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Cayman holds $265 billion in US Treasury bonds

| 22/06/2016 | 2 Comments

Cayman Islands US bonds(CNS Business): The Cayman Islands is now the third biggest foreign holder of US government debt, topped only by China and Japan. Holdings of US Treasury bonds in Cayman reached $265 billion in March, which was up more than 30% from the same period last year and was the first time that the Treasury data broke down bond holdings of Caribbean countries, according to Bloomberg News.

China and Japan, both responsible for over a trillion dollars of US debt are the only countries that hold more Treasury bonds than Cayman, but while Asian investors have long propped up the US economy with their voracious appetite for T-bonds, the concern regarding Cayman’s holding is that the fast money hedge funds could just as quickly spark a flurry of net selling.

Bloomberg also said that foreign holdings of Treasury bonds reached a new record in March, with other fund centres such as Ireland involved.

Cayman’s influence on the US bond market was firmly felt in April, according to industry blog ZeroHedge, which noted the record $75 billion sale of Treasury transactions by foreign holders – the most ever for that month – with $51.5 billion of net sales attributable to Cayman Islands investors. This was attributed to short sales of Treasuries by entities domiciled in Cayman and meant that, just as bond yields had started to inch higher with inflationary expectations, the market could instead anticipate even lower returns.

It is quite unusual for a paltry 1.7% yield on 10 year Treasury bonds to be so attractive to hedge fund managers, who are normally associated with generating alpha and far higher returns. It also begs the question of what exactly are these highly paid managers doing for their fees when they are behaving more like mutual funds, scooping up what has always been considered to be one of the safest and most secure investments on the planet.

A recent article in the New York Times stated that some major investors, disappointed with poor performance by hedge funds were withdrawing capital in a big way, while those that remain were looking to get a better deal on fees than the traditional 2% management fee and 20% performance fee.

In addition to showing some pushback on fees, industry index group Hedge Fund Research also said investors were pulling out of poorly performing funds, with hedge fund liquidations up sharply on a 12 month view, with 1,053 liquidations having taken place by the first quarter.

“Though launches showed an uptick in 1Q16, the environment for new hedge funds continues to be extremely competitive with discriminating investors exhibiting low tolerance for underperformance, resulting in an elevated number of liquidations,” said Kenneth Heinz, President of Hedge Fund Research. “The combination of ultra-low interest rates, flat equity markets and significant macroeconomic uncertainty has contributed to a challenging environment for allocators to achieve required return targets, resulting in intense focus on near-term performance, demands for greater liquidity to accommodate more frequent rebalancing activities, and heightened sensitivity to fee structures.”

The number of liquidations dropped to 291 in the first quarter of 2016, compared to 305 in the previous quarter, HFR said, but that was still up significantly from the 217 liquidations in Q1 2015. Alongside the 1,053 liquidations in the past year were 910 new launches.

In Cayman, the number of funds registered with CIMA inched higher at the first quarter stage, recovering from the dip seen at the end of last year. Total funds in Cayman, including Master Funds, stood at 10,965 at the end of Q1 2016, compared to 10,940 at the end of the previous quarter and up from 10,755 at the same point in 2015.

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Category: Finance, Financial Services

Comments (2)

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  1. Anonymous says:

    I hope it’s not all being bought by the same person who bought up Argentina’s debt (didn’t work out well for them) and most of Cayman’s land!

  2. Anonymous says:

    Damn straight!

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