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Cayman Islands

The global jurisdiction of choice for offshore investment funds.

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Why the Cayman Islands?

The Cayman Islands is the leading jurisdiction for the offshore investment funds industry due to its combination of flexible and appropriate regulation, an approachable and effective regulator, professional service provider expertise, high reputation among investors and a tax-neutral regime.

Competitive tax environment

The jurisdiction maintains a tax-neutral standing towards corporate, income and capital gains, paving the way for increased opportunities for foreign investment.

A leader in global tax information sharing, the Cayman Islands has fully adopted legislation to implement US FATCA and the OECD global common reporting standard (CRS).

Local legislation, international respect

Cayman Islands law, derived from English common law and supplemented by local legislation, ensures that Cayman Islands investment funds are structured as internationally accepted vehicles.

Pragmatic regulation

The Cayman Islands Monetary Authority promotes a pragmatic regulatory environment for investment funds.

Professional infrastructure

As well as fund managers, banks and custodians, the Cayman Islands has over 35 fund administrators (many of them international operations), accounting and audit services from all of the “Big 4”, as well as a multitude of independent directorship firms.

Investment fund structures

There are a number of ways to structure your offshore fund and the best option for you will depend largely on the location of the manager, the geographical spread of your investor base and the type of underlying investments that the fund will make.

Offshore standalone structure

It would generally be geared towards non-US investors but it could also be structured so as to allow for US domiciled tax-exempt investors such as pension funds, charitable organisations and endowments who are looking to efficiently optimise around unrelated business taxable income.

An offshore standalone structure is where only one fund vehicle is used to allow for collective investment on behalf of all of the investors.

The very simple structure would traditionally look like this:

standalone funds structure graph

This structure is predominantly used by managers who are not intending to initially allow for US taxable investors to participate in the fund.

Master-feeder structure

This structure is the most popular and the traditional route when you are seeking to blend a combination of US taxable and Non-US investors into the same fund structure.

In this scenario, we would create two new offshore vehicles, an offshore feeder and an offshore master, and we would work alongside your US counsel who would form a US feeder vehicle as well.

These structures can launch together at the same time or, where a US-based manager already has a standalone domestic fund, we can add the new offshore structures into the existing arrangement.

In this scenario, the existing US fund will contribute its assets into the offshore master upon the launch of the new structure. In turn, the offshore feeder will take in the US non-taxable investors and the non-US investors and “feed” them into the offshore master. The offshore master will then hold all of the existing investments and make any new investments on behalf of both feeder funds from this point forward, creating a collective investment offering in the most tax-efficient manner.

A typical master-feeder structure would look like this:

Master-feeder fund structure graph

The master-feeder structure enables the investment manager to operate a single trading entity and avoids the need to allocate trades between separate funds. It also avoids duplication of documentation with counterparties. In some cases, opportunities for leverage may be better than when operating a side-by-side structure.

Side-by-side structure

A side-by-side structure is used where a single manager is seeking investment from both US investors and non-US or US tax-exempt investors who require different tax treatment.

Two funds, an offshore and domestic US fund, are established and both are managed in exactly the same way, following the same underlying investment strategy as far as possible and with the same fee structure being charged to the investor base.

This structure is sometimes used for fund of funds strategies but less often for other trading strategies, given the administrative burden associated with either making two identical trades at the same time or splitting trade tickets between the two funds. Unlike the master-feeder structure where there is one performance result, each fund may have slightly different performance results as a consequence of having different fee levels.

The manager clearly needs to also consider any potential conflicts involved where the portfolios begin to look a little different.

While the popularity of these structures has weakened over the years, we have seen a resurgence recently due to the digital assets industry and a restriction that some of the target investments (whether that is through the execution of a SAFT or the establishment of an account on a centralised exchange, for example) place on having US taxable investors involved.

A typical side-by-side structure would look like this:

Side-by-side funds structure graph

The main reason for choosing the side-by-side structure over the master-feeder structure is to enable tax structuring measures to be taken by one or the other of the funds which, if used in the master-feeder structure, would have negative consequences for the other group of investors.

Mini-master structure

The mini-master structure is popular with managers looking to trial the use of an offshore fund vehicle for a small number of investors, without having to undertake the full cost and restructuring administration of a full structure.

In a mini-master structure, a single offshore fund is established which is taxed as a corporation to benefit US tax-exempt investors and block UBTI for non-US investors.

The offshore fund invests directly into the existing US fund, which will then act as the master fund (while remaining the fund into which the US taxable investors will continue to invest).

A typical mini-master structure would look like this:

This structure provides an additional benefit of not requiring ownership of assets of the domestic fund to be transferred. This reduces the administration around the restructuring and subsequently the cost as well. While there are some tax consequences to be discussed (and some investors may not want to invest, even indirectly, into a US vehicle), it has proved to be appealing to those looking to keep it as simple and cost-efficient as possible to begin with.

On occasions, you will see “reverse mini-masters” where the US vehicle invests into an offshore master fund instead. This is often where the offshore vehicle was the initial entity that was established or where it is not feasible for some or all of the underlying assets of the structure to be held by a US counterparty. This type of project will again require US tax advice to ensure that it doesn’t cause any adverse consequences for investors.

Cayman legal entities

Exempted Company

Exempted companies (ExCos) are companies that have been incorporated with limited liability and typically have a share capita. ExCos are the most common form of structure used for traditional hedge and other open-ended funds. ExCos are regulated by their memorandum and articles of association as well as the provisions of the Companies Act (Revised). ExCo's management rests with its directors. Typically, investment management authority is delegated to an investment manager or adviser, although the relevant directors will always be required under generally applicable law to maintain oversight of the investment manager’s functions. ...

Exempted companies (ExCos) are companies that have been incorporated with limited liability and typically have a share capita.

ExCos are the most common form of structure used for traditional hedge and other open-ended funds. ExCos are regulated by their memorandum and articles of association as well as the provisions of the Companies Act (Revised).

ExCo's management rests with its directors. Typically, investment management authority is delegated to an investment manager or adviser, although the relevant directors will always be required under generally applicable law to maintain oversight of the investment manager’s functions.

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Limited liability company

Limited liability companies (LLCs) can be incorporated in the Cayman Islands in a form closely aligned to the Delaware LLC. LLCs may be used in investment fund structures where a flexible structure similar to a limited partnership is required. But where the vehicle needs to be established as a body corporate distinct from its members. LLCs are regulated by their LLC agreement and the Limited Liability Companies Act (Revised). An LLC's management rests with its members (ie. member-managed) or a separate manager or managers (ie. manager-managed) as set out in the applicable LLC agreement. Typically, investment management authority is delegated ...

Limited liability companies (LLCs) can be incorporated in the Cayman Islands in a form closely aligned to the Delaware LLC.

LLCs may be used in investment fund structures where a flexible structure similar to a limited partnership is required. But where the vehicle needs to be established as a body corporate distinct from its members. LLCs are regulated by their LLC agreement and the Limited Liability Companies Act (Revised).

An LLC's management rests with its members (ie. member-managed) or a separate manager or managers (ie. manager-managed) as set out in the applicable LLC agreement. Typically, investment management authority is delegated to an investment manager or adviser, although the relevant members will always be required under generally applicable law to maintain oversight of the investment manager’s functions.

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Exempted limited partnerships

While an exempted limited partnership (ELP) is the most common vehicle for closed-ended funds including private equity, venture capital and real estate funds, they are also used for open-ended funds. An ELP has many similarities to its Delaware equivalent vehicle but an ELP is not a separate legal person and, for this reason, it is popular with managers and investors in a number of jurisdictions. An ELP is managed by its general partner. An ELP is required to have at least one ‘qualifying’ general partner, which means either (i) a Cayman Islands resident person or a Cayman Islands entity; or (ii) a foreign entity which has been registered, i ...

While an exempted limited partnership (ELP) is the most common vehicle for closed-ended funds including private equity, venture capital and real estate funds, they are also used for open-ended funds. An ELP has many similarities to its Delaware equivalent vehicle but an ELP is not a separate legal person and, for this reason, it is popular with managers and investors in a number of jurisdictions. An ELP is managed by its general partner. An ELP is required to have at least one ‘qualifying’ general partner, which means either (i) a Cayman Islands resident person or a Cayman Islands entity; or (ii) a foreign entity which has been registered, in the Cayman Islands as such.

An ELP's management rests with its general partner. Typically, investment management authority is delegated to an investment manager or adviser, although the general partner will always be required under generally applicable law to maintain oversight of the investment manager’s functions.

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Unit trusts

Cayman Islands unit trusts are established under, and governed by the Trusts Act (Revised) and, save as modified under that law, generally applicable principles of English trust law. Under a unit trust, investors contribute funds to a trustee which holds those funds in trust for the investors, and each investor is directly entitled to a pro rata share in the trust’s assets, its unit. Unit trusts are constituted under a trust deed that provides the terms on which the trustee holds the trust’s assets for unit holders. The use of Cayman Islands unit trusts is particularly popular in Japan for domestic tax purposes. A unit trusts management rest ...

Cayman Islands unit trusts are established under, and governed by the Trusts Act (Revised) and, save as modified under that law, generally applicable principles of English trust law. Under a unit trust, investors contribute funds to a trustee which holds those funds in trust for the investors, and each investor is directly entitled to a pro rata share in the trust’s assets, its unit. Unit trusts are constituted under a trust deed that provides the terms on which the trustee holds the trust’s assets for unit holders. The use of Cayman Islands unit trusts is particularly popular in Japan for domestic tax purposes.

A unit trusts management rests with its trustee. Typically, investment management authority is delegated to an investment manager or adviser, although the trustee will always be required under generally applicable law to maintain oversight of the investment manager’s functions.

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Segregated portfolio companies

An ExCo may further register as a segregated portfolio company, which is a single company limited by shares but offering statutory segregation of assets and liabilities between separate “portfolios” (SPC). It is similar to a segregated cell or protected cell company in many other jurisdictions. An SPC may establish any number of segregated portfolios. Assets and liabilities attributed to a particular segregated portfolio are legally separated from the assets and liabilities attributed to any other segregated portfolio. A creditor who is party to a contract involving a particular segregated portfolio will have restricted recourse and will be ...

An ExCo may further register as a segregated portfolio company, which is a single company limited by shares but offering statutory segregation of assets and liabilities between separate “portfolios” (SPC). It is similar to a segregated cell or protected cell company in many other jurisdictions.

An SPC may establish any number of segregated portfolios. Assets and liabilities attributed to a particular segregated portfolio are legally separated from the assets and liabilities attributed to any other segregated portfolio. A creditor who is party to a contract involving a particular segregated portfolio will have restricted recourse and will be entitled to recover only against assets attributed and credited to the specific segregated portfolio to which the contract is also attributed.

SPCs can be useful as multi-strategy vehicles and platform vehicles. Savings by using multi-strategy SPCs are often not as great as anticipated however, and SPCs with multiple segregated portfolios do require a greater degree of care to ensure assets are properly segregated; contracts are entered into on behalf of the correct segregated portfolio and inadvertent cross-collateralisation does not occur.

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Cayman funds products

Investment funds established in the Cayman Islands fall into two broad categories: open-ended funds and closed-ended funds.

Open-ended funds provide investors with voluntary redemption or repurchase rights and closed-ended funds do not provide investors with those rights. Typically, open-ended funds will invest in liquid assets which can be readily realised to fund redemptions (eg listed, liquid, tradable securities) and closed-ended funds will invest in non-liquid assets requiring time to liquidate/realise value (eg real estate, unlisted growth companies).

Open-ended fund types

Open-ended funds, also known as hedge funds, are funds that provide investors with voluntary redemption or repurchase rights. Typically, open-ended funds will invest in liquid assets which can be readily realised to fund redemptions (eg. listed, liquid, tradable securities).

The Mutual Funds Act (Revised) (MF Act) is the main legislation regulating open-ended investment funds in the Cayman Islands. Open-ended funds that meet certain criteria of the MF Act and are thus subject to regulation under CIMA’s Investment and Securities Division may qualify to conduct business as the following types of funds.

This is the most common category of regulation under the MF Act, with approximately 69 per cent of Cayman Islands mutual funds registered with CIMA coming under this category. To qualify for registration, a mutual fund must have either:

  • A minimum initial subscription amount of US$100,000, or its equivalent in any other currency (by far the most common), or
  • Its equity interests listed on a recognised stock exchange approved by CIMA

Master funds are a sub-category of registered funds. Approximately 27 per cent of Cayman Islands mutual funds registered with CIMA are master funds.

A master fund is a vehicle that facilitates the investment by a regulated feeder fund (which is a mutual fund regulated by CIMA under the MF Act that conducts more than 51 per cent of its investing through a master fund) in the underlying assets pursuant to a particular investment strategy. A master fund does not benefit from the single investor exemption.

For example, a typical master/feeder structure may involve a Cayman Islands feeder fund and a US feeder fund being set up to invest in a Cayman Islands master fund. If the Cayman Islands feeder fund were registered or licenced by CIMA then the master fund would have to register.

However, if the Cayman Islands feeder fund is not required to register with CIMA (for example, because it is a single investor fund or it is an exempted fund) and the only other investor is the US feeder fund, the master fund would not have to register with CIMA and is not considered to be a mutual fund.

Limited investor funds are those mutual funds of which the equity interests are held by not more than 15 investors, a majority of whom (in number and without reference to the number of shares or other equity interests held by each investor) are capable of appointing or removing the operator of the fund. A limited investor fund excludes master funds.

This category of fund was previously known as a “section 4(4) fund” or “exempt fund” because it was not required to be registered with CIMA. However, changes to the mutual funds registration regime in 2020 now require all such funds to be registered with CIMA by the deadline.

The key difference between a registered mutual fund and a limited investor fund is that a limited investor fund does not need to comply with a minimum initial investment amount of US$100,000 and is not required to have an offering document.

Administered funds make up approximately 3 per cent of mutual funds that are registered with CIMA.

Administered funds will generally be used if the promoter does not want to have a minimum initial investment amount for its investors. The mutual fund must designate a principal office in the Cayman Islands at the office of a Cayman Islands-based licensed mutual fund administrator. The key difference to registered funds is that responsibility for regulatory oversight for administered funds is largely delegated to the licensed mutual fund administrator, and therefore, the administrator providing the fund's principal office must be satisfied that:

  • Each promoter of the fund is of sound reputation
  • The fund's administration will be undertaken by persons with sufficient expertise to administer the mutual fund and who are of sound reputation
  • The fund's business and any offering of its equity interests will be carried out in a proper way

On an ongoing basis, the licensed fund administrator must notify CIMA if it has reason to believe that a fund for which it provides the principal office is acting in breach of the MF Act, is insolvent or is otherwise acting in a manner that is prejudicial to its creditors or investors. There are also specific on-going obligations applicable to licensed mutual fund administrators.

This is the rarest category of Cayman Islands funds with fewer than 1 per cent of regulated mutual funds being registered under this category.

Unless a mutual fund falls within one of the other categories described above, it must obtain a mutual fund licence. A fund promoter or manager would usually choose to license a fund under the MF Act if the fund is intended to be a retail fund offered generally to the public outside the Cayman Islands, with its administrator and/or manager and other key service providers located outside the Cayman Islands.

Licensed funds are rarely encountered in practice as retail investment funds are normally set up as onshore funds in accordance with the regulatory requirements of their relevant home jurisdiction. However, one of the main exceptions to this practice has been in Japan, where the use of licensed funds structured as Cayman Islands-exempted unit trusts has been popular. This type of category is usually only chosen by well-known financial institutions.

The Cayman Islands Government passed legislation which introduces the concept of ‘EU Connected Funds’ to enable Cayman Islands funds to take advantage of the passport regime under the Alternative Investment Fund Managers Directive as and when it becomes available to Cayman Islands investment funds. Further secondary legislation sets out in detail how EU Connected Funds will be regulated. The EU Connected Fund regime under the MF Act will allow both open-ended and closed-ended funds to apply to be registered or licensed with CIMA as EU Connected Funds and therefore enable them to benefit from the EU passport regime.

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Private funds

The Private Funds Act (Revised) (PFA) is the main legislation regulating closed-ended investment funds in the Cayman Islands, being those fund which do not offer voluntary redemption or repurchase rights. A private fund is required make an application to register with CIMA under the PFA within 21 days of receiving a commitment from investors and may not draw down on those commitments and receive contributions for the purposes of investment unless and until that application has been approved.

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