Cayman Islands: Much Ado About Nothing (Significant) – ESMA And The Cayman Islands AIFMD Passport

Recent commentaries by various offshore law firms on the delay by ESMA in extending the pan European passport for marketing the securities of Cayman Islands domiciled funds throughout the EU under the Alternative Investment Fund Managers' Directive ("the Directive") may have over emphasised the importance of the ESMA approval.

Firstly, the relevant statistics. Based on the most recently available figures from the IMF Coordinated Portfolio Investment Survey, EU investors have not historically been and continue not to be significant in terms of investment in Cayman Islands funds and notwithstanding efficacy of the private placement regimes. Most recently available figures from the Cayman Islands Monetary Authority ("CIMA") put Cayman Islands fund AUM at US$2.4 trillion, whilst the IMF figures put portfolio investment in the Cayman Islands at US$1.9 trillion. But even adopting the lower IMF figure, the EU element is only around US$158 billion (post-Brexit) or 8.3% of the aggregate Cayman fund AUM. Luxembourg investors lead at US$58 billion with Ireland at US$34 billion (of the non-EU jurisdictions, Switzerland leads at US$45 billion followed by (post Brexit) the UK at US$22 billion). Thus, investment by EU-based investors in Cayman Islands funds is dwarfed by those jurisdictions where the writ of the EU does not run, the US at US$908 billion, Japan at US$423 billion and Hong Kong at US$331 billion.

If we analyse the figures by jurisdiction of investment, we see that the EU is a net beneficiary of Cayman hedge fund investment as US$365 billion is invested by Cayman funds in the EU through EU situs managers. Interestingly, that figure has dropped by nearly 40% since the introduction of the Directive. This statistic not incidentally makes a mockery of the OECD assertion fundamental to its "Harmful Tax Competition" thesis that offshore financial centres drain capital from high tax jurisdictions.

Secondly, there seems to be confusion in the commentary to date about what it is that ESMA is approving. Whilst CIMA is indeed consulting with the private sector to introduce an alternative regime for Cayman Islands situs fund managers that meets the test laid out in the Directive for investor protection, market disruption, competition and the monitoring of systemic risk, this regime is not likely to be relevant even if introduced in the Cayman Islands and approved by ESMA (it is fair to say that on an objective analysis and absent overarching political influence it should be since it will be based on the recently approved Guernsey alternative regime). It is not likely to be relevant because there are very few fund managers as defined by the Directive based in the Cayman Islands undertaking portfolio investments that are EU-facing.

Indeed, in relation to the 7,600 Cayman regulated funds, there are only 170 Cayman managers based in the EU, the great majority of which are based in London and FCA regulated and would therefore necessarily be duly qualified under the Directive.

This is the point that appears to have been missed in most of the commentary. It is the manager which is regulated under the Directive not the fund, thus Recital (14) of the Directive states in the following terms:

"This Directive lays down requirements regarding the manner in which AIFMs should manage AIFs under their responsibility."

So too Recital (10) of the Directive explains why it does not seek to regulate funds:

"AIFs should therefore be able to continue to be regulated and supervised at national level. It would be disproportionate to regulate the structure or composition of the portfolios of AIFs managed by AIFMs at [European] Union level and it would be difficult to provide for such extensive harmonization due to the very diverse types of AIFs managed by AIFMs."

The foregoing analysis might therefore have led to the conclusion that the extension by ESMA of approval to an FCA regulated London based fund manager of a Cayman fund was unnecessary as nothing more needed to be done. But for a quite distinct and partly procedural reason that is not the case. The distinct reason is that Article 67(4) of the Directive requires ESMA first to advise the EU Commission (the "Commission") that, notwithstanding that the focus of its approval with respect to investor protection, marketing disruption, competition and the monitoring of systemic risk (more particularly described in Article 67(2)) is intended by the Directive to be based on a review of the fund manager, nevertheless, Article 67 appears to include the jurisdiction of the fund domicile in the analysis of the application of those matters.

Therefore, until such time as ESMA advises that none of these factors are obstacles in a Cayman Islands fund structure, albeit one managed by a London based fund manager, the Commission will not act to approve the application of Article 35 to the Cayman Islands. And it is in fact, Article 35 which will enable the FCA (being the materially relevant home country regulator for the purposes of the overwhelming majority of EU based managers of Cayman funds) to arrive at the necessary determination that the three factors specified by Article 35(2) are in place, namely (a) appropriate cooperation arrangements, (b) the fund domicile is not FATF blacklisted and (c) appropriate tax information exchange arrangements. It is apparently of no import that in fact all three of these requirements are clearly met and have been regarded as such for the purposes of the private placement regime arrangements (which continue in effect). Nevertheless, the FCA is not yet enabled by Article 35 to arrive at this self-evident determination simply because Article 35 has not yet been triggered by the Commission pursuant to Article 67(6). So much for the single market.

Thirdly, in any event, the ESMA approval is not a pre-condition to managing a Cayman fund out of the UK. With specific structuring, it is possible for a London based fund manager to manage a Cayman Islands fund under the MiFID II regime and avoid the application of the onerous AIFMD restrictions as to leverage, concentration and remuneration, and the involvement of the distributor otherwise required by the Directive (provided the fund is content to rely on marketing by way of reverse solicitation).

Fourthly, the foregoing analysis may well prove to be relevant only for the two year period following the United Kingdom government triggering Article 50 under the Lisbon Treaty after which the UK would be well advised to implement a regime for institutional investment into hedge funds free of the restrictions as to leverage, concentration, risk and remuneration imposed by the Directive.

Lastly, there is a more commercial point. Investors tend to follow yield and, given that Cayman Islands funds are almost exclusively marketed to institutional investors, it is unlikely that an institution seeking investment in a Cayman Islands hedge fund demonstrating superior performance would not have an affiliate in the United States or Asia that could do so in any event and free from the marketing and other restrictions that might otherwise be of application to a Cayman Islands fund managed in the EU pursuant to the Directive.

Accordingly in our view the ESMA passport approval is unlikely to be of much significance to the issue of investment in Cayman Islands funds and much less so than the issue of investment performance of the fund in question. That said, it is difficult to see good reason why ESMA has failed to provide its positive advice to the Commission to trigger Article 35(2).

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.