Investment Funds 2024 Comparisons

Entity options available for structuring investment funds include exempted limited partnerships, exempted companies, limited liability companies and trusts. Private equity funds are typically structured as exempted limited partnerships, and hedge funds make use of both exempted company and exempted limited partnership vehicles in standalone and master-feeder structures. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan. The limited liability company is becoming the vehicle of choice for general partner and/or management vehicles.

A key difference between an exempted limited partnership and an exempted company is that, notwithstanding registration, an exempted limited partnership is not a separate legal person distinct from its partners. An exempted limited partnership must act through its general partner, and all agreements and contracts must be entered into by or on behalf of the general partner (or any agent or delegate of the general partner) under general legal principles of agency on behalf of the exempted limited partnership. Any right or property of the exempted limited partnership that is conveyed to or vested in or held either on behalf of the general partner or in the name of the exempted limited partnership is an asset of the exempted limited partnership held upon trust in accordance with the terms of the relevant law.

The formation and registration processes in the Cayman Islands are streamlined and efficient. Exempted companies are formed upon the filing of a declaration and the memorandum and articles of association with the Registrar. Exempted limited partnerships and limited liability companies are formed upon the execution of the relevant operating agreement and the filing of a registration statement with the Registrar.

With limited exceptions, all open-ended funds must register with the Cayman Islands Monetary Authority (CIMA) under the Mutual Funds Act (As Revised), and all closed-ended funds must register with CIMA under the Private Funds Act (As Revised).

To register an open-ended fund, the requisite application form and offering memorandum must be submitted to CIMA in advance of the fund launch and directors must be registered under the Director Registration and Licensing Act. The administrator and auditor of the fund must submit consent letters confirming responsibility for these important roles.

To register a closed-ended fund, the requisite application form and offering memorandum (or summary of terms) must be submitted to CIMA within 21 days of a fund accepting capital commitments or, if earlier, prior to the fund receiving any capital contributions for the purpose of investments. The administrator and auditor of the fund must submit consent letters confirming responsibility for these important roles.

The Cayman Islands legal system is based on well-recognised legal concepts founded in English law, including limited liability and separate corporate personality, which underpin the corporate, partnership and trust vehicles used as collective investment schemes, all of which have been tried and tested and found to be robust during the global financial crisis.

As a general rule, in the absence of a contractual arrangement to the contrary, the liability of a shareholder of a Cayman Islands company that has been incorporated with limited liability and with a share capital is limited to the amount from time to time unpaid in respect of the shares it holds. A Cayman Islands company has a legal personality separate from that of its shareholders, and is separately liable for its own debts due to third parties.

A Cayman Islands exempted limited partnership does not have a legal personality separate from its partners. General partners have unlimited liability for all the debts and obligations of such partnerships by virtue of the Cayman Islands Exempted Limited Partnership Act (As Revised). Fund investors typically subscribe for limited partnership interests on which their liability is generally limited to their contributed capital and outstanding capital commitment (if any).

However, there are limited circumstances under Cayman Islands law whereby an investor who takes part in the conduct of the business of the partnership and holds itself out as a general partner to third parties may assume unlimited liability for the debts and obligations of the partnership. Exempted limited partnerships are the most common type of Cayman Islands vehicle used in private equity fundraising, and investors in such funds commonly seek Cayman Islands legal opinions in respect of the limited liability nature of their partnership interest, amongst other things.

Every mutual fund registered with CIMA (unless that fund is a “master fund” as defined under the Mutual Funds Act or a “Limited Investor Fund” – see 2.3.1 Regulatory Regime) is required to issue an offering document that must describe the equity interests in all material respects and contain such other information as is necessary to enable a prospective investor to make an informed decision as to whether or not to invest in the fund. CIMA has issued rules regarding the content of offering documents for registered mutual funds and rules regarding the content of marketing materials for registered private funds.

All fund offering documents are subject to the pre-existing statutory obligations with regard to misrepresentation and the general common law duties with regard to the proper disclosure of all material matters.

The Cayman Islands is a popular domicile for globally managed private equity, hedge and hybrid funds due to its tax neutral status, its flexible structuring options and its established and experienced financial services sector and professional service providers. In particular, the Cayman Islands is the jurisdiction of choice for US sponsors structuring funds for US tax-exempt investors and non-US investors. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan.

Private equity funds are typically structured as exempted limited partnerships. Hedge funds are typically structured as exempted companies and/or exempted limited partnerships. Cayman Islands trusts and other vehicles are frequently used as investment vehicles for investors in Asia, including China and Japan.

Unless a mutual fund is “licensed”, “administered”, a “Limited Investor Fund” or was registered with CIMA prior to 14 November 2006, all investors investing into a fund regulated by CIMA under the Mutual Funds Act are subject to an initial minimum investment amount of KYD80,000 (or its equivalent in another currency).

Investment funds that fall within the definition of either a “mutual fund” under the Mutual Funds Act or a “private fund” under the Private Funds Act are required to be regulated by CIMA.

A mutual fund is any company, unit trust or partnership (established or registered in the Cayman Islands) that issues equity interests that are redeemable at the option of the investor, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from investments. Mutual funds that issue debt are excluded from regulation, even if the bonds or notes are convertible or have warrants attached.

There are four types of regulated mutual funds.

• The “Licensed Mutual Fund” – a fund may obtain a licence from CIMA if CIMA considers that each promoter is of sound reputation, that the administration of the fund will be undertaken by persons who have sufficient expertise and are fit and proper to be directors (or, as the case may be, managers or officers in their respective positions), and that the business of the fund will be carried out in a proper way. The licensing process can take a few months and a fund must not commence operations until the licence has been granted. No regulatory minimum initial investment amount applies to this type of fund.
• The “Administered Mutual Fund” – these funds are required to designate a principal office in the Cayman Islands at the office of a licensed mutual fund administrator (MFA). Instead of CIMA doing so, it is the MFA that is required to be satisfied that the promoter is of sound reputation, that the administration of the fund will be undertaken by persons who have sufficient expertise to administer the fund and are of sound reputation, and that the business of the mutual fund and the offer of equity interests will be carried out in a proper way. No regulatory minimum initial investment amount applies to this type of fund.
• The “Registered Mutual Fund” – this type of fund is not subject to licensing nor is it required to have a principal office provided by an MFA. However, it must have either (i) a minimum initial investment amount of at least KYD80,000 (or its equivalent in another currency) per investor, thus making it suitable only for sophisticated investors, or (ii) its equity interests listed on a recognised stock exchange, making it therefore subject to additional regulation by such stock exchange.
• The “Limited Investor Fund” – this type of fund must have no more than 15 investors, who must be capable of appointing and removing the operator(s). Prior to the admission of a sixteenth investor, a Limited Investor Fund will be required to re-register with CIMA under one of the other heads of regulation described above. Unlike a Registered Mutual Fund, a Limited Investor Fund is not subject to any minimum initial investment amount.

A “master fund” is defined under the Mutual Funds Act as a company, partnership or unit trust (established or registered in the Cayman Islands) that issues equity interests that are redeemable at the option of the holder to one or more investors, one of which must be another fund regulated by CIMA that conducts more than 51% of its investing in the “master fund” directly or indirectly (a “regulated feeder fund”). The “master fund” must hold investments or conduct trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder fund. Each fund that falls within the definition of a “master fund” is required to register as a “master fund” under the Registered Mutual Fund category and is subject to the same minimum initial investment amount as a Registered Mutual Fund.

All mutual funds regulated by CIMA (other than “master funds”) are required to file offering documents or a summary of terms upon registration, and must notify CIMA within 21 days of any material changes to service providers or the terms of the offering. In addition, all CIMA-regulated mutual funds must file audited accounts and a fund annual return within six months of their financial year-end.

A private fund is any company, unit trust or partnership (wherever established) that offers or issues or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:

• the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and
• the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, but this does not include certain licensed or registered persons or any non-fund arrangements.

CIMA has wide-ranging powers in respect of Cayman Islands entities that are regulated as mutual funds or private funds in the jurisdiction. CIMA has worked alongside overseas regulators in regulatory investigations involving investment funds, including the US Securities and Exchange Commission and the UK’s Financial Conduct Authority.

There is no requirement for the investment manager or manager of a fund to be domiciled in the Cayman Islands or for a non-Cayman Islands manager or investment manager to be regulated in the Cayman Islands. Most fund managers are not domiciled in the Cayman Islands.

The Cayman Islands continues to adopt and embrace international best practice approaches for anti-money laundering (AML) and combatting terrorist financing. The AML regime covers a wider range of investment entities, including all types of investment funds (whether regulated or not) in the Cayman Islands. All investment entities are required to appoint experienced risk and compliance professionals with specific knowledge of the Cayman Islands AML regime to the roles of anti-money laundering compliance officer (AMLCO), money laundering reporting officer (MLRO) and deputy MLRO. The AMLCO, in particular, will assist the investment entity in ensuring compliance with relevant requirements and, where the investment entity looks to rely upon a third party for carrying out AML/KYC checks on investors, the AMLCO will likely take a lead role in assessing the suitability of that third party. It is clear that CIMA expects the operators of investment entities, together with their AMLCO, to carry out a risk-based due diligence exercise when assessing the suitability of a service provider and that this exercise should be tailored to the risk profile of each investment entity (taking into account its investor base and its anticipated investment activities). This continues to be a rapidly evolving area and the importance of retaining specialist risk and compliance professionals continues to rise.

The increasing compliance burden – not just in the Cayman Islands, but globally – has led to a sharp increase in outsourced administration among closed-ended investment entities. Outsourced service providers are increasingly acting as a “one-stop shop” for compliance solutions where expertise and scalable data can result in marked increases in compliance efficiency.

There is generally no requirement for non-local service providers to be regulated in the Cayman Islands. However, all directors of companies regulated by CIMA as mutual funds under the Mutual Funds Act must be registered with, or licensed by, CIMA pursuant to the Directors Registration and Licensing Act.

There is generally no restriction on a fund manager from another jurisdiction managing a fund established as a Cayman Islands vehicle. However, if an overseas manager establishes a Cayman entity to act as the investment manager for a fund, such manager vehicle may be subject to licensing or registration with CIMA under the Cayman Islands Securities Investment Business Act (As Revised). Such Cayman Islands entities acting as a discretionary manager of an investment fund may also be subject to local substance requirements under the Cayman Islands International Tax Co-operation (Economic Substance) Act (As Revised).

Licensed Mutual Funds must apply to CIMA for a licence to operate. The licensing process can take a few months and a fund must not commence operations until the licence has been granted.

Administered Mutual Funds, Registered Mutual Funds and Limited Investor Funds must make an online filing with CIMA in the prescribed form and submit an offering document (or summary of terms), service provider consent letters and an application fee before the launch date.

Private funds must make an online filing with CIMA in the prescribed form and submit an offering document (or summary of terms), service provider consent letters and an application fee within 21 days of accepting capital commitments or, if earlier, prior to the fund receiving any capital contributions for the purpose of investments.

See 2.3.6 Rules Concerning Marketing of Alternative Funds.

The marketing of investment funds in the Cayman Islands does not require specific regulatory approval.

Investment funds are typically established as either Cayman Islands exempted companies, exempted limited partnerships, limited liability companies or trusts. An exempted company that is not listed on the Cayman Islands Stock Exchange is prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of its securities. Exempted limited partnerships and limited liability companies are prohibited from undertaking business with the public in the Cayman Islands other than so far as may be necessary for the carrying on of their business exterior to the Cayman Islands. If a trust is registered as an “exempted trust”, investors must not – and must not be likely to – include any person who is resident or domiciled in the Cayman Islands (other than exempted and ordinary non-resident Cayman Islands companies or the object of a charitable trust or power).

The “public in the Cayman Islands” does not include:

• any exempted or ordinary non-resident company registered under the Cayman Islands Companies Act;
• a foreign company registered pursuant to Part IX of the Companies Act;
• a foreign limited partnership registered under Section 42 of the Cayman Islands Exempted Limited Partnership Act;
• any company acting as general partner of a partnership registered under the Exempted Limited Partnership Act; or
• any director or officer of the same acting in such capacity, or the trustee of any trust registered or capable of registration as an exempted trust under the Cayman Islands Trusts Act acting in such capacity.

See 2.3.6 Rules Concerning Marketing of Alternative Funds.

See 2.3.6 Rules Concerning Marketing of Alternative Funds.

There are no investor protection rules that restrict the ownership of fund interests to certain classes of investors, except that a Registered Mutual Fund must have a minimum initial investment amount of KYD80,000 (or its equivalent in another currency). Such a fund is geared toward more sophisticated investors and is subject to lighter-touch regulation by CIMA. A mutual fund that has a minimum initial investment amount of less than KYD80,000 (other than a Limited Investor Fund) is subject to increased regulation by having to obtain a licence or having a “principal office” provided by a CIMA-licensed mutual fund administrator.

CIMA is a well-respected and dynamic regulator that consistently evolves its practice and approach to reflect the changing regulatory environment. CIMA has well-established consultation processes that are mandated by statute and allow for co-ordinated feedback from industry. CIMA has historically adopted a light-touch approach to enforcement, looking to assist in remedying breaches and minimising the chances of future errors rather than penalising regulatory oversights. However, there are signs that this approach is shifting, largely in response to external assessments, and the use of active enforcement to drive compliance is anticipated, particularly in the light of new powers granted to CIMA to impose administrative fines for regulatory breaches without recourse to the judicial system.

The majority of investment funds established in the Cayman Islands are private non-retail funds. Indeed, a Cayman Islands company that is not listed on the Cayman Islands Stock Exchange is prohibited from making any invitation to the public in the Cayman Islands to subscribe for any of its securities, and exempted limited partnerships are prohibited from undertaking business with the “public in the Cayman Islands” other than so far as may be necessary for the carrying on of the business of the partnership exterior to the Cayman Islands.

For these purposes, “public in the Cayman Islands” does not include the following:

• any exempted or ordinary non-resident company registered under the Cayman Islands Companies Act (As Revised);
• a foreign company registered pursuant to Part IX of the Companies Act;
• a foreign limited partnership registered under Section 42 of the Cayman Islands Exempted Limited Partnership Act (As Revised);
• any company acting as general partner of a partnership registered under the Exempted Limited Partnership Act; or
• any director or officer of the same acting in such capacity or the trustee of any trust registered or capable of registration as an exempted trust under the Cayman Islands Trusts Act (As Revised) acting in such capacity.

Investors in an exempted trust registered under Part VI of the Trusts Act must not and must not be likely to include any person who is resident or domiciled in the Cayman Islands (other than exempted and ordinary non-resident Cayman Islands companies or the object of a charitable trust or power).

Subject to the above restrictions, certain categories of regulated open-ended mutual funds may be established without a statutory minimum investment requirement and therefore could be established as retail funds, although they are not common in the Cayman Islands.

There are four types of regulated open-ended “mutual funds” under the Mutual Funds Act.

• The “Licensed Mutual Fund” – a fund may obtain a licence from CIMA if CIMA considers that each promoter of the fund is of sound reputation, that the administration of the fund will be undertaken by persons who have sufficient expertise and are fit and proper to be directors (or, as the case may be, managers or officers in their respective positions), and that the business of the fund will be carried out in a proper way. Funds that have obtained a licence from CIMA are not subject to a minimum initial investment amount.
• The “Administered Mutual Fund” – this type of fund is not subject to a minimum initial investment; however, instead of going through the licensing process, the fund is required to designate a “principal office” in the Cayman Islands at the office of a CIMA-licensed mutual fund administrator.
• The “Registered Mutual Fund” – this type of fund must have either (i) a minimum initial investment amount of KYD80,000 (or its equivalent in another currency), which will thus render it not suitable as a retail fund, or (ii) its equity interests listed on a recognised stock exchange. Any mutual fund that falls within the definition of a “master fund” under the Mutual Funds Act must register as a “master fund” under the Registered Mutual Fund category.
• The “Limited Investor Fund” – this type of fund must have no more than 15 investors, who must be capable of appointing and removing the operator(s). Prior to the admission of a sixteenth investor, a Limited Investor Fund will be required to re-register with CIMA under one of the other heads of regulation described above. Unlike a Registered Mutual Fund, a Limited Investor Fund is not subject to any minimum initial investment amount.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.

See 3.1.1 Fund Structures.