Cayman Islands: A Comparison Of Cayman And US Funds

Last Updated: 23 February 2017
Article by Ian Gobin

In a recent interview with HFM Week, Harneys Partner Ian Gobin compared Cayman and US funds and discusses how Cayman continues to lead the market. The full interview was published in February 2017 in their report, How to start a Hedge Fund in the US.

Why set-up a Cayman fund at the same time as setting up a US fund?

It's a frequently asked question, particularly with start-up and emerging managers. Where a manager is setting up a US fund (a US limited partnership or US limited liability company, generally organised in Delaware) to attract US taxable investors, the manager will often market to or come across US tax-exempt investors, such as charities, pension funds, and university endowments, as well as non-US investors, who like the product and want to invest. If that's the case then simultaneously with the set-up of the US fund, the manager will set up a Cayman fund as part of the pooled investment structure to take in the US tax-exempt investors and non-US investors.

Why? In short, to avoid potential US tax exposure that could result from direct investment in a US pass-through entity such as a US limited partnership or US limited liability company. It's been explained to me by US Counsel, and I apologise in advance for the tax talk:

  1. US tax-exempt investor issues: When a US tax-exempt investor derives income that is separate from its US tax-exempt purpose, then such income may be subject to a form of US federal income tax known as unrelated business income tax (Ubit). Certain types of passive income are specifically exempt from Ubit, including short-term and long-term capital gains, dividends, and interest income. However, such Ubit exemptions do not apply if the income is considered "debt-financed income". Thus, if the partnership or other pass-through fund uses borrowed funds, there could be Ubit for the US tax-exempt investors that are direct investors in that fund. In addition, if the pass-through fund invests in businesses organised as partnerships (including publicly traded partnerships), the income and gains realised could be Ubit even if no debt financing is involved. US tax-exempt investors can avoid such Ubit exposure by investing through a Cayman fund that is treated as a foreign corporation for US tax purposes. There is no pass through treatment in the case of investments made in a fund that is treated as a corporation (hence the term "blocker" corporation). Thus, the Cayman fund, or the Cayman master fund in which it invests, can use debt without creating Ubit exposure for the tax-exempt investors in the Cayman fund.
  2. Non-US investor issues: Non-US investors are also advised to invest in funds that are organised as foreign "blocker" corporations for US tax purposes. There are two US tax reasons. First, if the US partnership fund were to engage in a US trade or business (other than merely trading in stocks or securities for its own account), then the non-US investors in such fund would be subject to US income tax on their share of any of the fund's income that is treated as effectively connected US trade or business income (ECI). The non-US investor in the partnership fund would be required to file US income tax returns even if the fund's ECI for the year is nominal or a negative number. In the case of non-US individual investors, there is also US estate tax exposure if the investor invests directly in the US partnership fund. Non-US individuals are not subject to US estate tax at death if they own stock in a non-US corporation that owns US securities, whereas direct ownership of an equity interest in a US partnership fund would be treated as "property situated in the US" which is subject to such US estate tax.

Therefore, managers wanting to attract US taxable investors, US tax-exempt investors and non-US investors will generally set-up both a US fund and an offshore fund in a jurisdiction such as the Cayman Islands. As such the manager needs to decide from the outset which investor groups they will be targeting; and in doing so managers need to be realistic. Much will depend upon their track record, history and story for the new fund. The early stages in the capital-raising of a new fund will generally, with some exceptions, be challenging. To set up both a US fund and an offshore fund is not insignificant in terms of organisational and running expenses; particularly with a start-up or emerging manager, their survival depends upon making the right decision from the outset. Most US-based managers will likely have access to US taxable investors from the start but may not yet have the critical mass to attract allocations from US tax-exempts investors or may not yet have a network of international investors. For these managers the best route may be to set-up a US fund which will lead to the establishment of an offshore fund once they have established their track record. More established, mid-market and billion-dollar-plus managers will typically already have the internal infrastructure and resources to establish the US fund and the offshore fund at the same time in order to approach both markets from the outset.

Why choose Cayman rather than, say, BVI for the offshore fund?

This a question that I'll have to be careful with, given that we're the oldest and largest offshore law firm in the BVI. Therefore, we have had the honour and pleasure of helping to shape the legislation over the years and design the fund products that are available in the BVI which meet the ever-changing challenges of the global funds industry.

There could be a number of reasons why the BVI would be the right jurisdiction for the manager to domicile their offshore fund and over 5,000 funds have their home in the BVI. Like the Cayman Islands, the BVI is a tax neutral jurisdiction. Both have no direct personal, corporate or property taxes. BVI law and Cayman Islands law are derived from English common law and supplemented by local legislation, ensuring that both BVI and Cayman Islands funds are structured as widely accepted vehicles on the international stage.

The two primary reasons we see managers elect to use the BVI are firstly the fact that it is slightly more cost-effective to establish a fund than Cayman and secondly that there are slightly fewer regulatory requirements; with registered funds not needing a local audit sign-off or director registration requirement, for example. While this remains appealing to our long-standing institutional managers, it is also attractive to start-up and emerging managers who are looking to find reasonable cost savings and flexibility in every aspect of their launches to allow them to grow their asset base as quickly as possible.

But why Cayman? There are more than 10,000 funds registered in the Cayman Islands (with probably a similar number of unregistered funds). The financial services industry in the Cayman Islands is highly competitive and there is a deep bench from which managers can choose their Cayman service providers. As such, it's the undisputed global jurisdiction of choice for investment funds. With over 30 years of servicing the funds industry, the Cayman Islands have grown through innovation and forward-looking policies which have served as models in other jurisdictions. The Cayman Islands Monetary Authority (CIMA) promotes a pragmatic regulatory environment for investment funds and the courts of the Cayman Islands have a specific financial services division, which allows for much quicker resolution of fund disputes than some notable onshore centres. A robust and quick launch and registration process for investment funds and fund managers allows managers to get their offshore fund and management vehicles up and running quickly to take advantage of market opportunities.

What is the process of setting up a US fund and Cayman fund like? How quick/seamless is it?

Quick, easy and yes, seamless, provided that the manager chooses US and Cayman Counsel who, as part of their core businesses, structure investment funds. These are the folks who, if the manager chooses wisely, will become their trusted advisors for many years to come. If this is the case then US Counsel will work seamlessly with Cayman Counsel.

But before we get to the process, the manager needs to decide how their US Fund will work in conjunction with their offshore fund. In deciding which route to follow, US Counsel will walk the manager through the options. The three most widely-used options are "side-by-side", "master-feeder" and "mini-master". With a side-by-side structure, the US fund and the offshore fund both make investments directly with trade tickets allocated between them. Given the extra administration involved, we rarely have managers opt for side-by-side funds. Probably the most popular route is to set-up a master-feeder structure. Here an offshore master fund is created with the US fund and the offshore fund investing all of their assets into the offshore master fund, leaving the offshore master fund to make the investments. In a mini-master structure a US fund and an offshore fund are established, but in this structure, the offshore fund invests in the US fund which acts as the master fund and also as the fund into which the US taxable investors will invest. The offshore fund will be taxed as a corporation to benefit US tax-exempt investors and block Ubit and non-US investors.

In all models, it's also important for the US manager to consider how they will be paid in the most tax efficient manner. It is crucial that US managers discuss with their US counsel about how this may be structured. At the moment, the current preference is for US managers to take their performance fee as an allocation from the relevant master fund (be it the offshore or in the case of the mini-master, the onshore (master) fund).

Once the structuring advice has been given and the structure is agreed, the manager will need to select the other service providers to the funds. These will include a fund administrator, auditor, bank, custodian, prime broker and, often, independent directors. We'll know about the fund from the manager, including details of the investment strategy, likely AuM and background of the principals and have a feel for both what the manager needs and what they are looking for in selecting the other service providers. We're always more than happy to make the right recommendations and introductions.

Simultaneously with the appointment of the other service providers, US Counsel will form the US fund and work begins on preparing the offering document for the US fund and the offshore fund, as well as the subscription documentation and investment management agreement. At the same time, Cayman Counsel will incorporate, assuming say, a traditional master/feeder structure has been decided upon, the exempted limited companies to be used for the master fund and the feeder fund (although it is not unusual to see exempted limited partnerships being used for master funds). This can be completed within the day. Standard form constitutional documents will be used, which will be amended and restated as necessary to tailor them to the offering document, once final. One key road block is often the establishment of a banking relationship for the fund. Sometimes this can be done through the relevant administrator but there may be trading or other requirements for the relevant strategy which will mean the manager may want to set this up. If this is the case, the manager is well-advised to start the banking discussions early and provide all relevant documentation and information required to the bank as soon as possible. The same applies for the other service providers being appointed. Cayman Counsel will review the offering document and build-in the Cayman Islands disclosure and legal requirements, such as Cayman Islands mutual funds law disclosure, Cayman Islands anti-money laundering legislation and automatic exchange of financial information disclosures, share rights including the terms of the offering, general disclosure language regarding providing information to law enforcement and other authorities. Cayman Counsel will also complete the set-up of the master fund and the feeder fund which would include the appointment of the directors and prepare the suite of Cayman launch documents, which will include board resolutions, various documents required by the CIMA, consent letters for the administrator and auditor and prepare the amended and restated constitutional documents of the master fund and the feeder fund. Cayman Counsel will also need to review the administration agreement, custodian agreement and prime brokerage agreements to ensure they comply with Cayman Islands law. Once all of the documents are in final form, it's down to the directors of the feeder fund and the master fund, who should have been involved with the process from the beginning, to review all of the documentation and ultimately approve by way of the board resolutions, the launch of the feeder fund and the master fund. Following which Cayman Counsel will attend to the various filings with the Registrar of Companies and the CIMA and when complete the offshore fund can take in investors and trade. Other than the legal work involved, transaction management is key. Both US Counsel and Cayman Counsel will be pressing all service providers to make sure they have what they need to jump through the various internal hoops required for them to be appointed and sign-off on the documentation and ultimately provide the services to the Funds and that this is done efficiently and within the deadlines given.

Timing, from the initial kick-off call with the manager to the launch of the US fund and offshore fund is a manager moveable feast. It's not overnight, that's for sure, but neither should it take six months, unless than manager needs the six months to, for example, line-up investors, seed capital or on-board the service providers. Some managers have already worked on their detailed investment strategy and have considered the commercial terms of the offering. Some managers need advice on both. Some managers have all of their anti-money laundering documentation ready for the service providers and some haven't. Often it's the opening of the bank accounts and take-on sign-offs from service providers that can cause delays to the launch of the funds. All things being equal, the timing is around six to 12 weeks, six weeks being pretty aggressive, but it can be done and that's for the US fund and the offshore fund.

How popular are Cayman structures with US managers? Do you see this popularity continuing? Why?

Very popular and more popular than any other offshore jurisdiction by, as you would say in the UK, a "country mile".

The glass half-empty brigade of investment fund commentators were all doom and gloom for 2016. Underperformance from some of the institutional fund managers, some institutional investors pulling out of institutional funds, over-regulation in the US, cyber-security, the SEC's treatment of managers, being some of the reasons why and leading to many journalists writing headlines such as "is this the end of the hedge fund?". We were fortunate to have been involved and co-sponsored a Private Funds Leadership Forum with a major US investment funds law firm at the end of 2016, attended by many of the industry's big names, the aim being to take the temperature of the investment funds market for the coming year. Let's just say that I'm extremely optimistic about 2017 in terms of new fund launches for US funds and Cayman funds. Although there might be a bump or two in the road, 2017 will be seen as a much better year than 2016! Famous last words? Let's hope not!

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.

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

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

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”

Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.