Investment Funds

“Widely regarded as one of the foremost independent firms in the Cayman Islands, Solomon Harris wins praise all round."
(Source:www.legal500.com)

"The Firm has particular expertise in the structuring of investment funds at the outset."
(Source: Chambers Global)

Recognising the world-wide trend and phenomenal growth area in mutual funds and other investment funds, the Cayman Islands enacted its first Mutual Funds Law in 1993. Today, the Cayman Islands is, by a long way, the leading domicile for the establishment of alternative investment funds and recent figures show that some 75% of all hedge funds are established here.

In drafting and updating the legislation, careful regard has been had to, first, the fact that Cayman funds have tended to attract institutional and sophisticated investors and, second, existing good practice and high standard of self-regulation. The law aims to ensure that only those of sound reputation and with appropriate expertise are permitted to establish and administer investment funds in the Cayman Islands.

Why Domicile Your Investment Fund In The Cayman Islands?

The investment fund industry has experienced phenomenal growth since it was regulated and the reasons the Cayman Islands is viewed as a jurisdiction of choice include:

• market access;
• the availability of professional services;
• the flexibility afforded by the range of structures used to operate investment funds;
• positive investor perception;
• local infrastructure;
• availability of listing on the Cayman Islands Stock Exchange;
• geographic location and time zone; and
• the legal, regulatory and tax environment.

Specific advantages of the Cayman Islands as a jurisdiction for investment funds are:

• Professional service providers including accountants, attorneys, administrators and directors are readily available, giving fund promoters the assurance that they have access to high quality services regardless of the complexity of their products.
• The Cayman Islands has a high level of technological sophistication with first-class international telephone, facsimile, cable and Internet links via satellite. This allows the quick processing of transactions, and provides account information for a wide range of products and currencies efficiently and at a cost-effective rate.
• The Cayman Islands is well known for its close working relationship between government and private sector. This has created a business environment that is efficient and free of time-consuming bureaucracy.
• The Cayman Islands Mutual Funds Law is designed to be a user-friendly regulatory framework for fund managers underpinned by a principles-based approach.  Regulatory and licensing procedures are straightforward and proportionate.
• Cayman has a well-developed and sophisticated legal and court system with ultimate appeal to the Privy Council in London. The legal framework permits flexibility and enables Cayman funds to participate in sophisticated investment techniques. These may include leveraging the portfolio, short-selling, investing in all types of securities and derivatives, and investing, without restriction, in any currency or instruments.
• Cayman is a “no-tax” jurisdiction; it has no history of taxation whatsoever and the country has no mechanism for taxation in existence.

Investment Fund Regulation

The law is simple and straightforward.  Not all investment funds are regulated under the law. Not required to be registered are close-ended funds (i.e. those with no redemption or repurchase rights for the investors), debt issues, and funds with shares held by no more than 15 investors who by majority are capable of appointing or removing the operators of the fund (i.e. directors, trustees and general partners).  There are no prohibitive licensing and regulatory provisions or stringent measures calling for local custodians, managers or directors. Rather, the legislation recognises that most of those engaged in the industry are already strictly regulated or controlled within or outside the Cayman Islands. Thus, reliance to a large extent on self regulation within the industry is seen as reasonable.
There are also no restrictions placed on investment objectives, risks, rates of return, leveraging or other commercial matters given the institutional and sophisticated nature of the investors in Cayman funds.
The law requires that the offering memorandum describes comprehensively the equity interests and contains sufficient information (on objectives, risks, service providers, conflicts of interest etc.) to enable the investor to make an informed decision.
A regulated investment fund must qualify under the law before starting business. To do so it may either obtain its own licence, appoint a licensed mutual fund administrator in the Cayman Islands to provide its principal office, or be automatically registered if it is for a sophisticated investor, i.e. the minimum investment per investor is US$100.000. Funds established before 14th November 2006 are permitted to retain the previous minimum investment requirement of US$50,000.

Categories of funds regulated under the Law

There are therefore three categories of funds regulated under the law:

• the licensed fund
• the administered fund
• the registered fund

Types Of Investment Fund Structures

The Cayman Islands has company, trust, partnership and related laws which allow a high degree of flexibility for establishing investment funds. The three vehicles commonly used for operating investment funds are the exempted company, the unit trust and the exempted limited partnership.

• The exempted company may redeem or purchase its own shares and may therefore operate as an open-ended corporate fund. Close-ended corporate funds can also be established using the exempted company, and it is a relatively straightforward procedure to convert from one to the other. The Companies Law also allows re-domiciling of companies and corporate reconstruction so that fund mergers are easily facilitated.
• The unit trust is usually established under a trust deed with the investors interests held as trust units.
• The exempted limited partnership provides a second unincorporated vehicle and it can be formed as easily as the exempted company or the unit trust.

The Cayman Islands Mutual Funds Law provides for the regulation of mutual funds by the Cayman Islands Monetary Authority. In this Law, a mutual fund is defined as “any company, trust or partnership either incorporated or established in the Cayman Islands, or outside the Cayman Islands, which issues equity interest redeemable or repurchasable at the option of the investor, the purpose of which is the pooling of investors funds with the aim of spreading investment risk and enabling investors to receive profits or gains from investments.”
We are able to assist with all fund structures but have a particular expertise in master/feeder, fund of funds, Shariah compliant funds and segregated portfolio companies.

Investment Fund Trends

Frequently, Cayman investment funds are established as part of a wider product structuring and it is common to see master feeder and side by side structures connected with one or more onshore funds. Fund of funds are very much a feature of the Cayman funds industry and there is also increasing use of segregated portfolio companies in the case of umbrella structures where there is a diversity of risk profiles as between the various sub-funds or leveraging. The United States remains a significant source of business for Cayman service providers but Europe and the Far East are of increasing importance.  In fact, the firm has considerable expertise in Shariah compliant investment funds, establishing its first such fund in 1989.

Solomon Harris is able to advise on all aspects of both the structuring and the establishment of a Cayman investment fund, working alongside your onshore counsel as appropriate. We are also able to make introductions to other service providers, in particular, administrators, auditors and professional directors. Typically, a Cayman fund can be established within 4-6 weeks depending on the complexity of the structure.

Members of the Solomon Harris funds team originate from firms such as Appleby, Allen & Overy, Cromwell & Moring, Eversheds, Freshfields, Glovers, Slaughter & May, Stikeman Elliot and State Street.

Notable clients include Société Générale, Lyxor Asset Management, Banco Itau, Unibanco and Harcourt.
Solomon Harris was a founding member of the Cayman Islands Chapter of AIMA and our funds team regularly participates in AIMA events.