When it comes to hedge funds, the Cayman Islands is a true heavyweight in the offshore world. Paul Scrivener, joint head of the investment funds group at Solomon Harris explains why and outlines what a hedge fund manager can expect when setting up his offshore fund here.
Investment funds are a major part of the Cayman Islands financial services industry but it is in the area of hedge funds in particular that Cayman has carved out a world-renowned niche. A remarkable statistic is that more than 60% of the world’s offshore hedge funds are domiciled in this jurisdiction and some put this percentage even higher. The total number of Cayman regulated investment funds now exceeds 6500 and this figure does not even include the large number of closed-end funds and exempted funds because they are not subject to regulation. The figure is growing not only as a result of start-up funds but also due to the relocation of a number of existing funds from other jurisdictions such as Bermuda and the Bahamas. Why do so many onshore fund managers choose to set up their fund in the Cayman Islands? Paul Scrivener explains why and outlines the process involved in setting up a hedge fund in the Cayman Islands.
Frequently, a hedge fund manager will be guided towards the Cayman Islands by their onshore advisers. Onshore advisers have various reasons for choosing Cayman. At the top of the list is the fact that Cayman is tried and tested in the alternative investments arena. The process will be time efficient and cost effective. The regulatory regime is proportionate and ideally suited for hedge funds with an emphasis on disclosure rather than regulatory restrictions. The service providers have a wealth of experience and a "can do" approach to business.
An important aspect for any hedge fund manager is to ensure that the establishment of the fund is dealt with properly and on a timely basis. Onshore counsel, Cayman counsel, the auditors and the fund administrator all have important input at the set up stage but in most cases onshore counsel and Cayman counsel will have the lead role.
Onshore counsel will outline the key features of the proposed fund covering: structuring, investment objective, target investors, likely size of the fund, liquidity, minimum subscriptions and so on. Cayman counsel will invest time at the beginning to gain a clear understanding of the proposed fund and the manager’s objectives and aspirations. Onshore counsel and Cayman counsel will agree responsibility for document preparation and a timetable. The offering memorandum is typically prepared by onshore counsel and then reviewed by Cayman counsel. In cases where the fund manager has not engaged onshore counsel, Cayman counsel will draft the offering memorandum.
Timing is usually at the forefront of the fund manager’s mind. The manager may have investors lined up before he has even considered the domicile of the fund! In those circumstances, there is considerable time pressure to get the fund up and running. Cayman service providers are used to this and, with full commitment to the process from all involved, a Cayman fund is frequently launched within 4 to 6 weeks. This turn-round time has been a major factor in the huge growth Cayman has experienced in the hedge funds arena. This timeframe is assisted by the speed with which the fund vehicle can be formed (usually within 24 hours of all paperwork being in place) and then registered with the Cayman regulator, the Monetary Authority (from filing the registration particulars, the registration certificate is normally issued within 3 or 4 business days).
A Cayman regulated fund is required to appoint a Cayman-based audit firm and, depending on the time zone of the fund manager and/or the investors, will often appoint a Cayman-based administrator. Cayman domiciled directors of the fund may also be appointed to ensure that the "mind and management" is offshore.
How do things typically unfold? At the outset, it is important to decide whether the fund falls within the regulation of the Cayman Islands Mutual Funds Law and its categorisation under that Law. A traditional open-ended hedge fund will be regulated and will not require a licence but instead will merely have to register certain particulars with the Monetary Authority. The Mutual Funds Law contains a general statutory requirement that the offering document must describe the securities being offered in all material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision whether or not to invest. Cayman counsel will review the draft against this yardstick. The proposed auditors, administrators and directors will also need to review the draft and in most cases the document will go through several drafts before it is in final form.
In parallel with the preparation of the offering memorandum, the fund manager will be negotiating terms with the prime broker, auditors and administrators, deciding with onshore counsel whether separate vehicles (whether onshore or offshore) should be established to act as the investment manager and the investment adviser to the fund, speaking to potential investors, preparing his due diligence information for the onshore and offshore service providers, keeping on top of the various drafts of the offering document and still trying to run his existing onshore fund! The commitment required of the manager should not be under-estimated.
The lawyers will also be progressing the other principal documents - the constitutional documents for the fund (memorandum and articles of association, limited partnership agreement or trust depending on the type of fund vehicle), investment management, investment advisory, administration and prime broker/custodian agreements.
These 4 to 6 weeks will be a period of sustained activity and commitment. Efficiency and good organisational skills are essential. A week before launch, the various documents will come together in final form, the fund vehicle will be set up, organisational formalities taken care of and the documents signed. It merely remains for Cayman counsel to file registration particulars and supporting documents with the Monetary Authority. Once the fund registration certificate is received from the Monetary Authority, the fund manager may begin receiving subscriptions and trading the fund, at which point, the fund manager will have a properly structured vehicle established in a significantly shorter time and more cost efficiently than would be possible in virtually any other reputable jurisdiction.
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.