There are many reasons why managers will want to form hedge funds in offshore jurisdictions like the Cayman Islands or the British Virgin Islands. While a domestic hedge fund can be established in as little as two to three weeks (depending on whether the manager must be registered as an investment advisor), the offshore hedge fund will usually take around 6 to 10 weeks to form, depending on a number of different factors. This article will detail the process of creating an offshore hedge fund.
Deciding on the offshore hedge fund structure
Prior to starting the fund formation process, the hedge fund manager and the attorney (and usually the auditor or tax advisor) will discuss the potential offshore hedge fund structures including the offshore master-feeder structure and the offshore side by side structure. The ultimate structure will depend on a number of factors including the tax residence of the investors as well as the underlying investment program. This part of the process can take some time, but it is probably the most important part – I have seen a number of instances when managers have rushed to establish a structure only later to determine that it is not the correct structure. This is the time where the attorney and the tax advisor will be the most helpful to the manager.
Establishing the domestic entities
Once the structure is determined the hedge fund attorney will begin establishing the domestic entities (the hedge fund management company and the hedge fund entity itself). This part of the process will take only a few days and the manager should generally receive the paperwork back within a week or so.
Establishing the offshore entities
Establishing the offshore entities is not a difficult process, but it can be a lengthy process. This is because most reputable offshore hedge fund jurisdictions will require extensive due diligence on the hedge fund manager. Typically these due diligence requirements entail the manager producing the following documents:
1. Identifying information on the fund’s director(s) and/or manager(s)
2. Original or notarized copy of the director’s passport
3. Original or notarized copy of the director’s utility bill
4. Professional reference(s) for the director
When the attorney or offshore registered agent has the above information the registered agent will be able to form the offshore entities by submitting a Memorandum of Association and an Articles of Association for each entity. These are substantially equivalent to the domestic hedge fund’s limited partnership agreement or the limited liability company agreement. Of course before the registered agent can actually form the entities the manager will need to decide on a name for the fund. (Please see Hedge Fund Naming Conventions.)
Solidifying Relationships with Service Providers
Many offshore managers do not realize that establishing bank accounts, brokerage accounts and administration relationships takes time and should be considered of utmost importance when trying to establish a fund in a relatively short period of time. We always recommend managers begin talking with these outside service providers as soon as possible to avoid delays. The hedge fund attorney will be able to provide the manager with industry contacts which should help speed the process along.
Offshore Hedge Fund Offering Documents
While the manager is solidifying the service provider relationships and the while the offshore entities are being formed, the attorneys are drafting the offshore hedge fund offering documents (which are very similar in nature to domestic hedge fund offering documents). Generally the attorney will circulate draft copies of the offering documents for comment by the manager and/or the service providers. After this comment and revision period the offering documents will be revised and put into final form.
Regulatory Filing or Approval
In both the Cayman Islands and the BVI the attorney will generally work with offshore counsel to get the documents filed appropriately with the necessary offshore agency. Typically this is a “rubber stamping” process, but occasionally the regulatory body will have questions or request more information on items mentioned in the offering documents. Generally these inquiries are innocuous and will not, in general, significantly slow down the launch of an offshore hedge fund.
Please contact us if you would like to establish an offshore hedge fund or have any questions regarding the process. Related offshore hedge fund law articles include: