Tag Archives: BVI

Hedge Funds in the BVI – new requirement to submit annual information

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The British Virigin Islands (BVI) is a popular jurisdiction for many offshore hedge funds to be located.  The BVI is known to have good financial oversight and relatively reasonable offshore hedge fund formation fees.  Over the past year the BVI Financial Services Commission (FSC) has become more involved in hedge fund oversight as political pressure increases.  It is expected that the BVI’s Mutual Funds Law will undergo changes within the next 6 months to a year because of this political pressure.

In addition, on September 9 the FSC surprisingly announced that BVI hedge funds (known as “mutual funds” in the BVI) will need to submit a yearly Annual Return to the FSC which provides information about the fund to the FSC.  This is a new requirement for all BVI based hedge funds.  Before this year the FSC had a voluntary mutual funds survey which requested information similar to the information requested in the Annual Return.  Certain closed end funds (generally private equity funds established in the BVI) will not need to submit the Annual Return.

BVI Annual Return Requirement

The items a fund will need to submit are:

–    Basic information on the fund and its service providers, including the registered agent
–    Financial information including:

Beginning NAV
Total subscriptions
Total redemptions
Net income/ net loss
Dividends/ distributions
Ending NAV
Year end gross assets

–    General description of the fund’s asset allocation (but not individual positions)

The Annual Return will need to be submitted to the FSC by June 30 of 2009.  Funds which do not submit the Annual Return by that date may face an enforcement action.

A sample Annual Return can be found here: sample-annual-return

What this means for offshore hedge funds

With regard to this new requirement, current BVI funds are going to need to complete the Annual Return.  While the Annual Return will not be a huge resource drain, it will take some time to complete.  Generally most of the questions can be answered fairly quickly by the hedge fund manager or by an assistant.  Some of the information may require input from the hedge fund administrator and potentially the hedge fund attorney as well.

In the future, this seems to be the first step towards greater scrutiny and disclosure requirements from offshore hedge fund jurisdictions.  However, it is unclear whether this will affect the number of start up funds which will be based in the BVI as the intrusion is relatively mild.  However, it may mean that other offshore jurisdictions such as Nevis, Guernsey and Dubai become more popular in the future.

Please see guidance from here from Maples and Calder, an offshore law firm: BVI Annual Return Requirement

Offshore hedge funds – structure and considerations

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Many people don’t understand what an offshore hedge fund is or the purpose of the offshore hedge fund.  An offshore hedge fund is simply a structure used by hedge fund managers as a way to attract offshore investors (non-U.S. citizens) or U.S. tax-exempt investors (explained later in this article).  The offshore hedge fund will generally be established in various jurisdictions through a variety of structures (that is, as a single entity structure, a side by side structure or a master-feeder structure).

I provided the information in the article below to inform you about the various jurisdictions in which offshore hedge funds will be established.  Please note that the driving considerations for establishing an offshore hedge fund will be tax efficiency (both the structure and jurisdiction should be discussed with your attorney), preference and perception of manager and prospective investors and the cost of establishing the fund in the various jurisdictions.  Your attorney should discuss these items with you when you consider in which jurisdiction to establish your hedge fund.

Offshore Hedge Fund Jurisdictions

The offshore hedge fund can be established in a variety of different jurisdictions and the driving force for the jurisdiction of choice will be tax considerations.  A vast majority of the hedge funds are established in low or zero tax jurisdictions.  This means that there is no corporate level tax for the offshore hedge fund – this does not, however, necessarily mean that there are no taxes for the investors in the fund.  Instead the investors in the fund will generally be taxed in their country of residence on the income from the fund.  Another consideration will be the regulatory laws in place in the jurisdiction.

The two most prevalent offshore jurisdictions are the Cayman Islands and the British Virgin Islands (BVI).  In both the Caymans and the BVI there are strong regulatory structures in place in order to assure investors that the managers of the offshore funds are legitimate.  Other offshore hedge fund jurisdictions include: Bahamas, Bermuda, Nevis, Guernsey, Jersey, Dubai, among many others.

Structure

There are three main offshore hedge fund structures: single, side by side and master-feeder.  The structure will be dictated in large part by the intent of the sponsor of the offshore fund.

Single fund structure – this is a structure which is geared primarily towards non-U.S. investors, and also potentially to U.S. based non-taxable investors (such as pensions and endowments).  The sponsor and management company can be either U.S. based or offshore based, but most offshore stand alone fund structures are managed by offshore individuals.

Side by Side structure – in this structure a U.S. based (typical) investment manager will run two completely separate funds in the exact same manner.  This means that the manager will form both a domestic and offshore hedge fund.  This structure is often good for certain strategies such as a fund of funds strategy.  It is not as good for other, trading intensive strategies simply because trade tickets are typically split between the domestic and offshore fund which creates administrative hassles.

Master-feeder structure – this is a very common structure which will have a domestic hedge fund “feeder,” an offshore hedge fund “feeder” and an offshore hedge fund “master.”   In many cases the master-feeder structure is the preferable structure from an ease of administration point of view.  However, please be aware that there are some accounting considerations which you should be aware of when establishing a master-feeder structure.  In many instances this structure can be used to minimize tax impact on the investment manager – our firm has substantial experience with this structure and would be happy to help you think through the issues involved.  Other law firms should also be able to help you use this structure to minimize tax impact to the manger.

Cayman Island hedge funds

Cayman is probably the most popular offshore jurisdiction and is viewed to be the pre-eminent offshore hedge fund jurisdiction.  The Cayman Islands regulatory body is named the Cayman Islands Monetary Authority or CIMA.  There are two types of offshore funds which can be structured in the Caymans:  a registered or non-registered fund.

Registration

A Cayman hedge fund is required to register with CIMA if:

  • The fund is open-ended and has more than 15 investors, OR
  • The fund has 15 or less investors and those investors do not have the right to appoint or remove a director.

A fund would not need to be registered with CIMA if neither of the above items were applicable.  Generally this will be the case for private equity funds and for offshore incubator hedge funds.

Requirements

If the Cayman offshore fund is registered with CIMA, it will need to comply with the following requirements:

  • payment of an up front and recurring annual fee of US$3048 to CIMA
  • at least 2 directors who must be individuals (the directors do not need to be resident in the Caymans)
  • an auditor who is situated in Cayman
  • a minimum initial investment of US$100,000 or higher

If the fund is not CIMA registered, the fund will only need to have 2 directors.

Other

It was recently released that Cayman Islands has over 10,000 offshore hedge funds registered with CIMA.

BVI hedge funds
[Information on the BVI will be coming soon!]

Tax Considerations
[Information on tax considerations will be coming soon!]

BVI FSC may request additional information for hedge fund “recognition”

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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.