The Cayman Islands have become the leading offshore jurisdiction in the funds industry and are currently home to an estimated 80 percent of the world’s hedge funds.
The term ‘hedge fund’ was originally coined to describe a type of collective investment vehicle that employed sophisticated hedging techniques to trade in the corporate equity markets. Over time the activities of hedge funds have expanded and now the term refers generally to investment funds that follow one or more alternative investment strategies and utilise return enhancing tools including leverage and arbitrage.
Hedge funds are typically intended for sophisticated institutional and high-net-worth investors who are not only capable of understanding the risks and rewards associated with alternative investment strategies but are able to withstand any adverse financial consequences. Hedge funds are constantly evolving and promoters favour jurisdictions with a regulatory environment that is consistent with a desire to develop and market innovative investment strategies to sophisticated investors within the framework of a sound and reputable legal system.
The Cayman Islands are attractive to hedge fund promoters for many reasons including: an expeditious formation process and a user friendly registration system with the Cayman Islands Monetary Authority (‘CIMA’); a regulatory regime that focuses on full disclosure and transparency within the offering document and on an annual audit of the financial statements by an independent auditor approved by CIMA; no regulatory restrictions on investment policies or strategies, commercial terms or choice of service providers; no requirement to appoint local directors; availability of experienced professional service providers, including administrators, trust companies, accountants and lawyers; a tax neutral environment with no direct taxes applicable to funds; and a respected legal system.
Hedge funds may be established in the Cayman Islands as companies, trusts or partnerships and the relevant laws and regulations are designed to provide flexibility in the creation of investment vehicles that accommodate the requirements of a particular fund.
Common structures include master/feeder funds which enable investors from different jurisdictions to participate in the same investment pool and multi-class funds (often established as segregated portfolio companies) which enable the same vehicle to offer more than one investment strategy.
Open-ended funds where equity interests may be redeemed at the option of the investor are generally required to be registered with CIMA in accordance with the provisions of the Mutual Funds Law whereas closed-ended funds (where investors are locked in until the fund is liquidated or becomes open-ended) and open-ended funds with fifteen or less investors are exempted from registration.
Finding the right balance between commercial flexibility and appropriate regulation is a challenge; the success of the Cayman Islands in attracting the hedge funds shows that the right balance has been found.
This article is only intended to provide a limited overview of the subject matter and is not a substitute for proper legal advice in relation to a particular transaction or proposal.
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