Launching your first offshore fund: Cayman or BVI?

BVI

CaymanAs a funds lawyer practicing both Cayman and BVI law, I am often asked by start-up managers and their onshore lawyers which jurisdiction is preferable.

Like the photographs here, the two jurisdictions may appear identical at first. After all, Cayman and the BVI are both excellent and highly regarded offshore fund jurisdictions. We have long-standing clients who elected to use one or the other for different and highly sensible reasons at the time of their first launch. But there are differences, and a number of our largest clients actually have fund vehicles in both jurisdictions to maximize the advantages that they each offer.

(And if you are curious which photo is which, read on to the end of this post.)

For a manager looking to establish their first offshore fund vehicle, choosing between jurisdictions will depend on their specific requirements.  On that basis, I ask managers the following questions to help identify the best jurisdiction for them:

Are you looking to minimise cost?

In terms of corporate and regulatory costs, Cayman is a significantly more expensive funds jurisdiction than the BVI (for example, the annual cost to keep a typical hedge fund registered in Cayman is just under US$4,300 whereas the annual cost in the BVI is US$1,000). Unlike the BVI, Cayman also requires a local audit sign-off for its funds, which adds that extra layer of administrative costs. For this reason, many fund managers who are starting out with a small amount of AUM prefer to establish their offshore fund in the BVI to keep overheads down whilst they build a track record.

Are you looking to simplify the due diligence process for potential investors as far as possible?

Cayman is the world’s most popular offshore funds jurisdiction. We estimate that Cayman has about 70 per cent of the world’s offshore funds and I think it is fair to say that most institutional investors would not blink twice if a manager told them that their offshore fund vehicle will be established in Cayman.  Although the BVI is clearly in second place with about 15 per cent of the world’s offshore funds, managers who opt to establish their funds in the BVI sometimes encounter the additional question from institutional investors of “Why BVI?”.  Whilst there may be very reasonable and logical answers, the selection of Cayman removes this query.

Are you looking for the lightest possible regulation for your offshore fund?

The answer to this is not as straight-forward. In Cayman, if you are looking to launch  an open-ended fund with 15 or fewer investors, a majority (in number) of whom are able to appoint or remove the directors of the fund, then the fund will not need to be regulated in Cayman. This exemption reduces Cayman overheads quite significantly and is very popular for funds with only one investor or friends-and-family funds.

The BVI does not have an exempt fund as such, but is about to launch two new fund products in 2015 that will provide both a light regulatory touch and maintain the cost-effectiveness of the jurisdiction. We will blog about these separately as soon as they are launched, but in conclusion, both jurisdictions now offer very flexible vehicles for the manager wanting to minimize their regulatory obligations.

Where are your potential investors likely to be based?

Without wanting to make sweeping generalisations (but doing so anyway…), if your intended investor base consists of mainly of institutional investors from the US, South America and/or Western Europe, the Cayman Islands will be a more familiar offshore jurisdiction.  On the other hand, if you are looking at an investor base situated in Russia or Asia, they are likely to be more familiar with the BVI business company as an offshore vehicle. However, given strong funds industries in both Cayman and BVI, you will generally find that investors are well aware of both jurisdictions.

Are you looking for significant offshore legal expertise in your chosen jurisdiction?

Well you’ve come to the right place. Harneys has the largest funds practice in the BVI and the fastest growing Cayman global funds practice out there. Whichever jurisdiction you choose, we’re here to help and look forward to hearing from you.

Answer:  The clue is the skyline; the BVI (top photo) is a collection of volcanic, mountainous islands whereas Cayman (bottom photo) is as flat as a pancake!

Lewis Chong
Funds partner Lewis Chong has practised law in London, New Zealand, BVI and Cayman and is now based in Vancouver. A former golden gloves boxing champion in New Zealand, Lewis now focusses his energy on slightly less dangerous activities like touch rugby and hiking.

20 comments

  1. Hi Lewis,

    Found you via internet search. I’m in Victoria BC and looking to create an offshore management company primarily focused on the FX markets. Your blog is helpful and wondering if you might be able to provide some advice (and services?).

    Needing some clarity on location and registration requirements for an offshore financial management company. As I will be beginning with my own capital and looking to attract investors based on track record, I am looking for something that is very low cost (startup and ongoing) with minimal regulatory hurdles, and that can be scaled up in time if needed.
    I would like to be able to put up a website and be highly visible and accept as many clients as possible; however, I am willing to limit clients from certain regions and or minimum account sizes as well if startup benefits dictate so.
    I am considering 2 models but am flexible if there is another approach that can achieve my goals. I would be managing other peoples’ money on the forex markets only. I am considering managed accounts only, where my trades are passed through to the clients account (using MAM/PAMM software) for a performance fee based on returns. Therefore all monies are held by a 3rd party broker. The other structure, which I expect would be more complicated but would like to consider, would be a fund in which clients monies are held by the offshore structure, pooled together and traded on the forex markets via a brokerage account.

    Is this something that you would be able to give a couple scenarios and associated costs?

    Cheers
    Warren

  2. Hello Lewis I’m looking at a services provider out of Liechtenstein to create a fund but I would like to touch base with you and see what services you can provide.

  3. Hi Lewis, I’m looking for guidance in order to create a Forex Fund. Contact me and will elaborate better the scenario for you.

    Thanks.

  4. Hey Lewis, I am looking to open a fund focusing primarily in FX and am looking on opening an offshore account to bring investor capital in. The reason being is mainly due to taxes and regulatory issues. I would like to hear what you have to say.

    Thanks

  5. Lewis I’m looking to start a fund and will like the guidelines please send me an email with your contact info so we can talk.

  6. Hi I’m looking to setup a fund in the forex and crypto field and need assistance with structures in the cayman

  7. Hi Lewis,
    Found you via internet search. I’m in Cairo – Egypt and looking to create an offshore Hedge Fund.
    I am in needing some clarity on location and registration requirements for an offshore financial management company.
    As I will be beginning with my own capital and looking to attract investors based on track record, I am looking for something that is very low cost (startup and ongoing) with minimal regulatory hurdles, and that can be scaled up in time if needed.

    I would like to be able to put up a website and be highly visible and accept as many clients as possible; however, I am willing to limit clients from certain regions and or minimum account sizes as well if startup benefits dictate so.
    So, please let me know the procedures, documents you need from me, the time factor and the cost and how & when will be paid?
    Regards,
    Amr Osman

  8. Hi, great article. I have some questions around establishing an offshore cryptocurrency fund. Specifically, I’m looking to gather knowledge on an optimal fund structure, initial costs, recurring costs and regulatory requirements.

    Look forward to speaking and learning more.

    Best,
    Brandon

  9. Dear Ian

    We are a new establish company in Hong Kong, and our mother group is familiar in fund setting in China. As we want to set up a Cayma Islands Fund in coming month, we want to know several thing.
    1. How we can set up a fund in your company? What we need to prepared before the setting?
    2. How many successful cases are in Hong Kong or China company? and are there any certificate about the suitability of solicitor or registration proof?
    3. SPC Fund / Exempt Fund / Closed-end Fund, are there any different charges and advantages for setting these fund?
    4. Any details about the charges for your company and solicitor?
    5. how can we contact you? whatsapp? or skype?

    Thanks for your kindly reply.

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