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Cayman Island Hedge Fund Options
Cayman Island Hedge Fund Types One of the reasons why Cayman Islands funds are popular is the variety of fund products available. The Cayman Islands Monetary Authority (CIMA) supervises regulated investment funds via the Mutual Funds Law, which regulates open-ended funds such as the typical Cayman hedge fund. For funds where the investor is able to choose whether to redeem (i.e., cash out) their investment on a regular basis, the Mutual Funds Law offers 3 types of regulated funds and an exemption in certain circumstances where there are 15 or fewer investors (i.e., the Category 4(4) fund). The Caymans, like many other countries, also allows for a type of closed-ended fund. We have seen an increase in the use of two share class companies and limited partnerships accompanied by offering documents (i.e., the closed-ended fund) operating as unregulated de facto funds.
Caymans or BVI? As a funds lawyer practicing both Cayman and BVI law, I am often asked which country is better. The Cayman and the BVI are both excellent and highly regarded offshore fund jurisdictions. We have clients who elected to use one, the other or both to maximize the advantages that they each offer. Both countries offer a mix of appropriate regulation of open-ended funds regulated funds and closed-ended funds that make each country a good choice.
Closed End Funds Investment funds established in the Cayman Islands fall into two categories: closed ended funds and open ended funds. Open ended funds are referred to as "mutual funds" under the Cayman law and include for example the Category 4(3) and Category 4(4) funds. Closed ended funds are not subject to regulation in the Cayman Islands. Closed ended funds are not defined in Cayman law. Typically, closed ended funds have no regular redemption date, allow redemptions in limited circumstances and/or have an extensive lock-up period. If the right to withdraw from a closed ended fund granted to limited partners in the case of illegality or regulatory issues, that will not cause a closed ended fund to be treated as a mutual fund subject to regulation.
The vehicles chosen for closed-ended fund in the Caymans include the limited partnership and the exempt limited company. Cayman Islands closed ended funds can be structured as an exempted limited partnership, an exempted company or a segregated portfolio company (unit trusts are not commonly used). Exempted segregated portfolio companies are an increasingly popular.
Now that Cayman law allows for limited liability companies (LLC), the unlicensed Cayman Island fund structure may become more popular. The Cayman Islands LLC is closely aligned with a Delaware limited liability company and contains a number of features that make it much more flexible than a Cayman Islands exempted company (the usual entity used for Cayman fund). The Cayman LLC Bill should be implemented during the First Quarter of 2016.
As closed ended funds are not regulated in the Cayman Islands there are no provisions requiring third party administration or audits of such funds. A closed-ended fund is free from all Cayman Islands income, capital gains, corporation and withholding taxes, companies and limited partnership. Such fund can file an undertaking to ensure such tax-free status for a period of up to 30 years for a company and 50 for a limited partnership.
Companies Companies are the most popular form of vehicle to used as an offshore fund. The corporate structure is easily understood by investors and principles of limited liability for shareholders are well-established. When investors invest money in a fund structured as a company they will become shareholders in the company and they will be issued shares (usually in uncertified form) to represent their interests, which will be held and be redeemable subject to the terms of the company’s constitutional documents.
Limited Partnerships Limited partnerships are also a popular structure for offshore funds. Limited partnerships are constituted by a partnership agreement made between a general partner who has unlimited liability for the debts of the partnership, and limited partner investors who are liable only up to the amount they committed to invest in the partnership. The limited partnership operates by or through the general partner and the general partner is responsible for the management of the partnership business. The limited partners are passive investors in the business who cannot take part in the management of the business. Investors in funds structured as limited partnerships are limited partners and entitled to a return of their capital and share of any profits of the fund.
Exempted Segregated Portfolio Company Any exempted company may be created as or converted into a segregated portfolio company (SPC). The concept of an SPC is that the relevant company, which remains a single legal entity, may create separate segregated portfolios such that the assets and liabilities of each such portfolio are statutorily ring fenced from the assets and liabilities of each other portfolio and the general assets and liabilities of the SPC and are available to meet only the liabilities incurred on behalf of the particular portfolio. Income and other property of an SPC not attributable to any portfolio constitute the general assets of the SPC. One or more classes of shares may be designated to each portfolio and the proceeds of issue allocated to such portfolio. Payments in respect of portfolio shares may only be paid to the extent that they can be financed out of such portfolio. The general liabilities of an SPC may not be satisfied out of the assets attributable to any portfolio but the general assets of an SPC can be applied to the liabilities to any portfolio to the extent that the assets attributable to such portfolio are insufficient to meet portfolio liabilities unless the articles of the company prohibit such application of general assets which is usual.
Cayman Mutual Fund DefinedUnder Cayman law a mutual fund is: “a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments” and an ‘equity interest’ is a share, trust unit or partnership interest that “carries an entitlement to participate in the profits or gains of the company, unit trust or partnership” and is “redeemable or repurchasable at the option of the investor.”
Category 4(4) Funds If an open-ended fund has 15 or fewer investors, a majority (in number) of whom are able to appoint or remove the directors of the fund (or the general partner where the fund is a partnership or the trustee for a unit trust), then the fund does not have to register with CIMA, under an exemption set out in section 4(4) of the Mutual Funds Law. The 4(4) exemption is popular for funds with only one investor, friends and family funds and start-up funds in some circumstances, although the exemption is not available for master funds. If you want to set up a Category 4(4) Fund, please email Hannah Terhune, Attorney.
Category 4(3) Funds The most popular regulated fund is the Category 4(3) fund, named after section 4(3) of the Mutual Funds Law. There are no restrictions on a Category 4(3) fund’s investment objectives and no requirement to appoint a Cayman resident manager or directors. However, directors must be registered or licensed by CIMA and such funds must be operated by licensed investment managers. The minimum initial investment level is US$100,000 for each investor, or the equivalent in another currency, or the equity interests must be listed on a stock exchange recognized by CIMA. This is the type of fund which is typically used when setting up a hedge fund in the Cayman Islands.
To register as a 4(3) fund, the fund must send CIMA its offering document setting out details of the shares / other equity interests being offered to investors, an application form, the registration fee (currently US$4,268) and consent letters from the fund’s administrator and auditor. The auditor must be based in the Cayman Islands and on an approved list issued by CIMA. Once registered the fund then has to file audited annual accounts within 6 months of its financial year end, pay an annual fee to CIMA and file any amendments to its offering document with CIMA. Master funds set up in the Cayman Islands have to register as Category 4(4) funds if they have one or more feeder funds which is regulated by CIMA.
Investment Manager Licensing Many countries make it impossible to get licensed as an investment manager. If you are from a country like that, consider getting licensed in the Caymans, the British Virgin Islands or in the United States. Contact Us For Assistance
Our Cayman Island Fund Services Include:
• Service and legal fees • Cayman Islands Monetary Authority Application Fee • Registrar of Companies incorporation Fee • Registered office Fee • Communication/Courier costs • name check • preparation of company Memorandum of Association • preparation of company Articles of Association • preparation of the Cayman Islands Monetary Authority application form • filing with the Registrar of Companies • filing with the Cayman Islands Monetary Authority • certificate of incorporation • share certificates • minutes of the first board meeting • register of directors • register of members • company seal • preparation of offering documents and fund agreements • certifying documents for the Cayman Islands Monetary Authority • payment of the first year Registrar of Companies Fee • payment of the first year Cayman Islands Monetary Authority Fee • Tax Exemption Certificate • Courier Service
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Strategic Hedge Fund Planning by Hannah Terhune. Wilmott Magazine Ltd. (Volume 2013, Issue 63, pages 8-11 January 2013).
Trading Foreign Index Contracts? Know the Tax Rules Before You Trade by Hannah M. Terhune and Roger D. Lorence. Stocks, Futures and Options (June 2005).
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