Cayman Island hedge funds 'halve deposits with UK banks'

Hedge funds based in the Cayman Islands have "almost halved" their deposits with UK banks over the past year as the credit crunch takes its toll on the British Overseas Territory, according to new figures.

Data from the Bank of England reported in the Guardian shows deposits shrank from $356 billion at the end of Q1 2008 to around $173 billion in the corresponding quarter of this year.

Loans from UK banks to financial institutions in the Caymans outweighed deposits by $123 billion in the first three months of 2009, up from an overhang of $12 billion in the final three months of 2008.

The newspaper said the sharp increase in outflows "puts the spotlight" on threats in the hedge fund industry to quit Britain if tougher regulation, higher taxes and stricter limits on pay and bonuses are introduced.

It added that the low taxation and limited regulation of the Cayman Islands has seen it become the base for around 80 per cent of the global hedge fund industry, although hedge fund managers remain largely based in London and New York.

According to industry monitor Eurekahedge, global hedge funds attracted net inflows for the first time in ten months during May.