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.

Similar Articles
Relevancy Powered by MondaqAI
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
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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 (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

To Use 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.


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.


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