Category Archives: Funds 101

If you are new to offshore investment funds, this is where to start

Fund disputes: key drivers, common themes and lessons learned

We are often asked by managers why investor fund disputes happen and how they can be prevented. It’s a bit like asking, “can car accidents be avoided?” and I’d answer both questions with a “Not always, but there are certainly situations that can be avoided.” As my old headmaster used to say to me “Gobin, be in the right place at the right time”, (although more often than not I wasn’t…). As an investor and as a manager, you absolutely need to be. I guess that’s why I became a lawyer instead!

Investor fund disputes come in all shapes and sizes, from issues regarding valuation of fund assets, fund liquidity, inter-fund transactions, insider trading, ponzi-schemes, to undisclosed manager fees, misallocated expenses and undisclosed conflicts of interest, to name just a few. One of the most common forms of investor fund disputes revolves around the use of side letters, particularly relating to enforceability, inconsistencies between side letters and offering/constitutional documents, and the use of nominees to enter into side letters on the investor’s behalf. Another difficult question relates to the investor’s ability to challenge audit holdbacks, and when excessive use of holdbacks constitutes a red flag to investors.

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Marketing tips for fund managers

I’m sorry if I got anyone’s hopes up with the title to this post. Unfortunately, this is not going to give fund managers magical insights on how to secure that crucial investment to launch a fund or take an existing fund to the next level. However, this post may help keep some fund managers out of trouble!

I am often approached by clients and contacts with queries about the marketing of their fund interests internationally. This may be because my business cards and email signature state that I am a “Practitioner of Foreign Law” – perhaps people think I am able to advise on the laws of every “foreign” jurisdiction!

The bad news for people with such queries is that I am usually not qualified to answer specific queries on marketing in particular jurisdictions – I only practice Cayman and BVI law. However, the good news is twofold:

1. Asking these types of questions is the right thing to do! All our fund manager clients are (hopefully) aware of the various laws, regulations and rules that govern marketing fund interests in their home country. What every fund manager should also know is that they need to tread very carefully when marketing fund interests overseas. My fellow Offshore Funds Bloggers have written some useful posts on the European Union’s Alternative Investment Fund Managers Directive here and here. Although the funds marketing regime in Europe can be considered one of the most stringent in the world, it is worth remembering that almost every other jurisdiction will have laws and regulations on how (and to whom) fund interests may be marketed there. For example, managers in the United States will be very familiar with the careful planning needed to ensure that their funds fall within the various exemptions and safe harbours of the Securities Act and Investment Companies Act (not to mention state-by-state blue sky filing requirements!). Continue reading

What is the process of setting up a US Fund and Cayman Fund like? How quick/seamless is it?

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.

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Why-set-up-a-fund-in-the-US.

Why set up an Offshore Fund at the same time as setting up a US Fund?

This question is asked by start-up and emerging managers all of the time and for good reason. Generally it’s the manager who’s putting down their cash to set-up the Fund, albeit the set-up fees will be amortized at the Fund level when investors come-in. As such the manager needs to be extremely confident (show me a manager who isn’t extremely confident….) that they need a US Fund and the Offshore Fund, rather than one or the other. To make this decision, the manager needs to be focused and strategic with their marketing and to have discussed the pros and cons with their legal counsel. Otherwise the manager could well be wasting their own money. Let’s jump into why a manager should be setting-up a US Fund and the Offshore Fund at the same time.

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Cayman LLCs – up and running

Idea Bulb Concept Drawing on Blackboard

They’ve been talked about for a while by our bloggers and contributors but the moment has now come for the Cayman LLC, which has been available for registration since 13 July and numerous of which have already been formed. The Cayman LLC was introduced to meet the requirements of North American managers and intermediaries who use Delaware LLCs and want a flexible offshore version, and Cayman lawyers dealing regularly with North American clients are particularly excited about now being able to offer a “Cayman” version. Its introduction also highlights Cayman’s responsiveness to market demand as it continues to maintain its position as the dominant brand in North America for funds structures.

So what makes the Cayman LLC – or limited liability company, to give it its full name – so interesting?

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Why use an Outsource CFO?

In this guest post, my friend Scott Rosenthal discusses the role of an Outsource CFO and the reasons why fund managers might like to engage one. Do feel free to get in contact with Scott or myself if you would like to discuss any of this further.

There is a growing segment of the hedge fund and private equity fund service provider population called the Outsource CFO. Outsourcing has become very popular in recent years, in regards to back office, middle office, compliance (including outsourcing the investment advisers CCO), trading, and most other areas that a hedge fund needs to operate. What could be considered the final frontier of the service provider population is the Outsource CFO. The Outsource CFO model assists the start-up or smaller fund manager, who may not have the budget or the need for a full time CFO. So, instead of hiring someone who may not have the appropriate experience in order just meet the budgetary restrictions, fund managers can now opt to hire an Outsource CFO.

So why use an Outsource CFO?

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Preparing for the demands of institutional investment in an era of transparency

As an emerging manager who has set up a BVI incubator fund with the backing of friends and family, the two to three-year incubation period is time to prove your credentials and build a solid track record with the ultimate aim of attracting sophisticated and institutional investors. However, there is so much more to do during that period than prove that your investment strategy stands up to scrutiny.

In an age of increasing transparency, it is vital that you use the incubation period to start preparing for a time when you will need to meet institutional-style demands in terms of your operations. It is still early days – and you may still fall below AUM thresholds for complying with extraterritorial regulation – but there is a level of infrastructure and reporting that sophisticated and institutional investors will expect before they are going to invest. Continue reading

What do I need to do to register my Section 4(3) Fund with CIMA?

Black pen draws a checkmark in the list. 3d image. Isolated white background.

If you’ve decided that a section 4(3) Cayman fund is the best structure for your fund (see our earlier blog for an Introduction to Cayman Fund Products), you’ll need to register it with the Cayman Islands Monetary Authority (CIMA) before you launch. The process is well established and fairly straightforward, involving your Cayman lawyers filing the following with CIMA via their online registration system.

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Private Placements and AIFMD

 

AIFMD. Love it or loathe it – and let’s face it, it’s not the most popular law – the Alternative Investment Fund Managers Directive (AIFMD) has changed the way that alternative funds are marketed to investors in Europe. Ultimately this will hopefully allow European and non-European alternative investment funds (AIFs) to be marketed to professional investors in Europe by way of a passport, similar to the way that UCITS funds can be passported round Europe. For now, though, the passport only works for European AIFs marketed by European managers, with non-European AIFs and managers waiting for the European Securities and Markets Authority (ESMA)’s further recommendations on extending the passport to non-European jurisdictions. Your typical Cayman or BVI investment fund isn’t capable of being passported yet and so needs to be marketed using the AIFMD private placement regimes in each country.

So how do the AIFMD rules work for Cayman and BVI AIFs being marketed to professional investors in Europe by non-European managers?

 

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The Five Key Ongoing Obligations of BVI Funds

I wanted to write a post on the continuing obligations for BVI funds because if you are thinking of launching a fund in the BVI, knowing what your obligations will be is essential. My challenge was how to do it without boring you all to tears. I think I have managed to capture the obligations in five key headings so, hopefully, I can hold your attention for just long enough!

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Five Key Ongoing Obligations for Cayman Islands Regulated Funds

Once your fund is registered with the Cayman Islands Monetary Authority (CIMA) it will need to comply with various ongoing obligations under the Mutual Funds Law.

The list isn’t long but it’s important for regulated funds to comply to keep the fund in good standing with CIMA and avoid offences / penalties. Failing to comply with FATCA-related reporting obligations can also potentially result in a 30% withholding tax applying to the fund, which is clearly best avoided.

So, if your fund’s registered under section 4(3) of the Mutual Funds Law (see our earlier blog on the different kinds of funds), what are its ongoing obligations?

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What should your fund director actually be doing?

You’ve appointed your independent directors. They seem like good people, came highly recommended, have great resumes and seem interested and enthusiastic about your strategy. Now that you have them on board though, do you know what they should actually be doing?

Since the 2008 financial crisis, directors of investment funds have faced more and more scrutiny of their actions and decisions. Recent court cases have confirmed the rules on directors’ duties and in December 2013 the Cayman Islands Monetary Authority (CIMA) issued a statement of guidance on corporate governance (the Guidance) which it expects regulated funds to follow as a minimum. Although the BVI does not have an equivalent to the Guidance, the principles under BVI law are the same and a BVI fund director would be well advised to take direction from the Cayman Guidance.

So what should the directors of a regulated fund in Cayman or the BVI actually be doing?

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What are the Directors’ Duties for Cayman Islands and BVI Funds?

There’s been increased focus from the courts and regulators on the duties owed by directors of a Cayman Islands or BVI fund since the financial crisis of 2007-8 and various high profile fund meltdowns. So what duties does a director of a fund actually owe?

In both the Cayman Islands and the BVI, directors’ duties are based on a mix of English common law, statute and regulatory guidance. A director of a corporate fund owes the same duties to the fund as a director of any other Cayman Islands or BVI company owes to its company. Under common law a director owes fiduciary duties and duties of skill, care and diligence.

Directors’ fiduciary duties are:
– to act in good faith in what the director considers is the best interests of the fund;
– to exercise powers for the purposes for which they were conferred and in the fund’s interests;
– to act with unfettered discretion; and
– to avoid conflicts of interest and to disclose personal interests in transactions.

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