Tag Archives: CIMA

Start a Hedge Fund in the Cayman Islands

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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Please contact us if you have any questions or would like to start a hedge fund. Other related hedge fund law articles include:

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.

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!]

Offshore hedge fund director requirements

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Two of the most popular offshore hedge fund jurisdictions are the Cayman Islands and the British Virgin Islands. In another post I will detail the requirements for registration or recognition with these jurisdictions, but for the purposes of this article it is enough to point out that both jurisdictions will generaly require each hedge fund entity (in the case of a master feeder structure there would normally be two offshore entities) to have two directors.

Cayman Islands Director Requirements

In the Cayman there are two types of funds – (i) Cayman Islands Monetary Authority (“CIMA”) registered funds and CIMA non-registered funds. CIMA registration is required if a hedge fund is open-ended (allows investors the option to redeem) and has 16 or more investors. CIMA registration is not required if a hedge fund is closed-edned (does not allow investor the option to redeem) or if a hedge fund has 15 or fewer investors who have the right to appoint or remove directors.

For CIMA registered funds, there must be at least 2 directors who must be individuals. For non-CIMA registered funds, there must be at least 1 director who must be an individual. The individual directors do need not to be a Cayman resident.

BVI “four eyes” policy

In the BVI most hedge funds are deemed to be mutual funds. Because they are mutual funds, they will need to be “recognized” as such with the BVI’s Financial Services Comission (“FSC”).

Pursuant to BVI laws and statutes all companies (including hedge funds) are only required to have 1 director. However the FSC has just recently instituted a new “four eyes” policy which effectively requires that all funds have two directors (the “four eyes” policy has been applied for some time in relation to BVI-incorporated investment managers; however, its application to BVI based funds is a new development). This policy is not codified and it seems to be enforced only on a case by case basis. We are recommending to our clients that they name 2 directors because the liklihood of the FSC requiring 2 directors prior to recognition is quite high.

In the BVI a hedge fund can name a company to be a director.

Offshore Nominee Directors

Not all hedge funds will not have two persons who wish to serve as directors of the fund. The reasons may vary from unwanted perceptions to unwanted responsibilities. For whatever reason in these instances the hedge fund will need to name another person (or a company, for the BVI) which will serve as a director for the fund.

In such cases an offshore hedge fund manager may want to think about using a “nominee” director. There are companies in both the BVI and the Cayman Islands which can provide nominee director services, usually on an annual basis, for a fee. While these fees will depend on a number of factors, including the percieved risk of the fund and the manager, you will probably be looking at anywhere from US $5,000-$10,000 per year.

When searching for a nominee director we recommend shopping around as there are going to be groups which naturally feel more and less comfortable with your program. Some nominees will require some sort of involvement in the high-level affairs of the fund. Some nominees will also ask to be at least be co-signatories on any bank accounts opened in the name of the fund. These precautions are understandable as the nominee services are typically provided by services companies (registered office, registered agent, etc) who could potentially lose their license if something happens with the fund.

Directors from non-US jurisdictions

Please note with all directors the issue of perception. There have been recent instances of large brokerage firms refusing to establish brokerage accounts for some hedge funds because the directors (or even a director) were from states known to support terrorism. It will be a good idea to think about selecting a director who is from country which supports or sponsors terrorism. I do not think that this is a wide-spread practice; however, if a brokerage firm does not allow for the account formation because a new director will need to be appointed, you are going to end up delaying your launch.

Confidentiallity of Director information

In the BVI, the details of directors and shareholders of BVI funds is strictly confidential and not a matter of public record. Funds can if they wish elect to file a register or a document which details directors &/or shareholders but this is not common practice. Obviously the details of directors and shareholders may come into the public domian when they are distributed to third parties (e.g. administrators or auditors) but many times these third parties have previously agreed to keep also such information strictly confidential. Any information held by a fund’s registered agent, likewise, will be kept confidential unless required to be disclosed by order of the FSC (believing it to be in the best interests of the jurisdiction – this is not common and generally requires substantial proof of criminal activity), or a BVI Court.

Offshore Director due diligence requirements

Becoming a director of a company which acts as a hedge fund is not difficult but there are many due diligence requirements for all directors of these companies. While all jurisdictions will differ, the BVI and the Caymans will typically require the following documents from each director:

List of director details – name, address, etc
Copy of director utility bill – can include: gas, power, electric, water, television/cable, phone/internet; showing home address; notarized
Copy of director passport – showing a clear picture of the director, notarized
Director bank reference – should include length of relationship; may need to include average amount of assets
Director professional reference – should be from a lawyer or accountant who has had a previous professional relationship with the director
List of owners/shareholders of director (if an entity)
Copy of director formation documents (if an entity)
Other items as requested by the registered agent

Please contact us if you have any questions on any of the above or would like to inquire about a nominee director or establishing an offshore hedge fund.

Cayman notches 10,000th hedge fund

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In a press release statement from Walkers, the Cayman law firm announces that the Cayman Islands have over 10,000 registered hedge funds as of the end of June 2008. Please see release below:

Cayman Islands Sets Milestone with 10,000 Registered Funds
28-Jul-2008

Recent second quarter figures from the Cayman Islands Monetary Authority (CIMA), have confirmed the achievement of a key milestone by the Cayman Islands financial services industry, with over 10,000 investment funds currently registered in the jurisdiction.

At the end of June 2008 there were 10,037 funds on CIMA’s register, compared with 9,681 at the end of the previous quarter and 8,972 at the mid point of 2007. The current annual growth rate of 12% in net new hedge funds, which takes cancellations into account, is particularly striking in the context of the deterioration in global markets following the sub-prime meltdown and associated credit crunch.

“This is yet another round of impressive statistics from CIMA,” said Mark Lewis, senior investment funds partner at Walkers. “The 10,000 barrier has been breached as hedge funds continue to be formed in the Cayman Islands, which remains the clear jurisdiction of choice for investment managers and their advisers around the world.

“Business remains active and the volatility which has impacted world markets as a result of the credit crisis, and the relatively weak valuations of many securities, has provided hedge fund managers with great opportunities to create alpha after a number of years of relatively flat returns”, Lewis added. “Hedge funds have also provided the market with much needed liquidity, which has been especially beneficial amid the current tight lending conditions.”

The continued growth in net hedge fund registrations is also partly explained by the absence of a significant spike in fund terminations. While there has certainly been a slight increase in terminations over the past 12 months, funds are not being closed at an unprecedented rate.

“There have been some forced closures, but in the cases where funds are struggling, the managers we work with are being pro-active by placing hard-to-value securities in side pockets, suspending redemptions and imposing gates. Such measures may enable a fund in distress to ride out the storm or to wind down its affairs in an orderly manner,” said Walkers investment funds partner Nick Rogers. “In the Cayman Islands the key drivers behind the actions being taken are the need to treat all investors equitably and to act in the best interests of the fund, and this provides a firm foundation for protecting market participants and preserving value.”

Among the new funds that have been established in the Cayman Islands, strategies such as distressed debt and special opportunities presented by the widespread markdown in asset prices have continued to feature strongly.

“There has also been significant ongoing activity in emerging markets and commodities,” Rogers added. “The convergence of these two hot asset classes has been particularly interesting.”

There are a number of factors behind the Cayman Islands’ attractiveness as a domicile for hedge funds, in particular the stable economic and political climate, the close relationship between the public and private sector and the presence of the world’s leading professional services firms. The regulatory regime in the Cayman Islands has been recognised internationally, notably by the International Monetary Fund (IMF) and the Caribbean Financial Action Task Force (CFATF) for its high standards. In the area of transparency and “know-your-client” regulations, these standards surpass many of the world’s top international financial centres.