Cayman Islands: The Centre Of Choice For Hedge Funds

Last Updated: 23 October 2008
Most Read Contributor in Cayman Islands, September 2018

INTRODUCTION

The financial services industry of the Cayman Islands has a worldwide reputation for diversity and quality and is now the world's fifth largest financial centre. It is home to all but a few of the world's leading banks and major international accounting firms, and as of December 2005 held assets of US$1,265 billion. It attracts over 80% of all new offshore hedge funds and, as of 30 September 2006, has 8,088 active hedge funds registered with the Cayman Islands Monetary Authority ("CIMA"). During the nine month period from January to September 2006 alone, there were 1,406 new fund registrations. The total of active registered hedge funds does not include the vast number of unregulated private equity funds, for which there is little statistical information, and there are many billions of US dollars also currently invested in closed-ended funds and debt issues.

Cayman's reputation is well established and has been justly earned by combining the various tax and regulatory advantages that the Cayman Islands have to offer, with the quality and expertise of its local services, infrastructure and legal system. All these factors work together to produce a business environment in which sophisticated investors can produce imaginative investment strategies off the back of flexible regulations and local know how.

Some of the main reasons why the Cayman Islands is such a popular destination for investors include:

Tax and Regulatory Advantages

Local Infrastructure, Services and Legal System

Tax neutral jurisdiction

No restrictions on investment policy

CIMA - single independent regulatory body

No restrictions on the issue of equity interests

No restrictions on prime brokers

Access to markets

Cayman Islands Stock Exchange

Flexibility of investment fund structures

Availability of professional services

Local infrastructure

Location and time zone

Government / private sector relations

International acceptance of the legal system

Compliance with international standards – OECO, FATF, IMF

Political and economic stability

TAX ADVANTAGES

Tax neutral jurisdiction

The Cayman Islands are a tax neutral jurisdiction and there are no corporation, capital gains, income, profits, withholding or inheritance taxes attaching to investment funds established in the Cayman Islands, nor to investors in such investment funds.

Government undertakings

In addition, and by virtue of an undertaking from the Government, companies with exempted status (the usual corporate investment fund vehicle) remain tax-free for twenty years (although this is usually extended by a further ten years). Exempted limited partnerships and exempted unit trusts enjoy similar undertakings of fifty years' duration.

No exchange control restrictions

The absence of any exchange control restrictions or regulations means that investment funds can be freely transferred in and out of the Cayman Islands.

REGULATORY ADVANTAGES

No restrictions on investment policy

The Mutual Funds Law was introduced in 1993 and consolidated and revised in 2007 (the "MF Law") with a focus on ensuring that proper disclosures are made and that only parties with relevant experience are approved with respect to the management, audit and administration of investment funds. The MF Law does not apply any specific statutory or regulatory constraints on the investment policies and strategies to be adopted by an investment fund, nor does it impose restrictions on other commercial matters such as the appointment of local custodians or managers. As a result of this flexibility and the freedom it affords, the Cayman Islands have tended to attract sophisticated and institutional investment managers who have the resources to conceive and implement imaginative and complex investment fund structures. However, the Cayman Islands is also home to many retail funds, most of which are aimed at retail investors in Latin America and the Far East, notably Japan.

CIMA - single regulatory body

CIMA is the independent primary regulator and sole authority for the registration and regulation of all funds captured by the MF Law. In contrast to some other jurisdictions, no other governmental approvals are required, thus allowing a streamlined, fast and efficient registration process and a consistent application of the MF Law requirements. In simple terms, investors know the score when they elect to register an investment fund with CIMA.

No requirement for local service providers

A Cayman Islands' established investment fund is not required to appoint a Cayman resident administrator unless the aggregate minimum subscription in the relevant investment fund is less than US$100,000.00 (or its currency equivalent). Similarly, there is no requirement to appoint local directors or custodians.

No requirement for annual meetings

There are no statutory requirements to hold annual shareholder or board of directors meetings in the Cayman Islands, which can minimise the expenses attributed to an investment fund if this is a concern. Indeed, shareholders and directors of exempted companies can elect not to hold shareholders' meetings at all.

No restriction on the issue of equity interests

No governmental approvals or consents are needed and no statutory requirements have to be complied with in connection with the issue of equity interests by a Cayman Islands' investment fund (other than registration with CIMA). Similarly, no Cayman Island approvals or consents are required for the circulation of the offering documentation as long as it is recognised that the offer must not be made to the public of the Cayman Islands (unless the investment fund, in the case of a corporate vehicle, is listed on the Cayman Islands' Stock Exchange).

Prime brokers and custodians

There are no restrictions on the arrangement an investment fund may wish to make with respect to prime brokers or custodians and CIMA does not impose any requirements with respect to prime brokers or custodians appointed by a Cayman Islands' fund.

The Cayman Islands Stock Exchange (the "CSX")

The CSX has been operational since July 1997 and was formally designated as a "recognised stock exchange" by the UK Inland Revenue on 4 March 2004. This recognition is welcome news to investment funds, which represent around 87 per cent of all listings, as it increases the attractiveness of the fund and the potential investor base.

Since its inception, the CSX has approved over 1,000 new issues from companies established in the Cayman Islands and elsewhere and has a wealth of experience in listing a variety of investment fund structures including hedge funds, umbrella funds, mutual funds, feeder funds and various specialist funds. Compared to many other exchanges, the CSX offers a competitive and efficient service with relatively few restrictions or requirements. As of 27 October 2006, 896 mutual funds were listed on the CSX with a combined market capitalisation of more than US$80 billion.

Flexible fund structures

The MF Law regulates all mutual funds established in or operating from the Cayman Islands. It allows funds to be structured through a choice of three vehicles: a Cayman Islands' incorporated exempted company (which is the most common), a unit trust (this is favoured in particular by investors in Japan); and through an exempted limited partnership (which is popular with US investors as the Exempted Limited Partnership Law closely follows the equivalent legislation in Delaware and US investors are familiar with it).

LOCAL INFRASTRUCTURE, SERVICES AND LEGAL SYSTEM

Availability and quality of professional services

Attorneys, accountants, fund administrators, auditors and trust company managers are all located in the Cayman Islands and, by virtue of the flexibility afforded by the MF Law, are all experienced in dealing with complex investment fund products and structures. This makes the Cayman Islands a very convenient and reliable "one-stop shop" for offshore funds. The major international accounting firms are all represented and perform the annual audit function required by the MF Law and CIMA. There are a large number of fully qualified professional fund administration companies offering administration services which include acting as registrar and transfer agent, calculating the fund's net asset value, processing share subscription applications and redemption requests, issuing certificates evidencing equity interests (if required) and communication with investors.

Government and private sector relations

As a British overseas territory, the Cayman Islands possess the security and stability traditionally associated with the British flag whilst remaining responsible for their own internal affairs and government. The Cayman Islands' Government and the private sector enjoy a close working relationship over the development of the jurisdiction as a major international financial centre and there is much collaboration over the introduction of the various finance-related legislation and regulations. Consequently, by structuring the framework to meet the demands of the financial community it serves, the Government ensures the continuation of an environment in which business can be conducted efficiently and effectively.

Legal system and Legislation

The Cayman Islands have an independent legal and judicial system based on a combination of English common law and local legislation. Up-to-date company, trust and partnership laws shape the traditional common law to bring it in line with the international demands of the financial industry. This means that fund vehicles and the various securities offered by funds established within this system are well recognised and accepted internationally. The court system is also very well developed with most civil cases being heard in the Grand Court with appeals to the Cayman Islands Court of Appeal followed by the Privy Council in London.

Location and Time Zone

The Cayman Islands are undoubtedly an attractive place to work and visit and this enhances the cosmopolitan nature of the local industry by attracting professionals from all over the world. Being less than an hour from Miami and with direct flights to many US airports, the Cayman Islands are easy to get to but with a central time zone creating overlapping links with Asia, Europe and the US, communication with overseas investors and markets is easy and reduces the need to travel.

Internationally accepted standards

To underpin the continuing reputation of the Cayman Islands as a first class centre for the establishment of investment funds, the Government has been pro-active in implementing legislation that focuses on ensuring that internationally accepted standards are met. This demonstrates a willingness to set standards rather than always reacting to those imposed by the international community. Examples of the various checks and procedures introduced include:

  1. introducing tax information exchange regulations by treaty with relevant jurisdictions;

  2. restricting the issue of bearer shares;

  3. maintaining its commitment to the zero tax regime;

  4. regulation by the Securities Investment Business Law;

  5. continuing its long commitment to internationally recognised anti-money laundering standards by monitoring and improving the relevant legislation; and

  6. the independence of CIMA.

The points raised above highlight how the Cayman Islands have responded to the increasing international popularity in hedge funds and other investment funds. By putting in place legislation that is flexible but effective in regulating this fast growing industry and providing reliable on the spot expertise to capitalize on the advantages and opportunities on offer, the Cayman Islands continue to attract a large proportion of the investment funds market.

Cayman Islands
Jonathan Tonge, Partner

London
David Whittome, Partner

Jersey
Heather Bestwick, Partner

British Virgin Islands
Richard May

Hong Kong
Philip Millward, Partner

Dubai
Rod Palmer, Partner

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.

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