor does it want any therefore the fund management performance is pretty irrelevant from a commercial perspective. Ask yourself whether you think they will be investing in the best fund management talent or getting by with the basics and keeping costs to a minimum?

If your pension is stuck in a zombie fund then call the helpdesk on 01642 525514 for guidance.

For more on this story go to: http://www.joslinrhodes.co.uk/pensions-148/zombie-funds-115.html

 

See the following related stories

Frustrated investors sue ‘zombie’ Cayman funds

By Steve Johnson From FTfm

Hedge fund investors are increasingly resorting to the courts to force the windup of “zombie” hedge funds still holding pools of illiquid assets from the global financial crisis.

Frustrated investors lodged 29 winding-up petitions against Cayman Islands-based funds last year, up 26 per cent from 2012 and 81 per cent on 2011, according to figures from Appleby Global, a law firm.

Last year also saw a 50 per cent year-on-year rise in the number of petitions for conversion of voluntary liquidation to court-supervised liquidation based on insolvency grounds.

“The statistics suggest that investors are increasingly losing patience with investment managers’ efforts or promises of restructurings or other turnrounds,” said Jeremy Walton, head of litigation and insolvency for the Caymans at Appleby.

During the financial crisis, many hedge funds that could not meet redemption requests due to the heightened illiquidity of some of their assets imposed “gates” to stop withdrawals, or shifted hard-to-sell positions into frozen “side pockets”.

Six years on, assets worth tens of billions of dollars are still believed to be locked up in this way. Mr Walton said filings to the Caymans’ Grand Court, which are now rising for the first time since they peaked in 2009, could rise still further.

“The significant increase in insolvent liquidation petitions filings in particular signals a shift in investors’ responses to the dilemma of protracted illiquidity,” he said.

“This trend suggests that the ramifications of the largest financial crisis of our lifetimes have not yet concluded, and that the next wave of investor rejections of continued informal wind-downs and other manager-led restructurings has begun.”

Kinetic Partners, an advisory firm, said: “This trend is indicative of growing investor frustrations in realising portfolios of illiquid assets and suggests that investors are looking increasingly more to liquidation and wind-downs as a way to exit so-called ‘zombie’ funds.”

For more on this story go to: http://www.ft.com/cms/s/0/a5ceeb96-ab87-11e3-8cae-00144feab7de.html#axzz3C422yaQZ

First published in Financial Times March 16 2914

Kinetic Partners develops Cayman Islands zombie funds team

From hedgeweek

Kinetic Partners, the global financial services advisory firm, has promoted Jess Shakespeare to member in the Cayman Islands.

Shakespeare becomes a member within the corporate recovery and forensic & dispute advisory team.

Kinetic Partners has strengthened its team in the Cayman Islands to reflect the increase in zombie funds assignments and the call by many investors to exit these positions.

With zombie funds, Kinetic Partners’ focus is to support clients to expedite positions, by implementing bespoke exit strategies for investors in these distressed funds.

Mark Longbottom, member at Kinetic Partners’ Cayman Islands office, says: “Our reputation as leading Cayman liquidators and forensic experts, particularly with our role in a number of recent high profile cases, has driven an uptick in new engagements to service the increasingly complex need of our clients. The growth of our Cayman office and service offering is focused on our experts’ understanding of the challenges which can arise from changing market conditions in a dynamic industry.”

For more on this story go to: http://www.hedgeweek.com/2014/04/24/201110/kinetic-partners-develops-cayman-islands-zombie-funds-team

First published in Hedge Week April 24 2014

Yawn of the dead

From Joslin Rhodes

Anyone remember Simon Dee? To refresh any aging memories out there (as you’re probably over 50 if you do remember him), Simon Dee hosted the Dee Time show in the late Sixties and had over 18 million viewers. Which was impressive at the time as that covered just about everyone with a television. For two brief years he was the most famous man on TV and very much enjoyed spending his £100,000 salary on life’s good things to the point that he made Chris Evans’s binges look like Hannah Hauxwell sneaking an extra digestive at the vicars tea party.

So what happened? Well his wage demands become too high, his ego too big and he fell to earth after his contract was cancelled. He struggled with debts for many years and even spent a month behind bars for non payment of rates, ultimately winding up as a bus driver.

Now, not a lot of people know that, because once off the radar he was never mentioned again. In those days, when your star stopped burning you quietly exited stage left and were never seen again. In modern times however even the most minor of celebrity can stretch out a living for a good few years. Admittedly they need to leave their dignity, respect and any last remnants of self worth at the ITV2 studio doors, but that is a trade off that many seem happy to make.

Let’s just throw a few more names at you from the past and see if you remember them. Pearl Assurance? Scottish Mutual? Clerical Medical? United Friendly? Equitable Life? Jog any memories? Yes, thought so. Have you ever wondered where they are now?

Back in the Seventies and Eighties most insurance companies employed salesmen to go around knocking on doors and selling their products. We all remember the man from the Pru. You didn’t need any qualifications, just a thick skin and some smooth talking. One day you were digging holes in the road, the next day you had a suit and a briefcase and you were an insurance man.

Earnings were good for the successful ones because the commissions were very generous, largely due to the obscenely high charges applied within the plans that weren’t exactly highlighted on the front page of the glossy brochure.

In the Nineties however regulations were tightened up dramatically and the FSA (and its predecessors) essentially gave the insurance companies two options. Either tidy up your act, or get out of town.

So some of them thought ‘right, let’s train our staff, lower our charges, make our products more transparent and generally get into line’. They joined the mainstream and many are still around today.

Others thought ‘nah that’s looks too much like hard work and we’d rather just keep the big pot of policyholders money that we have and shut the doors to new business’, and that’s exactly what they did because the charges they receive on their existing funds are too good to give up in the name of ‘being a good company’. They are referred to as closed funds.

A less salubrious term is ‘zombie funds’ because they are half way between alive and dead. In celebrity terms they are a long way from prime time Saturday night but not yet driving a bus. Probably eating bugs in a jungle somewhere or having their wedding/funeral/mothers hip replacement filmed.

The problem with closed funds is that they still need to be managed and investment decisions taken. Growth is normally generated in funds by investing in growth assets such as shares and property and holding a percentage in defensive funds for security such as cash and bonds. Normally the inflow of cash from new investors can be used to pay the outflow of leaving investors, meaning the percentage of money held growth assets can remain high.

If however there are no new customers but only exiting ones, then a larger proportion of the fund needs to be held in cash which produces a lower return, which annoys more of the remaining policyholders, so they leave which means that more has to be held in cash which means the returns are lower….you get the idea. The trick is not to be the last person standing. A bit like musical chairs but staking your life savings to spice it up a bit.

The moral of this story is that just because an insurance company hasn’t died it doesn’t mean that it isn’t in a coma somewhere, being kept alive by the life support of your policy charges. Oh, and if you are with Resolution or Phoenix then that is like a hospice for terminally ill insurance companies.

So, don’t assume that just because you get a statement every year that they are still prime time. Maybe you should have a dig about at the bottom of your wardrobe and check that.

For more on this story go to: http://www.joslinrhodes.co.uk/financial-adviser-blog/investments-10/yawn-of-the-dead-49.html