Hedge Funds In The Cayman Islands

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Stuarts Humphries

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Stuarts is a leading offshore law firm in the Cayman Islands specialising in investment funds and offering fully integrated corporate and commercial advice from a team of experienced, award-winning attorneys. Whether it's navigating the complexities of Fintech, cryptoassets, real estate, investment funds, M&A's, regulatory, banking, company incorporation, dispute resolution, immigration, or any other business challenge, Stuarts have the expertise and experience to guide you toward success. At Stuarts, our team are known for world-class responsiveness, efficiency, and cost-effectiveness; working closely with clients from around the world to solve their most complex business challenges, transactions and obligations. Our proven track record in advising leading international law firms, investment managers, investment companies and high-net-worth individuals is a result of the deep understanding of our markets and our clients’ needs.
The Cayman Islands stands out globally as a top choice for setting up offshore hedge funds.
Cayman Islands Finance and Banking
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The Cayman Islands stands out globally as a top choice for setting up offshore hedge funds. Its appeal is due mainly to the use of innovative legislation; the absence of taxation and exchange controls; and the long-standing presence of sophisticated and professional service providers, ensuring responsible supervision and regulation, and a safe and trusted environment for investors. These factors make the location attractive to hedge fund managers worldwide.

Stuarts funds attorneys take a look at what a hedge fund is, what structures are used for hedge funds in the Cayman Islands and how to invest in a hedge fund. Understanding the key services that hedge funds in the Cayman Islands offer can help you make informed decisions about establishing a hedge fund in the jurisdiction.

What structures are used for hedge funds in the Cayman Islands?

Several structures exist for establishing hedge funds in the Cayman Islands, such as the exempted limited company, the exempted limited partnership, the unit trust and the segregated portfolio company ("SPC").

Exempted Limited Company is one of the most commonly used entities for hedge funds established in the Cayman Islands, offering management control and flexibility. Its directors hold overall management control and are responsible for appointing service providers, including the investment manager.

Exempted Limited Partnership is another option for structuring a hedge fund which establishes a contractual arrangement between its passive limited partners and the general partner. Typically, the general partner appoints the hedge fund's investment manager.

Exempted Unit Trust: The Cayman exempted unit trust functions as a contractual agreement between its unitholders and the fund's trustee, who issues units to investors. The trustee maintains overall control of the trust and typically delegates the management of trust assets to the investment manager.

Segregated portfolio company (SPCs): Hedge fund companies in the Cayman Islands can also be registered as an SPC. SPCs offer a unique advantage by segregating assets and liabilities between different portfolios, reducing risk and enhancing efficiency.

Read more on Investment Funds in the Cayman Islands.

How are hedge funds regulated in the Cayman Islands?

Cayman Islands investment funds typically fall under the regulation of the Cayman Islands Monetary Authority ("CIMA").

Open-ended funds, including most hedge funds, are regulated under the Mutual Funds Act (as Revised). While closed-ended funds, such as private equity, venture capital, real estate, infrastructure, and other funds dealing with illiquid assets, are governed by the Private Funds Act (as Revised).

Exceptions to these regulations include single investor vehicles, proprietary investment vehicles, and pension funds.

What is the timeframe to launch a hedge fund in the Cayman Islands?

The hedge fund must have a registered office in the Cayman Islands. Our affiliated service provider, Stuarts Corporate Services can provide this.

The hedge fund will also need to appoint a local auditor in the Cayman Islands and we can assist with a suitable recommendation.

A CIMA regulated hedge fund is able to commence operating as soon as:

  • the constitutional and offering documents are finalised;
  • the service providers' agreements are finalised; and
  • the offering documentation and certain prescribed particulars are filed with CIMA.

In addition to the foregoing, registered private funds are allowed to accept commitments up to 21 days' prior to applying for registration with CIMA (but must be registered with CIMA before drawing down such commitments for investment purposes). CIMA will generally confirm registration of a hedge fund on the same day application is submitted to CIMA.

Liquidity of a Cayman Islands hedge fund

Cayman Islands funds can be structured as open-ended or closed-ended funds and in either case, where their constitutional and offering documents permit, can make redemptions in kind by transferring underlying assets to investors on redemption. Where a Cayman hedge fund is open-ended, the following liquidity control mechanisms can be employed:

  • redemption gates;
  • suspension of redemptions;
  • deferred redemption payments;
  • redemption holdbacks; and
  • side pockets.

Restructuring and insolvency of distressed hedge funds

Stuarts' Cayman hedge fund attorneys provide restructuring advice to creditors, shareholders and other stakeholders of distressed funds and portfolio companies. We provide advice in relation to enforcement options to creditors and regularly advise liquidators, directors and shareholders of distressed funds.

Stuarts distressed funds team has been instructed in connection with many of the largest fund insolvency events in the Cayman Islands. Services offered include:

  • Advising hedge funds and their directors on winding down or restructuring funds' affairs and the use of side pockets;
  • Advising on the deregistration and liquidation of the hedge fund;
  • Advising on disputes between hedge funds and investors on subscription terms and the interpretation of side letters;
  • Acting for funds and service providers on NAV mis-pricing cases, claims against directors and audit negligence disputes; and
  • Acting for leverage providers and counter-parties to distressed hedge funds.

How can Stuarts help with your hedge fund?

If you are looking to establish a hedge fund, Stuarts Humphries have an experienced team of hedge fund attorneys who offer in-depth market knowledge, understanding and expertise in relation to the hedge funds market.

Our legal team specialising in hedge funds offers guidance to some of the largest and most esteemed hedge fund clients throughout the entire life cycle of their funds, including providing advice on downstream transactional matters.

Our hedge fund lawyers can offer advice on how to invest in a hedge fund and all of the legal aspects impacting the ongoing operations of hedge funds. This includes providing specialist advice to hedge fund managers on the operations of the fund, AML and compliance, and contentious issues.

Originally published 11 March 2024

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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