Cayman Islands: The Industry's Number One - Importance Of The Cayman Islands To The US Hedge Fund Sector

Last Updated: 11 September 2017
Article by Jarrod Farley and Thomas Marriott

Partner Jarrod Farley and associate Thomas Marriott explain the importance of the Cayman Islands to the US hedge fund sector, which first appeared in the HFM Special Report: How to start a hedge fund in the US 2017.

The Cayman Islands is the most popular domicile for hedge funds, with close to 11,000 funds registered with the local regulator (Cima), which constitute over 60% of global hedge funds by number and by net assets. Of these funds, more than 70% are managed by US managers and close to a third are administered by US administrators. Evidently, the Cayman Islands are a key participant in the US hedge fund industry, but why is this?

Crosshead: The need for an offshore solution

The Cayman Islands as a financial centre, in common with other offshore financial centres, exists to provide solutions to onshore tax and regulatory problems. The starting point for any US manager looking to launch a hedge fund will quite naturally be to establish a vehicle in the US, generally a Delaware limited partnership. This may be fine when the fund only admits or intends to admit US taxable investors, but it can be problematic for funds that want to admit US tax exempt investors or non-US investors.

Crosshead: Tax issues

US tax issues can be complex, and it is not the intention of this article to delve into them in detail. Suffice to say that there are two principal issues that arise, primarily as a result of investments being made through a tax transparent vehicle. First, US tax exempt investors may be taxed on their share of the vehicle's investment income as "unrelated business taxable income", and second, non-US investors may be taxed on any income that is "effectively connected" with a US trade or business. The solution, in each case, is to invest through a corporation or a vehicle that can "check-the-box" to be treated as a corporation for US tax purposes. If that vehicle is itself established in the US, it will be subject to tax on its income and gains, which would negate the benefits for US tax-exempt investors and result in double taxation for non-US investors (who would still pay tax in their own jurisdictions on any distributions they receive from the corporation). The solution is to establish the vehicle in a jurisdiction that does not impose any direct taxation, such as the Cayman Islands.

Crosshead: Regulatory issues

As with US tax issues, the US regulatory issues are fiendishly complex, but the goal for all alternative investment funds is generally to avoid the costs of unnecessary regulation by falling within available exemptions. So, for example, hedge fund managers will generally try to avoid registering the fund as an investment company under the US Investment Company Act of 1940, by ensuring that it falls within one of the exemptions, such as the exemption in s.3(c)(7) for funds that only admit investors who are qualified purchasers (as defined). We understand that when the fund vehicle is established in the US, such restrictions generally apply to all the fund's investors (whether US investors or non-US investors), but where the fund vehicle is established outside the US, the restrictions will, in certain cases, only apply to the US investors in the fund. This helps to explain why a US feeder fund and a Cayman Islands feeder fund will generally pool their investments through a Cayman Islands master fund, rather than through a US master fund.

Crosshead: Why the Cayman Islands?

Of course, the Cayman Islands is not the only offshore financial centre with no direct taxation, so why has the Cayman Islands become such an integral part of the US hedge fund industry instead of those other jurisdictions? The Cayman Islands has certain geographical and historical advantages that put it in the right time zone to service the US market, with a well-respected legal and judicial system based on English common law, but more importantly, the public and private sectors have co-operated closely since the early 1990s to produce a simple but effective regulatory regime for hedge funds.

Crosshead: Cayman Islands regulation of hedge funds

Cayman Islands hedge funds are regulated under the Mutual Funds Law (as revised) of the Cayman Islands, and the undeniable success of the regulatory regime has largely been a result of its simplicity. There are three tiers of regulation: at the top, fully licensed funds whose operations are subject to full regulatory scrutiny by Cima. These funds are few in number and mainly service the local Cayman Islands market. In the second tier are administered funds, where a locally licensed administrator operates a form of delegated regulatory responsibility. These are mostly funds that could register under the third category, but do not wish to impose the minimum investment requirement. There are only a few hundred of these funds. The third, and by far the most popular category is the registered fund, accounting for around 96% of all Cayman Islands regulated funds. Finally, there is an exemption from any regulation for hedge funds with no more than 15 investors, who have the power to appoint and remove the fund's operator (directors, general partner or trustee, as applicable) by majority vote.

Registered funds register with Cima pursuant to s.4(3) of the Mutual Funds Law, which requires: (i) a minimum investment of $100,000 (or its equivalent in any other currency); (ii) an offering document with sufficient information that a prospective investor can make an informed decision about investing; and (iii) the appointment of a local auditor approved by Cima. There are no other local service provider requirements, no restrictions on investment strategy, leverage, liquidity or risk and investors can be admitted and trading can commence as soon as the registration filings are made with Cima. On an ongoing basis, the only requirements are to update Cima if there are any material changes to the matters disclosed in the offering document and to file audited accounts (and certain extracted information compiled in an annual return) with Cima within six months of the fund's financial year end.

Crosshead: Cayman Islands expertise

Over the years, the success of the Cayman Islands as a hedge fund jurisdiction has been self-perpetuating. It has become the most familiar hedge fund jurisdiction to advisers in the US and elsewhere who are the first port of call for managers looking to launch a new hedge fund, and it has a large body of local service providers including fund accountants and auditors, fund attorneys, independent directors, fund administrators and trustees, with over two decades of accumulated expertise. This familiarity and concentration of expertise inevitably makes the establishment and ongoing operation of hedge funds in the Cayman Islands more efficient in terms of timing and costs than less-specialised jurisdictions.

Crosshead: The future

For the past few years, the US itself has been the most popular domicile for new hedge funds. Without going into the underlying reasons for this, it suggests there may be a large number of hedge funds that have so far only raised capital within the US, perhaps on a relatively small-scale to fall outside the SEC's regulatory ambit. As the more successful of these funds attract or seek to attract larger investments from institutional investors inside or outside the US, they are likely to encounter the tax and regulatory issues mentioned above and reach out for the structuring solutions that the Cayman Islands provides.

This article first appeared in the HFM Special Report How to start a hedge fund in the US 2017.

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