Hedge Fund Segregated Portfolio Companies
A segregated portfolio company (SPC) is a single entity structure which contains a series of segregated portfolios (sometimes referred to as “cells”), each of which is regarded as a separate legal entity for asset protection purposes. For offshore hedge funds, the segregated portfolio company is the functional equivalent to the domestic hedge fund series LLC. This article will detail: SPC jurisdictions, SPC Offshore structures, SPC offering documents, SPC advantages and SPC disadvantages.
Like traditional offshore hedge fund structures the offshore SPC will usually be established in a traditional offshore jurisdiction like the Cayman Islands or the British Virgin Islands. Other offshore jurisdictions include: Anguilla, Jersey and the Isle of Man.
Structure of offshore hedge funds in the SPC structure
There are two central structures where offshore hedge funds will use the segregated portfolio company structure: (1) with a single entity offshore hedge fund structure or (2) with a master-feeder offshore hedge fund structure.
Single Entity SPC Structure
The single entity offshore SPC structure is a relatively straightforward structure. This option would be best for an offshore hedge fund sponsor who is looking to have only offshore (non-U.S. investors) or U.S. tax-exempt investors.
Master-Feeder SPC Structure
The master-feeder SPC structure is a more complicated structure and is generally an option for those hedge fund sponsors who wish to market a fund “platform” to both U.S. and non-U.S. investors.
The master-feeder SPC can be structured in a number of different ways. Generally there will be (1) an offshore SPC master fund, (2) an offshore feeder level which may be comprised of individual funds or of another segregated portfolio company, and (3) a domestic feeder level which may be comprised of individual funds (established as limited partnerships or limited liability companies) or a series LLC. There are many considerations when determining the actual structure including costs, compliance and jurisdictional specific issues.
Because of the complex legal, accounting and tax issues associated with both the single entity and master-feeder SPC structure, the actual structure will generally be solidified after consultation between the sponsor/manager, lawyer, accountant/administrator and auditor.
Segregated Portfolio Company Offering Documents
Like a traditional offshore hedge fund, the SPC will have the traditional offering documents:
• Offering memorandum or private placement memorandum
• Memorandum and Articles of Association
• Subscription Documents
There are a couple of ways of drafting the offering documents. One way provides an offering memorandum which is shorter and includes a general description of the fund, the risks of the fund and a description segregated portfolios. The offering memorandum would not provide the specifics of each program and instead a portfolio supplement will be provided with each offering memorandum. The supplement would provide greater detail of the individual portfolio investment program and the specific risks applicable to the program.
Another way to draft the offering memorandum is to include all of the information on the fund as well as information on each investment program and all of the attendant risks. Obviously this will create a very large document, depending on the number of investment programs offered.
Segregated Portfolio Company Advantages
The advantages of the SPC structure are similar to the Series LLC. In many instances there are cost advantages to having a SPC structure instead of establishing a group of separate offshore funds. Additionally, the SPC structure can be a great way for larger investment management companies to add outside managers to a recognized and established platform. Many times the addition of an extra portfolio to a SPC is faster than establishing an entirely new offshore fund, but this is not always the case.
Segregated Portfolio Company Disadvantages
The central disadvantage of the SPC structure is the initial complexity. Generally there is also not any sort of cost savings with the SPC structure unless the manager has a fair amount of segregate portfolios (generally at least 8). In addition, the SPC structure is a relatively new structure which has not been extensively tested in courts. This means that some jurisdictions may not respect the asset protection features of the entity.
Please contact us to discuss your offshore hedge fund and a potential segregated portfolio company. Other hedge fund law articles related to this post include: