by JOHN P RUEHL
Cayman Islands sits at the heart of a secretive British financial network that manages trillions in global assets
China, which was the largest holder of US government debt as recently as 2019, has cut its holdings to the lowest level since 2008, driven by changing trade patterns, geopolitical concerns, and domestic economic pressures.
The Cayman Islands has emerged as an unlikely place to fill the gap. This small British overseas territory held US$427 billion in US Treasuries as of November 2025, making it the sixth-largest foreign holder.
But a 2025 Federal Reserve analysis revealed that the total figure was actually closer to $1.4 trillion by the end of 2024—with some estimates reaching as high as $1.85 trillion—after nearly 40 percent of new treasury notes and bonds were purchased in the Cayman Islands after 2022.
While these figures suggest that the territory is the largest foreign holder of US debt, the main buyers are not Caymanians or the government, but hedge funds.
After the territory passed its Mutual Funds Law in 1993 amid the 1990s hedge fund boom, these vehicles began incorporating in large numbers, drawn by flexible regulation and low taxes. The Cayman Islands today is home to roughly three-quarters of the world’s offshore hedge funds.
Many have used so-called “basis trades,” borrowing heavily to profit from small price gaps between US Treasury bonds and their future equivalents. The strategy has grown so large and opaque that it has triggered a Federal Reserve investigation.
Emergence and evolution of a financial hub
The Cayman Islands has played a major role in global finance since the 1960s, operating as a center for tax evasion and asset parking. Mostly European banks trading in dollars outside the US, nicknamed Eurodollars, could lend these dollars beyond the reach of American regulations and capital controls. As the market grew, the Cayman Islands became a central place to store and use these Eurodollars.
Local Cayman lawmakers also passed financial laws to attract international businesses in the 1960s, including having no direct taxes on individuals, corporate profits, or capital gains, which helped cement the islands’ role as an offshore financial center.
The legal system, based on English common law, offered clear rules, modern legislation, and independent courts. Packaged into a simple, finance-focused framework, it gave investors confidence and turned the territory into a quiet financial powerhouse.
Despite the Cayman Islands’ own elected government led by a premier, key powers remain with the United Kingdom. Final appeals in major cases are heard in London, while a governor appointed by the British monarch, on the advice of the British government, oversees internal security and coordinates foreign affairs with London.
In theory, Britain can also intervene in the territory’s governance, providing a level of political stability valued by outside investors.
The Cayman Islands’ success has come from a “collaborative policymaking process that involved local leaders, expatriate professionals, and British officials,” according to a working paper by the University of Alabama, along with embracing financial trends. Home to more than 120,000 companies as of 2025, including thousands registered at the five-story Ugland House, hedge funds are just one of several recent financial booms.
The parent company of Theleme Partners LLP, a hedge fund linked to former UK Prime Minister Rishi Sunak, “lists the notorious Ugland House as its address. The small office is the registered home to approximately 40,000 entities,” stated the Good Law Project.
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