Gibraltar: Gibraltar and Cayman Islands - A Comparison Of Their Favourite Fund Structures For Non-Retail

Last Updated: 30 May 2008
Article by Rolf Majcen

Cayman Islands has become the world's most important hedge fund domicile because of the ease with which funds for sophisticated investors can be set up and its light regulatory touch. However, different jurisdictions have revamped their regulations to make themselves more attractive as hedge fund domiciles and also Gibraltar is trying to get in on the act and its hedge fund industry has grown in leaps and bounds over the last couple of years. Gibraltar, which is part of the EU, has staked its claim as an efficient hedge fund centre that is open for business. It operates within a regulated fund regime that is in tune with the requirements of the modern hedge funds industry. The rationale of the Gibraltar Government is obvious make it a quick and painless process, to enable funds to launch efficiently in Gibraltar.

Whilst the "registered investment fund" (Section 4 (3) of the Mutual Funds Law) is the most common structure that is used for setting up an alternative investment fund in the Cayman Islands, the "Experienced Investor Fund" (EIF) is Gibraltar's premier vehicle for alternative investment strategies.

Gibraltar developed its EIF-regime in August 2005. The fast-track procedure with an authorisation-process based on a system of self-certification by the investor, the fund administrator and the fund's lawyer, enhanced its attraction as a jurisdiction for alternative investment funds and a good number of funds have already gone through that route.

The following comparison shall make it possible to compare the registered investment fund with the EIF. It also shall demonstrate the competitiveness of Gibraltar as a domicile for establishing alternative investment funds within the European Union.

Principal legislation

Cayman registered fund: Mutual Funds Law (2007 Revision).

EIF: Financial Services (Experienced Investor Funds) Regulations 2005.

Conditions for subscription

Cayman registered fund: The minimum required aggregate subscription per investor for a fund to qualify as a "registered fund" is US$100,000.

EIF: EIF are open to investors who are considered to be "experienced"; for instance, a person meets the requirement that is a professional asset manager or a person with net assets in excess of Euro 1 Mio. The term "experienced investor" is also fulfilled if a participant invests a minimum of Euro 100.000, which makes it easier to subscribe shares of an EIF. Each investor has to provide a written confirmation that he is an "experienced investor" and a written acknowledgement that he has received and accepted the investment warning required to be contained in the offer document.

Legal forms

Cayman registered fund: Mutual funds may be formed as companies, partnerships or unit trusts. Companies remain the most common vehicle used. The Companies Law (2003 Revision) authorizes registration of new and existing Cayman Islands investment funds as segregated portfolio companies ("SPC"). The Law offers the opportunity to create multi-portfolio structures with segregation of assets and liabilities, such that there are no cross liabilities between separate portfolios within an SPC.

EIF: In practice EIF are primary established as investment companies but Unit Trusts or partnerships are also possible. An EIF may also be constituted as a Protected Cell Company (PCC); this special type correlates with a SPC; with a PCC-structure any assets attributable to that cell (sub funds) are save to the extent that the company may have agreed so - isolated from other cells and therefore protected; thus, in no case cellular assets not attributable to the relevant cell shall be used to satisfy the liability of that other cell (§ 13 (1) lit. c Protected Cell Companies Ordinance 2001).

Redomiciliation

Cayman registered fund: In certain circumstances, the Companies Law permits corporations incorporated under the laws of other jurisdictions may be transferred to the Cayman Islands "by continuation" allowing it to obtain the benefits of incorporation in the Islands without losing its established identity (including its incorporation date) or having to transfer its assets or liabilities to a new entity.

EIF: Hedge funds originally domiciled as an investment company in a relevant state outside from Gibraltar can be redomiciled from their country of incorporation into Gibraltar in a relative simple procedure without liquidation and fresh registration, if redomiciliation is provided for in the constitutional documents and if permitted to do so by applicable law in the jurisdiction of their incorporation (legal basis: Companies (re-domiciliation) Regulations, 1996 amended as of 2005 combined with Circular No. 20 of Companies House dated as of 20th January 2007.) In the past funds moved from the Caribbean to Gibraltar; the largest fund administrators, such as Capita Financial Administrators (Gibraltar) Ltd., which is part of Capita Group PLC, a FTSE 100 listed company, have the know how to carry out a redomiciliation exercise without problems.

Minimum net assets

Neither a Cayman registered fund nor an EIF have to meet any requirements in respect of minimum net assets.

Investment restrictions

There are no regulatory restriction on investment policies or strategies or commercial terms (including performance and other fee arrangements) for EIF and Cayman registered funds.

Regulator

Cayman registered fund: They are regulated by the Cayman Islands Monetary Authority (CIMA, http://www.cimoney.com.ky/; legal basis for CIMA: Monetary Authority (Amendment) law, 2007).

EIF: They are subject to authorisation and supervision by the Financial Services Commission (FSC, http://www.fsc.gi;legal basis for FSC: Financial Services Commission Act 2007).

Authorisation/Registration of a fund

Cayman registered fund: To register a hedge fund with CIMA under section 4 (3) of the Cayman MFL, the directors must submit to CIMA an application form accompanied by a certified copy of the fund's Certificate of Incorporation/Formation, the offering document, a letter of consent to act from the fund's auditors and a letter of consent to act from the fund's administrator.

EIF: Once the EIF is established the administrator has 14 days to notify the Regulator of the establishment of the fund and file with them a copy of the offering documents and an opinion of a lawyer of at least 5 years professional standing and who is also a Barrister or Solicitor of the Supreme Court of Gibraltar, that the fund complies with the relevant provisions. The EIF is allowed to start investment activities before filing the notification with the FSC namely as soon as the board of directors approves and issues the offering memorandum and launches the fund.

Fund-Directors

Cayman registered fund: CIMA requires a minimum of two directors for registered funds; there are no residency requirements for directors. Corporate directors are acceptable.

EIF: They have to have at least two Gibraltarian resident directors authorised by the FSC. There is a wider pool of directors in Gibraltar authorised by the FSC that can be appointed to fund boards, which paves the way for better corporate governance and greater investor protection.

Depositary

Cayman registered fund: There are no requirements for local custodians.

EIF: An EIF is not required to have a depositary where the fund is a hedge fund or a closed end fund and an approved prime broker is appointed. Where an EIF has a depositary, whether or not pursuant to a requirement, the depositary shall be such person as the FSC may authorise to act as depositary; in practise usually a credit institute based in Gibraltar will be appointed (many first class international banks have established subsidiaries in Gibraltar), however a registered office in Gibraltar is not required. Funds that would like to maintain their foreign custodian only need to ascertain that the FSC has not any objections.

Fund manager

Both, the management of a Cayman registered fund as well as the one of an EIF can be done by the directors of the fund themselves (there is no regulatory restriction on the choice of external fund managers).

Administrator

Cayman registered fund: There are no requirements for local administrators.

EIF: Administrator of an EIF must be domiciled in Gibraltar.

Offering document

Cayman registered fund: The law requires that the offering memorandum for a mutual fund sufficiently describes the nature of the investment interest and contains sufficient information to enable the investor to make a fully informed decision as to whether to invest or not. The ongoing requirements are to submit to CIMA a revised offering document within 21 days of any change materially affecting any information in the fund's offering document.

EIF: An EIF has to issue an offer document that complies with the provisions of the Financial Services (Experienced Investor Funds) Regulations 2005. It must contain such information as would reasonably be required and expected by participants, and potential participants, and their professional advisers for the purposes of making an informed judgment about the merits of participating in the EIF and the extent of the risks of participating in the fund.

Reporting

Cayman registered fund: The fund has to submit to CIMA audited annual accounts signed off by an auditor registered in Cayman within 6 months of the fund's year end.

EIF: An EIF shall have an annual audit of its financial statements performed by an auditor registered under the Gibraltar Audit Registration Board. The audited financial statements shall be deposited at the Fund Administrator's Gibraltar office within 6 months of the financial statement period end. These shall be made available to the Authority at the same time. There is no commitment to establish semi-annual reports or other kinds of reports.

Publication of NAV

Neither for a Cayman registered fund nor for an EIF there are an obligations to publish the NAV.

Promotor

There is no need to have an official promoter.

Funds for a single investor

Cayman registered fund: The Cayman MFL does not cover funds with only one investor (no "pooling of investor funds").

EIF can be established for one single investor.

Fiscal provisions

Cayman registered fund: No income, capital gains or corporation tax and government undertaking that no such taxation, if

introduced, will be levied on the income or property of the fund for 20 years.

EIF: Gibraltar provides an attractive fiscal environment. A fund can apply for an exemption certificate from the Commissioner of Income Tax which acknowledges that income derived by the fund is exempt from taxes (Income Tax (Allowances, Deductions and Exemptions) Rules 1992). There are no capital gains taxes or VAT in Gibraltar. In addition, tax breaks for fund managers make it interesting to conduct the investment management from Gibraltar.

In addition, there are no exchange control restrictions or regulations for Cayman registered funds /EIF.

EU-Savings Directive

Both Cayman registered funds and EIF are deemed to be out of scope".

In Cayman, regulations made under the Reporting of Savings Income Information (European Union) Law, 2005 made it clear that only a fund fully licensed under the Mutual Funds Law and which is also listed on the Cayman Islands Stock Exchange was "UCITS equivalent" and therefore by omission, all other funds were "non-UCITS equivalent" and "out of scope".

EU-status

Gibraltar joined the European Union in 1973 by virtue of the UK's accession to the EU under the provisions of Article 299 Section 4 (ex-Section 227) of the Treaty establishing the European Community; the cited rule extends the provisions of the Treatyto those "European territories for whose external relations a Member State is responsible."

Stock Exchange

Cayman Islands offer funds the possibility to be listed in its own country with the Cayman Islands Stock Exchange. In Gibraltar the Gibraltar Stock Exchange (GibEX) is expected to be operational sometime in 2008; EIF can like Cayman funds be quoted in other jurisdictions, e.g., with the Irish Stock Exchange.

About the author

Rolf Majcen is Managing Director of FTC Capital GmbH in Vienna ( http://www.ftc.at)FTC is specialised in systems development for Managed Futures with a track record stretching back to 1994. All FTC´s trend-following trading systems are proprietary systems. FTC´s product portfolio includes both highly diversified managed futures funds as well as those that are specialised in certain markets (e.g. commodities). FTC funds are regular winners in international performance rankings. The hub of all FTC communication is its website, which provides a comprehensive platform and an extensive archive for all matters related to system trading and alternative investments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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