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Considerations for Establishing an Investment Fund in the Cayman Islands

May 3, 2018

The Cayman Islands is recognized worldwide as an international financial center and is the jurisdiction of choice for the establishment of offshore hedge funds. Industry experts have cited the following reasons why: tax neutrality, reputation, central time location, reliable legal system, proportionate regulation by Cayman Islands Monetary Authority (“CIMA”) and no exchange controls in place.

Some important factors to consider when setting up a hedge fund are outlined below:

Organizational Structure

Funds are established utilizing a range of structures depending on the needs of the investors and promoters. Typical structures include:

  • Stand-alone: Under this structure, investors purchase equity interests in a single vehicle.
  • Multi-Class or Umbrella: Multi-class funds have shares or units split into a number of different classes. Each class would have a different investment objective.
  • Side-by-Side: The establishment of a stand-alone onshore fund and a stand-alone Cayman Islands fund. The two funds will make identical investments in assets managed by the same investment manager.
  • Master/Feeder: The establishment of an onshore feeder fund, an offshore (Cayman Islands) feeder fund and an offshore (Cayman Islands) master fund. The two feeders will invest in the master fund which will acquire a pool of assets. You can also choose not to have an offshore feeder and have those investors invest directly into the master fund.

Investment Fund Vehicles

A synopsis of the most common types of vehicles and their features are outlined below:

Exempted Companies

  • Established under the Companies Law.
  • Must have at least one shareholder.
  • No minimum capital requirement.
  • Must have a registered office in Cayman Islands.
  • May obtain a 30-year tax exemption from the Cayman Islands Government.

Segregated Portfolio Companies

  • Established as an exempted company under the Companies Law.
  • Seeks to segregate separate pools of assets and liabilities to specified shareholders or creditors.
  • Must have a registered office in Cayman Islands.
  • Assets and liabilities attributed to a particular portfolio are legally separated from the assets and liabilities of the Company’s general account and all other segregated portfolios.
  • Useful for multi-strategy vehicles.

Unit Trusts

  • Established under the Trusts Law.
  • Constituted under a trust deed that provides the terms on which the trustee holds the trust’s assets for unit holders.
  • Must have a place of business in the Cayman Islands, approved by CIMA, which will be its principal office.
  • Multi-class unit trusts can be created without cross-class liability issues arising.
  • If registered as an exempted unit trust, they may obtain a 50-year tax exemption from the Cayman Islands Government.

Exempted Limited Partnership

  • Established under the Exempted Limited Partnership Law.
  • Must have at least one general partner.
  • Must have a registered office in Cayman Islands.
  • Partnerships are not separate legal entities and, as such, all contracts are entered into by the GP.
  • Formed by one or more GPs and one or more limited partners entering into a limited partnership agreement.
  • May obtain a 50-year tax exemption from the Cayman Islands Government.

Limited Liability Companies

  • Established under the Limited Liability Companies Law.
  • Must have at least one member at all times.
  • Must have a registered office in Cayman Islands.
  • Members enjoy limited liability without the company being limited by shares or guarantee.
  • May obtain a 50-year tax exemption from the Cayman Islands Government.

Regulatory Framework for Investment Funds

The regulation of investment funds established under Cayman Islands law is largely governed by the provisions of the Mutual Funds Law (“MFL”) and is supervised by CIMA. The MFL defines a mutual fund as a company, trust or partnership, incorporated or established in the Cayman Islands which issues equity interest redeemable or repurchaseable at the option of the investor.

If a fund has less than 15 investors and has the power to appoint and remove directors, they may be exempted from regulation. A close-ended fund, whose equity interests are not redeemable at the option of the investor, is not regulated under the MFL.

Primary statutory obligations of a registered fund:

  • CIMA registration: Complete the appropriate mutual fund form along with the prescribed documents.
  • Minimum capital requirement: Includes an initial investment of KYD$80,000 which approximates US$100,000 per investor unless the fund is registered on a recognized stock exchange.
  • Annual audit requirement: Must submit audited financial statements to CIMA within six months of the fund’s financial year-end, and the auditor must be a CIMA approved auditor.
  • Fund annual return: completed by the fund operator and electronically submitted by the fund’s auditor of record.
  • Pay an application fee and an annual fee each January.

Key Service Providers for Investment Funds

  • Lawyer: Used in preparing the offering document of the fund and assisting with registering the fund with CIMA.
  • Investment manager: The precise role can range from managing the fund’s assets or simply acting in an advisory capacity to the directors. No Cayman Islands residency is required, but it is common in order to obtain a tax deferral on part of the management and performance fees granted.
  • Administrator: Usually responsible for preparing the NAV but also may be responsible for other functions as would be outlined in the administration agreement.
  • Custodian: Appointed by the fund to hold the assets pursuant to the relevant custodian agreement.
  • Auditor: Usually appointed by fund, but in a regulated fund situation, they must appoint a local CIMA approved auditor.
  • Directors: The MFL imposes on a regulated fund that at least two directors are appointed and at least one of which be approved by CIMA. These should generally be individuals, but can be a corporation if they are established in the Cayman Islands and are well known to CIMA.

Establishing an investment fund in the Cayman Islands involves many considerations. Each fund is unique and its purpose and strategies are unique. The above should provide some insights into the decisions that will need to be made when considering the establishment of a Cayman Islands investment fund.

Asset Management Intelligence – Q2 2018

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