How to Set Up a Cayman Islands Hedge Fund
There are two main jurisdictions to establish an offshore hedge fund (either as a single hedge fund or as part of a master-feeder structure). The two jurisdictions are the BVI and the Cayman Islands. This article will discuss some of the features of Cayman Island based hedge fund structures.
Why the Cayman Islands?
Cayman has been the leading jurisdiction for fund formation with an estimated 80% of the world’s hedge funds domiciled there. As of December 2008, Cayman had over 10,000 hedge funds registered with the local regulatory authority: The Cayman Islands Monetary Authority (“CIMA”).
First and foremost: establishing a fund in the Cayman Islands is easy and efficient, offering managers many competitive advantages over other jurisdictions including:
- Non-public funds can be registered in as little as 3-5 days with CIMA and the vehicle of choice for the fund can be registered within 1 day prior to filing, if necessary;
- Flexible statutory regimes, with an absence of exchange control provisions, that are well-established and relatively low-cost;
- There are no restrictions on: (i) investment policy (ii) issue of equity interests (iii) prime brokers or (iv) custodians;
- The regulatory and legislative environment is continuously evolving to strengthen the jurisdiction’s appeal for hedge funds in response to ever changing market conditions;
- Cayman is a tax neutral jurisdiction – there are no capital gains, income, profits, withholding or inheritance taxes attaching to investment funds established there, nor to investors in such investment funds;
- Cayman is a British Overseas Territory and as such maintains all of the security and stability associated with the British flag. The UK remains responsible for the islands’ external affairs, defence and their legal system; and
- The quality and expertise of the Cayman Islands local services, infrastructure and legal system is well above par.
Does Every Hedge Fund Have to be Registered with CIMA?
While most funds (90%) will be required by Cayman Islands law to register with CIMA, there are some funds that will not: those funds where the equity interests are not held by more than 15 investors who collectively have the power to appoint or remove the “operator” of the fund i.e. the director, trustee, or general partner, depending on the fund’s choice of vehicle. For example, a private fund or closely held funds such as partners’ funds or those in incubation “testing the waters” before launching into the registered world. These funds need not make filings or pay fees to CIMA.
All other funds must register with CIMA, pay annual fees and undergo annual auditing.
What are the CIMA Hedge Fund Registration Requirements?
1. Incorporation/Formation of the fund vehicle. The fund must be in the form of one of three vehicles: i) a Cayman Islands Exempted Company (most common); ii) a Unit Trust; or iii) an Exempted Limited Partnership. (The latter is popular with US investors as the Cayman Islands Exempted Limited Partnership Law follows the equivalent legislation in Delaware.) There must be a minimum of two (2) directors appointed to the fund – corporate or individuals. The directors need not be local.
2. Preparation of the fund’s Offering Document.
3. Preparation of the fund’s constitutional documents (i.e. Memorandum and Articles of Association) to reflect the terms of the Offering Document. This is usually done by way of amending and restating the constitutional documents after the vehicle for the fund has been properly formed (see 1 above).
4. Preparation of the service agreements i.e. administration agreement/investment management agreement/advisory agreement etc.
5. Preparation of the form of subscription agreement to be executed by the investors of the fund.
6. Resolutions must be passed approving: the Offering Document, service agreements and the issue of equity interests by the fund.
7. All of the following documents must then be submitted to CIMA:
i) A certified copy of the fund’s certificate of incorporation (or otherwise, depending on the vehicle used);
ii) Fund’s Offering Document;
iii) Application Form (“Form MF1”);
iv) Auditor’s letter of consent; (A local auditor must be appointed. Such auditor must also sign off on the fund’s audited financial statements which are to be submitted annually to CIMA.)
v) Administrator’s letter of consent (no requirement for local administrator);
vi) Registration fee (approximately US$3,000 (subject to change))
What Are the Costs for CIMA Registered Funds?
The total approximate costs of setting up a Cayman Islands Hedge Fund will include: the incorporation/formation costs of the vehicle required plus the ongoing annual fee (for exempted companies); the annual administrator’s fee; the annual auditor’s fee; the initial registration fee of the fund with CIMA and an annual fee to maintain the fund’s registration, and any legal fees associated therewith.
Quotes for incorporation etc. and estimates for services may be obtained from service providers and legal counsel directly, as these will likely vary. Legal counsel may provide recommendations for service providers upon request.
Article Written by Michelle Richie
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Bart Mallon, Esq. has written most all of the articles which appear on the Hedge Fund Law Blog. Mr. Mallon’s legal practice, Cole-Frieman & Mallon LLP, is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about investment adviser registration with the SEC or state securities commission, please call Mr. Mallon directly at 415-296-8510.