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.
According to the latest available statistics, there were just under 11,000 investment funds registered with the Cayman Islands Monetary Authority (CIMA) as at the end of 2015, making it the leading jurisdiction for regulated alternative funds of all kinds.
There are also significant numbers of unregulated investment funds that are established in the Cayman Islands which qualify to be exempt from regulation by CIMA.
Investment funds established in the Cayman Islands fall into two broad categories: open-ended funds and closed-ended funds.
Open-ended funds, also known as hedge funds, are funds that provide investors with voluntary redemption or repurchase rights and closed-ended funds, are funds that do not provide investors with voluntary redemption or repurchase rights. Typically the former will invest in liquid assets which can be readily realised to fund redemptions (for example, listed liquid tradable securities) and the latter will invest in non-liquid assets requiring time to liquidate/realise value (for example, real estate, unlisted growth companies).
Fund Vehicle Options
Exempted companies limited by shares are the most common form of entity used for the establishment of open-ended investment funds with an investor's liability being limited to the amount paid or agreed to be paid in respect of their shares.
Segregated portfolio companies
An exempted company may register as a segregated portfolio company (SPC). An SPC is akin to a segregated 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 make its recovery 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 but savings by using multi-strategy SPCs are often not as great as anticipated 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.
Cayman Islands unit trusts are established under and governed by the Cayman Islands statue the Trusts Law 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 on 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.
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.
All of the above entities can be established on an expedited basis and no governmental or regulatory approvals are required.
Taxation of vehicles
All of the above vehicles are exempted from any Cayman Islands income or gains taxes and can obtain a tax undertaking certificate from the Cayman Islands government guaranteeing no change in their tax status for 20 years or more.
Liability of investors
All of the vehicles issue equity interests which typically limit investor liability to the amount paid or agreed to be paid in respect of their investment.
Management of entities
An exempted company or SPC's management rests with its board of directors, a unit trust's with its trustee and an ELP's with its general partner (typically a Cayman exempted company and so ultimately with that entity's board). Typically management authority is delegated to an investment manager or adviser but a board of directors will always retain a requirement under generally applicable law to maintain oversight and CIMA has also provided guidance as to the best practice for fund directors, please refer to our note on Cayman fund directors' duties for further details.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.