The Cayman Islands remains a leading center for hedge fund managers and the alternative investment industry. Its tax-neutral platform, stable economy, sophisticated banking sector, confidentiality and professional financial service industry are just some of the reasons the location is attractive to hedge fund managers the world over. A fund launch typically takes 4-6 weeks when factoring in the finalization of all legal documentation, on-boarding and account opening with service providers.
What Fund Structure Should You Use?
A hedge fund is typically open-ended, that is investors can make periodic redemptions, usually monthly. Accordingly there must always be enough cash or liquid assets in the fund to meet such redemption demands.
Fund managers should also consider whether to impose a lock-up period, during which investors cannot sell shares at all or subject to an early redemption penalty. A lock-in period allows the fund manager to invest all of the subscriptions during the early life of the fund without having to meet redemption requests.
Legal Entity
Cayman Islands hedge funds are typically structured as exempted companies. However, the particular needs or preferences of different types of investor, whether to reflect market convention, taxation or other considerations, may determine the actual fund vehicle or vehicles used.
Segregated Portfolio Companies may be considered a suitable option for Asian fund managers. Under Cayman legislation for SPCs, assets and liabilities can be separated into distinct pools amongst its segregated portfolios. This avoids the expense of incorporating individual companies to obtain the same effect.
Share Classes
The fund, where structured as an exempted company, will usually issue two kinds of shares: voting and non-voting. Voting shares (management shares) are non-redeemable, do not have economic rights but carry significant shareholder voting rights and are held by the fund sponsor or manager. Non-voting shares (participating shares) are held by the investors and will only give them the right to participate in the fund’s profits.
Regulation
An open-ended fund will be a mutual fund for the purposes of the Mutual Funds Act of the Cayman Islands (“MFA”) and will be regulated by the Cayman Islands Monetary Authority (“CIMA”), unless exempted. For hedge funds, this usually means being regulated as a “registered” fund on the basis that the minimum initial subscription by an investor is not less than CI$80,000 (approximately US$100,000). An open-ended fund with 15 investors or fewer, who have the power to appoint and remove the directors, will also be subject to regulation by CIMA under the MFA.
Cayman Islands’ master funds, being open-ended funds that hold investments and conduct trading to fulfill the investment strategy of a regulated feeder fund, are also regulated under the MFA. A registered fund must appoint:
a fund administrator,
an auditor
at least two directors who are CIMA registered under the Director Registration & Licensing Act
AML Compliance Officers
FATCA/CRS Reporting
Registered Office
Bell Rock routinely registers funds with CIMA for all legal structures.
Incorporation The fund must have a registered office in the Cayman Islands. Bell Rock, can provide this service, as we do for our clients around the world. Bell Rock will be able to assist with the incorporation and organisation of the fund as a Cayman Islands exempted company. Incorporation is usually finalised within 24 hours of submission to the Cayman Registrar.
Fund Documentation The documents typically required for the hedge fund offering will include:
The memorandum and articles of association (“M&A”)
The private placement memorandum (“PPM”) provides all relevant details about the participating shares, so prospective investors can make an informed decision about subscribing, it including the investment objectives and applicable risk factors.
Mutual Fund Application Form which sets out details prescribed by CIMA for registration as a regulated mutual fund.
The various service provider agreements such as a management agreement between the fund and the manager, where appointed, an advisory agreement between the manager and the adviser and the fund administration agreement and the prime broker/custodian agreement.
A subscription form (for investors subscribing for participating shares) and a redemption form (for when investors want to redeem shares).
A fund registration affidavit, which relates to electronic document filings with CIMA by Bell Rock.
The directors' and shareholders’ written resolutions for the fund, which covers the adoption of the fund’s M&A, the PPM, the service provider agreement amongst other matters. In addition, the Cayman Islands Directors Registration and Licensing Act requires the directors of any regulated mutual fund under the MFA to register with CIMA.
Bell Rock
As a leading fund services group, headquartered in the Cayman Islands and regulated by CIMA, we advise fund managers throughout the life-cycle of setting up Cayman funds and provide a complete solution including fund formation, fund registration, appointment of service providers required by law from our international network and ongoing support, as required, such as fund governance, compliance, registered office and other support services. We have launched all manner of funds, both open-ended and closed-ended such as stand-alone funds, SPC's, master-feeder funds, mini-master funds as well as investment management entities. For further information and/or our fund formation questionnaire in order to obtain a fee quote, please contact us: info@bellrockgroup.com
This article is intended to merely provide a brief overview and give general information.