Setting up a US fund and a Cayman fund is quick, easy and yes, seamless, provided that the manager chooses US and Cayman Counsel who, as part of their core businesses, structure investment funds. These are the folks who, if the manager chooses wisely, will become their trusted advisors for many years to come. If this is the case then US Counsel will work seamlessly with Cayman Counsel.
But before we get to the process, the manager needs to decide how their US Fund will work in conjunction with their offshore fund. In deciding which route to follow, US Counsel will walk the manager through the options.
The three most widely-used options are “side-by-side”, “master-feeder” and “mini-master”. With a side-by-side structure, the US Fund and the offshore fund both make investments directly with trade tickets allocated between them. Given the extra administration involved, we rarely have managers opt for side-by-side funds.
Probably the most popular route is to set-up a master-feeder structure. Here, an offshore Master Fund is created with the US Fund and the offshore fund investing all of their assets into the Offshore Master Fund, leaving the offshore Master Fund to make the investments. In a mini-master structure a US Fund and an offshore fund are established, but in this structure, the offshore fund invests in the US Fund which acts as the master fund and also as the fund into which the US taxable investors will invest. The offshore fund will be taxed as a corporation to benefit US tax-exempt investors and block UBTI and non-US investors.
In all models, it’s also important for the US manager to consider how they will be paid in the most tax efficient manner. It is crucial that US managers discuss with their US counsel about how this may be structured. At the moment, the current preference is for US managers to take their performance fee as an allocation from the relevant master fund (be it the offshore or in the case of the mini-master, the onshore (master) Fund) .
Once the structuring advice has been given and the structure is agreed, the manager will need to select the other service providers to the Funds. These will include a fund administrator, auditor, bank, custodian, prime broker and, often, independent directors. We’ll know about the Fund from the manager, including details of the investment strategy, likely AUM and background of the principals and have a feel for both what the manager needs and what they are looking for in selecting the other service providers. We’re always more than happy to make the right recommendations and introductions.
Simultaneously with the appointment of the other service providers, US Counsel will form the US Fund and work begins on preparing the offering document for the US Fund and the offshore fund, as well as the subscription documentation and investment management agreement. At the same time, Cayman Counsel will incorporate, assuming say, a traditional Master/Feeder structure has been decided upon, the exempted limited companies to be used for the Master Fund and the Feeder Fund (although it is not unusual to see exempted limited partnerships being used for Master Funds). This can be completed within the day. Standard form constitutional documents will be used, which will be amended and restated as necessary to tailor them to the offering document, once final.
One key road block is often the establishment of a banking relationship for the fund. Sometimes this can be done through the relevant administrator but there may be trading or other requirements for the relevant strategy which will mean the manager may want to set this up. If this is the case, the manager is well-advised to start the banking discussions early and provide all relevant documentation and information required to the bank as soon as possible. The same applies for the other service providers being appointed. Cayman Counsel will review the offering document and build-in the Cayman Islands disclosure and legal requirements, such as Cayman Islands Mutual Funds Law disclosure, Cayman Islands anti-money laundering legislation and automatic exchange of financial information disclosures, share rights including the terms of the offering, general disclosure language regarding providing information to law enforcement and other authorities.
Cayman Counsel will also complete the set-up of the Master Fund and the Feeder Fund, which would include the appointment of the directors and prepare the suite of Cayman launch documents, which will include Board Resolutions, various documents required by the Cayman Islands Monetary Authority, Consent Letters for the administrator and auditor and prepare the amended and restated constitutional documents of the Master Fund and the Feeder Fund. Cayman Counsel will also need to review the administration agreement, custodian agreement and prime brokerage agreements to ensure they comply with Cayman Islands law. Once all of the documents are in final form, it’s down to the directors of the Feeder Fund and the Master Fund, who should have been involved with the process from the beginning, to review all of the documentation and ultimately approve, by way of the Board Resolutions, the launch of the Feeder Fund and the Master Fund. Following this, Cayman Counsel will attend to the various filings with the Registrar of Companies and the Cayman Islands Monetary Authority and when complete the offshore fund can take in investors and trade.
Other than the legal work involved, transaction management is key. Both US Counsel and Cayman Counsel will be pressing all service providers to make sure they have what they need to jump through the various internal hoops required for them to be appointed and sign-off on the documentation and ultimately provide the services to the Funds and that this is done efficiently and within the deadlines given.
Timing, from the initial kick-off call with the manager to the launch of the US Fund and Offshore Fund is a manager moveable feast. It’s not overnight, that’s for sure, but neither should it take six months, unless than manager needs the six months to, for example, line-up investors, seed capital or on-board the service providers. Some managers have already worked on their detailed investment strategy and have considered the commercial terms of the offering. Some managers need advice on both. Some managers have all of their anti-money laundering documentation ready for the service providers and some haven’t. Often it’s the opening of the bank accounts and take-on sign-offs from service providers that can cause delays to the launch of the funds. All things being equal, the timing is around 6-12 weeks, 6 weeks being pretty aggressive, but it can be done and that’s for the US Fund and the offshore fund.
This post includes comments shared by me in a recent interview with HFM Week, which was published in their report, How to start a Hedge Fund in the US. For a copy of the full interview, click here, and for more information, please get in touch.