Cayman Islands: Hedge Funds – a Cayman Islands Success Story

Last Updated: 2 December 2005
Article by Alan de Saram

Introduction

The Cayman Islands have become the leading offshore jurisdiction in the funds industry and are currently home to more than 6,500 registered open-ended funds and many unregulated closed-ended or exempted funds. The majority of such registered funds are hedge funds intended for experienced investors and it has recently been reported that an estimated 80 per cent of the world’s hedge funds are registered in the Cayman Islands. This article briefly highlights some of the reasons for this success.

What Are Hedge Funds?

The term "hedge fund" was originally coined to describe a type of collective investment vehicle that employed sophisticated hedging techniques to trade in the corporate equity markets. Over time the activities of hedge funds have expanded so that today the term refers generally to investment funds that follow one or more alternative investment strategies and utilise return enhancing tools such as leverage and arbitrage.

Hedge funds are typically intended for sophisticated institutional and high-net-worth investors who are not only capable of understanding the risks and rewards associated with alternative investment strategies involving complex derivative instruments but are able to withstand any adverse financial consequences.

Why The Cayman Islands?

Hedge funds are constantly evolving and investment managers favour jurisdictions with a regulatory environment that is consistent with the desire to develop and market innovative investment strategies to sophisticated investors within the framework of a sound and reputable legal system. Key features that have made the Cayman Islands attractive to hedge fund managers include:

  • A regulatory regime that focuses on full and transparent disclosure in the offering document of all information necessary to enable a prospective investor to make an informed decision as to whether or not to invest in the fund and on an annual audit of the financial statements by an independent auditor approved by the Cayman Islands Monetary Authority ("CIMA").
  • No regulatory restriction on investment policies or strategies, commercial terms (including performance and other fee arrangements) or the choice of service providers (including managers, administrators, custodians and brokers).
  • No requirement to appoint local directors or service providers (except for an approved auditor and, in the case of funds for which the minimum investment is less than US$50,000, an administrator to provide the principal office).
  • Speed of formation together with an efficient and simple registration system with CIMA.
  • Tax neutral environment with no direct corporation, capital gains, income, profits or withholding taxes applicable to funds
  • Availability of experienced professional service providers including administrators, trust companies, accountants and lawyers.
  • A recognised and respected legal system derived from English common law as supplemented by modern local legislation together with a well developed court system and experienced judiciary.

Regulatory Regime

Open-ended funds where equity interests (i.e. shares, units or limited partnership interests, as the case may be) are redeemable at the option of the investor are generally registered with and regulated by CIMA in accordance with the provisions of the Mutual Funds Law (as amended). There are three forms of registration under the Mutual Funds Law of which the one most commonly used for hedge funds is a Section 4(3) registration applicable where the minimum investment per investor is not less than US$50,000 or where the equity interests are listed on a recognised stock exchange, including the Cayman Islands Stock Exchange.

Closed-ended vehicles where investors are locked in until the fund is liquidated are not subject to regulation under the Mutual Funds Law and open-ended funds with fifteen or less investors are exempted from registration (provided the majority of investors have power to remove the operator of the fund).

Hedge Fund Structures

Funds may be established in the Cayman Islands as companies, trusts or partnerships with the chosen form generally being dictated by the tax requirements of investors. The relevant laws and regulations of the Cayman Islands are designed to provide flexibility in the creation of investment vehicles and, as a result, the constitutional documents of a fund can normally be drafted to accommodate the requirements of a particular fund. Common structures include:

  • Single class "vanilla" funds which are generally set up with a single class of shares giving investors the opportunity to participate in a single investment portfolio.
  • Multi-class funds (sometimes referred to as umbrella funds) which issue equity interests in classes to enable investors to participate in a separate investment portfolios. The objective is normally to achieve cost efficiency but, since the portfolios are only segregated for accounting purposes, a conventional company is subject to the inherent risk of cross class liability. To deal with this issue multi-class funds are now commonly established as segregated portfolio companies under which the assets attributable to a particular portfolio are segregated by statute and not available to the creditors attributable to any other portfolio.
  • Master-feeder funds which are structured to enable subscriptions made in separate feeder vehicles to be pooled into and managed as a single master fund portfolio. A typical example would involve US domiciled taxable investors investing directly in an onshore vehicle (often a limited partnership) and US tax exempt or offshore investors investing in an offshore vehicle (normally a company). Each "feeder" fund then invests all its assets in an offshore "master" fund. The objective is to enable investors that are subject to differing tax or other regulations to participate together in the same investment portfolio.

Side Letters

Attracting significant subscriptions from institutional investors is increasingly critical to the success of a fund, particularly in the early stages, and finding a stable, reputable jurisdiction such as the Cayman Islands is a key a factor in any investment decision. Such investors also are aware of their strategic and economic importance to investment managers and are often in a position to negotiate terms that may not be available to other investors, including reduced management fees, improved liquidity and access to information in relation to underlying investments. Some such terms, such as the rebate of fees, can be dealt with through side letters between the investor and the investment manager. However, side letters are not always appropriate and the constitutional documents of a fund should be carefully drafted to allow the operator discretion to agree arrangements with key investors without prejudicing the interests of other investors.

Conclusion

Finding the right balance between commercial flexibility and appropriate regulation is a challenge; the success of the Cayman Islands in attracting hedge funds demonstrates that the right balance has been found.

This article is intended to provide a limited overview of the subject matter and is not a substitute for proper legal advice in relation to a particular transaction or proposal.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions