Cayman Islands: Cayman Hedge Funds Reach New Milestone

Last Updated: 3 November 2008
Article by Paul Scrivener and Laura Hatfield

Paul Scrivener and Laura Hatfield of Solomon Harris provide an update on Cayman's hedge fund industry

For quite some time now the Cayman Islands has been the global market leader for hedge funds, entirely dwarfing other offshore centres such as Bermuda, the British Virgin Islands and the Channel Islands. In June this year the number of hedge funds registered in the Cayman Islands reached and exceeded 10,000 and the hedge fund activity in this significant financial centre remains very strong despite the credit crunch and the general turmoil in the world economy. It is difficult to find hard data as to the total worldwide population of hedge funds but it is clear that the Cayman Islands is home to the vast majority and indeed some commentators put its share of the market as high as 80 per cent with the current annual growth rate being 12 per cent.

In June, Cayman's regulator, the Monetary Authority, published its first Investments Statistical Digest. The data relates to 2006 but nevertheless provides a fascinating insight into the make up of the Cayman Islands hedge fund sector. As at 31 December 2006, net assets under management within Cayman hedge funds totalled US$1.387 trillion with 28 per cent of those assets in the hands of New York-based managers and 18 per cent managed by London-based managers. The investors in Cayman hedge funds are predominantly high net worth individuals and institutions. In the Digest, 50 per cent of the funds were found to be master/feeder (a reflection of the importance of the US market) and 29% were fund of funds. The most popular strategies were multi-strategy and long/short equity.

The dominance of the Cayman Islands in this sector is attributable principally to the political stability of the jurisdiction, the regulatory regime, and the depth and breadth of the professional service providers including, in particular, fund administrators, lawyers, accountants and independent directors. The regulatory regime is particularly suitable for fund managers because of an absence of prescriptive rules that must be adhered to, such as rules that constrain investment policies or strategies, or restrict leveraging or investment concentration. Instead, there is an overriding obligation under the applicable legislation, the Mutual Funds Law (2007 Revision) ("the Mutual Funds Law") of fair disclosure to investors. This disclosure-based approach towards investors is entirely appropriate bearing in mind that the investor base is typically highly sophisticated.

Under the Mutual Funds Law, Cayman funds are placed into categories, with the dominant category being "registered funds", the category aimed at sophisticated investors. Most registered funds must have an initial minimum subscription of at least US$100,000. As at June 2007, registered funds totalled 9,378, accounting for well in excess of 90 percent of all regulated Cayman investment funds and thereby underlining that the investor base in Cayman funds is almost exclusively made up of sophisticated investors. For most registered funds, the initial minimum subscription is significantly in excess of the US$100,000 minimum mandated under the Mutual Funds Law, and it is not uncommon to find Cayman funds that have a minimum subscription in the seven figure range. The Investments Statistical Digest shows that almost two thirds of the funds covered in the Digest required initial minimum subscriptions of US$500,000 or more.

Unless there are onshore tax, regulatory reasons or other commercial reasons why a fund should be structured as a partnership or a unit trust, a Cayman fund will invariably be established as a Cayman Islands company. In the Cayman Islands, the corporate structure of the fund means that the fund will have a board of directors with important fiduciary duties to act at all times in the best interests of the fund and its investors. There is increasing focus on the responsibilities of the directors as the emphasis on good corporate governance spreads from the onshore world to the offshore world.

Frequently, a hedge fund manager looking to set up an offshore fund will be guided towards the Cayman Islands by their onshore advisers. Onshore advisers have various reasons for choosing Cayman. At the top of the list is the fact that Cayman is tried and tested in the alternative investments arena. The process will be time-efficient and cost-effective. As touched on above, the regulatory regime is proportionate and ideally suited to hedge funds. The service providers have a wealth of experience and a 'can do' approach to business.

An important aspect for any hedge fund manager is to ensure that the establishment of the fund is dealt with properly and on a timely basis. Onshore counsel will outline the key features of the proposed fund, covering structuring, investment objective, target investors, likely size of the fund, liquidity, minimum subscriptions, tax issues and so on. Cayman counsel will invest time at the beginning to gain a clear understanding of the proposed fund and the manager's objectives and aspirations. Onshore counsel and Cayman counsel will agree responsibility for document preparation and a timetable. The offering memorandum is typically prepared by onshore counsel and then reviewed by Cayman counsel. In cases where the fund manager has not engaged onshore counsel, Cayman counsel is more than happy to act as lead counsel.

Timing is usually at the forefront of the fund manager's mind. The manager will frequently have investors lined up before they have even considered the domicile of the fund. Therefore, frequently, there is considerable time pressure to get the fund up and running. Cayman service providers are used to this and, with full commitment to the process from all involved, a Cayman fund is frequently launched within four to six weeks. This rapid turnaround time has been a major factor in the huge growth Cayman has experienced in the hedge funds arena. The timeframe is assisted by the speed with which the fund vehicle can be incorporated (usually within 24 hours of all paperwork being in place) and then registered with the Monetary Authority (the registration certificate is normally issued within three or four business days of filing the registration particulars).

What impact has the credit crunch and problems in the world markets had for Cayman's hedge fund industry? Clearly, there have been closures and blow-ups, some high profile, but this is inevitable when Cayman has such a huge proportion of the worldwide population of hedge funds. For some managers these have been particularly stressful times with redemptions being suspended and redemption gates imposed to maintain stability or, in the case of funds beyond repair, to ensure an orderly wind down. There has also been increasing use of side pockets to segregate hard to value assets.

In the case of fund closures, cross-border insolvency issues as between Cayman and the US have proved interesting. There is frequently a US angle to any hedge fund collapse because the fund's assets or the fund's investors, or both, will be in the US. A new important consideration for a Cayman fund is the so-called Centre of Main Interest ("COMI"). The COMI of a company will be considered by a US court in considering whether to give recognition to any liquidators appointed by a Cayman Court.

Chapter 15 of the United States Bankruptcy Code states that the COMI of a company is presumed to be the place of the registered office location in the absence of evidence to the contrary. Cases in Europe and the US on the criteria for establishing COMI  have found to be relevant  "the existence of factors which are objective and ascertainable by third parties" which have been held to include the location of headquarters, management, primary assets, creditors and the law governing disputes. The much publicised Bear Stearns decisions have found that the liquidators of the Cayman incorporated Bear Stearns hedge funds could not show that the COMI of those companies was in the Cayman Islands due to the absence in Cayman of the sort of connections listed earlier. It was also established that the US courts should not simply accept a registered office location as definitive of the COMI but should look at the factors set out above. This is the case even where there is no opposition to the application for recognition of the liquidators.

Another way to obtain recognition in the US Courts for the Cayman liquidation, albeit a form of recognition which gives the liquidators less powers automatically, is to show that the fund has an establishment in the location where the liquidators were appointed. An establishment is defined as a "place of operations where the company carries out non-transitory economic activity" but the meaning of this phrase has still to be determined by the courts.

It is possible that a Cayman COMI or Establishment could be achieved through structuring of the Fund e.g. ensuring the Fund service providers are based in Cayman, Directors hold board meetings in Cayman, there is a bank account in Cayman. However, some commentators suggest that these recognition decisions from the US Courts will lead to a greater "bricks and mortar" physical presence in the Cayman Islands for Cayman hedge funds and that the jurisdiction will develop to a new level beyond a domiciliary and service provider centre. This may or may not happen but one thing is clear - the Cayman Islands has become the world centre for the establishment of hedge funds and, whilst there can be no complacency, there is no reason why it should not remain so for the foreseeable future.

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 Mondaq.com.

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

Authors
 
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
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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