BOSTON (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 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 US-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 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 epicentre 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 Companies, 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 US 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 centres at a time when many islands are trying to diversify revenue away from tourism.

To reach the ambitious goal of registering roughly 1,000 new hedge funds in the next year, Bermudians 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. The primary targets are in Europe, the Middle East and Asia, said Packwood, the Bermuda International Business Association's CEO. US-managed funds are welcome, but tougher to lure.

"It has a lot to do with tradition," said attorney Sarah Moule of Appleby, a law firm that specialises in offshore services. For years, US lawyers have urged hedge funds to set up in the Caymans, she said.

Lawyers say they have not even considered Bermuda as an alternative.

However, the Caymans occasionally suffer from a reputation of relaxed oversight, thanks to several recent hedge fund collapses. And the 1993 Hollywood movie "The Firm" is about a law firm whose nefarious activities include money-laundering in the Caymans.

Cayman regulators say that image is unfair.

"We do everything we can to combat that," Yolanda McCoy, head of investments and securities at the Cayman Islands Monetary Authority, said of financial irregularities.

Bermuda's backers hope its comparatively clean image can draw in funds, but the colony is not without scandals.

Dutch businessman and oil tycoon John Deuss stepped down as chairman and CEO of Bermuda Commercial Bank last year following news that the company's leading shareholder, First Curacao International Bank, was under investigation for money laundering.

Bermuda's lawyers, accountants and fund administrators point to a string of factors that they say give them credibility as a reputable and attractive offshore center.

• Anyone can review corporation documents, including the register of directors and officers in Bermuda. In the Caymans, the public cannot see those documents.

• Bermuda corporations must have at least two directors, compared with one in the Caymans.

• Financial records must be kept at a registered office on the island in Bermuda. This is not required in the Caymans.

Still, Bermuda's fight for hedge funds will not be easy.

"It will be tough for Bermuda because the Caymans law firms have just done such a good job in selling themselves to us," said Ron Geffner, a partner with New York-based law firm Sadis & Goldberg, which set up hundreds of new funds and has generally preferred to go to the Caymans. "There are years and years of built-up relations," he said, "and there is a sense that if the relationship is not broken, then don't fix it."