For offshore hedge funds one of the central questions during the formation process is which jurisdiction will you choose? While there are many possibilities, there are two jurisidictions which a vast majority of the hedge funds will choose – either the BVI or Cayman Islands. Because both offer the same liability protections and tax favored status, the question comes down to cost and regulation.
Generally Cayman is considered to be the “premier” jurisdiction with many of the blue chip hedge funds domiciled here. Cayman also had a bit of a first-mover status and has just announced that it had it’s 10,000th fund. Cayman is also the more expensive jurisdiction.
Because of these facts many funds, including many start-up hedge funds, will choose to go with the BVI. One issue with the BVI is that the fund “recogition” process is much more capricious. Where Cayman offers funds a very dependable timeline to fund start ups, the BVI’s “recognition” process can be delayed by the BVI’s Financial Services Commission (“FSC”), which has the authority to request certain information for BVI professional funds. In fact, the FSC is free to request any additional information as they please. (Note: this is also true during the entity formation stage, which is distinct from the fund formation stage.) In the past they have asked for more detailed information on the past job duties of Directors. They have also requested future confirmations on certain items in the offering documents related to a manager’s past performance. They have also requested information related to the service providers.
As a result of the requests they have made, the final “recognition” of certain funds has been delayed. However, this will not happen on a routine basis (it has happened, with my previous clients, maybe once every 10 funds) and normally the information request and subsequent recognition is handled relatively quickly so that there has really been no delay of a manager’s launch date.
When deciding on a jurisdiction, this is something to be aware of, but it should not be dispositive on your decision one way or another.