ANALYSIS-Bermuda battles Caymans for offshore funds

By Svea Herbst-Bayliss

BOSTON, Dec 11 (Reuters) - The pastel-colored buildings lining Bermuda's main commercial district are home to thousands of the world's top hedge funds -- from Europe's Man Group Plc (EMG.L) and GAM to Connecticut's DKR Capital.

But the British colony has been struggling to catch up to its Caribbean cousins, the Caymans and British Virgin Islands, in the race for the $2 trillion hedge fund industry's fast-growing offshore business.

That could soon change, said Cheryl Packwood, a U.S.-trained lawyer who as chief executive of the Bermuda International Business Association heads the campaign to attract hedge funds.

In the next 12 months, the 22-square-mile (57-sq-km) land of pink beaches and rolling golf courses expects to raise the number of registered funds by 50 percent to 3,000, she said.

"We want Bermuda to be the destination of choice for hedge funds," Packwood said in early November during an interview in Southampton, near the capital city of Hamilton.

While Bermuda dominates the offshore insurance industry, the Cayman Islands is the epicenter for hedge funds, with about 9,000 of these loosely regulated investments registered in the British territory.

But Bermuda is competing hard, having recently made registration quicker, easier and cheaper. It also touts its proximity to the United States -- it is only a two-hour flight from New York, while a trip to Caymans is much longer and often involves a stopover in Florida -- and its fewer direct hurricane hits than Grand Cayman.

"We are on a level playing field now," said Arthur Jones, a senior executive with Bermuda-based Consolidated Group of Cos, which provides accounting and other services for hedge funds.

Offshore centers play a big role in the fast-growing hedge fund industry, where assets doubled in the last four years.

Managers who invest for foreigners or tax-exempt U.S. clients, such as pension funds and colleges, are attracted to offshore centers because costs are lower and regulatory requirements less stringent than in the United States.

In return, hedge funds bring lucrative business to the offshore centers at a time when many islands are trying to diversify revenue away from tourism.

GENTEEL TRADITIONS

To reach the ambitious goal of registering roughly 1,000 new hedge funds in the next year, Bermudans are jetting to international conferences. As they meet investors and rub shoulders with new fund managers, they try to distinguish their chain of islands from its rivals by giving would-be customers a glimpse of its genteel traditions.

Many lawyers and fund administrators dress in the islands' traditional knee-length trousers with woolen knee socks and navy jackets, saying it helps project a memorable image. Some also hand out miniature bottles of Bermuda's famed Gosling's rum.