Caymans’ Folly: Do You Know Where Your Pension Funds Are?

From Huffington Post:


When you imagine a person with one hand in overseeing your retirement, do you envision them holding a blender drink in the other hand? Perhaps you should.

Islands like the Caymans are well-known as corporate tax havens, and earlier this week in the Huff Post, Vermont Senator Bernie Sanders railed against rampant offshore tax abuse.

What’s less well-known, but perhaps just as troubling is that hedge funds use these havens to avoid something else as well: proper governance. This is especially disturbing because many pension funds have poured money into offshore hedge funds, desperate for higher and higher returns to cover their rising liabilities.

With perhaps two-thirds of all hedge funds domiciled in the Cayman Islands, Bermuda, and British Virgin Islands (BVI), a web of “independent directors” has developed in these island paradises. Officially, these directors are independent watchdogs who protect the interests of investors, such as pension funds. The problem is that some appear to be little more than “paper directors,” with perhaps billions of retirement dollars exposed to funds with weak oversight and potentially conflicted governance. This might not be an urgent concern if hedge funds lived up to their hype, but broadly speaking, they do not: hedge funds have actually been underperforming the S&P.

Recently, investors and politicians who have sought more transparency scored a partial win: the Cayman Islands has reportedly proposed creating a public database revealing details of their funds including information about their independent directors (pending ongoing negotiations), letting a few rays of that powerful Caribbean sunlight into one of the darkest corners of the financial world. But other crucial questions necessary for investors to reasonably judge risk remain unanswered: hired by hedge fund managers themselves, whose interests do these directors really have at heart? How many boards do they sit on simultaneously, and is it alongside other directors who also are serving on the same multiple boards? What is their level of competence, and does their supposed oversight have any teeth? Hedge funds are known for their “lone wolf” approach, without the same supervision as, say, a mutual fund or a typical corporation. This gives hot-shot managers enormous latitude to invest and operate as they see fit. And the culture of hedge funds is straight from today’s Shadow Elite playbook in that accountability is elusive.

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