If you are thinking of setting up an offshore hedge fund our new infographic which sets out the key steps is just for you.
The BVI and Cayman are often referred to as “tax neutral” and you might have been told that, for this reason, it would be advantageous to establish your fund in either jurisdiction. What does this actually mean and what does it mean for your fund?
So you’ve got a great idea for your fund’s investment strategy, perhaps you have tested it and developed a track record and maybe you even have proposed seed financing, but who else needs to be involved in setting up and launching your fund? I have set out a list of the key players below.
Cayman and BVI funds are not restricted to using Cayman and BVI service providers. They have the flexibility to appoint service providers from all over the world, subject to some technicalities which are beyond the scope of this blog.
There are a number of ways to structure your offshore fund and the best option for you will depend largely on the location of the manager, your investor base and the type of investments that the fund will make. I have set out a summary of the three most common structures to use for offshore funds in this post.
Securities investment business in or from the Cayman Islands is regulated by the Securities Investment Business Law (Revised) (SIBL). SIBL sets out which securities investment business activities are regulated, and so need a license to do them, and also various exemptions from the licensing requirement.
So how does SIBL work? Continue reading
It is nearly three years since the BVI launched its Approved Manager Regime. The introduction of the Approved Manager Regime at the end of 2012 was the jurisdiction’s first step towards putting together a complete package focused on the smaller and emerging manager and it has been a great success.
My Cayman colleagues will probably jump up and down when I say this; but it is such a success that we now see Cayman funds being set up with BVI Approved Managers, given that the Approved Manager out-performs the Cayman equivalent, the Cayman Islands Securities and Investment Business Law (SIBL) Exempted Manager, both on cost (establishment and ongoing) and because it has the stamp of being a regulated product, which the Cayman equivalent does not. In addition, the Approved Manager offers greater flexibility, as a Cayman Exempted Manager is limited to only acting for funds whose investors fall within the definitions of a “sophisticated investor” or “high net worth person” under SIBL, whilst the Approved Manager has no such limitation.
It seems to have fallen upon me to talk about all the things that can go wrong with your fund! As it happens, suspending NAV calculations, subscriptions and redemptions is not the end of the world that it was once considered. If you keep in mind a few key considerations, chances are you will survive this challenge.
If you want to de-register a BVI fund by cancelling its certificate of recognition, the chances are things haven’t gone as planned. Perhaps the launch was not a success and the fund never traded, perhaps the launch went well but performance was poor and you are winding up. Or maybe things are more positive, you have just realised that you could operate as a closed-end fund and it makes financial sense to de-register or you think you would be better off domiciled in another jurisdiction. Whatever the reason, don’t be down. In the words of Henry Ford, “Failure is only the opportunity to more intelligently begin again”. The good news is, de-registering is pretty easy so we can save you a headache!
So, your fund is up and running, your portfolio performance is in the upper quartile for your asset group, you’re attracting more and more interest. Your own marketing (or your newly appointed marketing team) is beginning to gain traction and you are now at the stage where you are bringing in more investors. In fact, you have a closing in just over two weeks which will significantly bump up your asset under management figure. Is it time to break out the next bottle of Cristal (or whatever your preferred choice is – Highland Park single malt is always a popular choice of your average Cayman attorney and we’re always happy to help celebrate your success)?
Whilst you’re basking in the slight glow of your success, you stop and think. Wait. Is there a Cayman regulatory issue I have to deal with? Wasn’t there a magical number set out in the offering memorandum that I have to think about?
Last month, the BVI launched the incubator fund and the approved fund. These fast and low-cost options for managers wanting to set up a regulated fund are a great addition to the BVI funds industry. It is not surprising that everyone is talking about them. If you have missed this, have a read of my last post.
It is taking the internet a bit of time to catch up with the developments in the BVI and I have noticed that much of the general information available on BVI funds is out of date.
For anyone thinking of establishing a new fund in the BVI I have set out a brief guide to each of the BVI fund products below. I try to limit the use of acronyms but you will need to know that the funds industry in the BVI is governed by the Securities and Investment Business Act (SIBA) and regulated by the Financial Services Commission (FSC).
An incubator fund will be restricted to having a maximum of 20 investors, each investing no less than $20,000, and a cap on assets under management of the fund of $20,000,000. The incubator fund is aimed at the start-up manager looking to launch quickly (approval is given within two days of submitting a complete application) with low cost, minimal regulatory hurdles and no mandatory functionaries. It can operate as an incubator fund for up to three years. At that point, if the fund has proved to be viable, it will need to convert to a private, professional or approved fund. Alternatively, it can wind up its operations.
One of the reasons why Cayman Islands investment funds are so popular is the flexibility of the fund products available. The Cayman Islands Monetary Authority (CIMA) supervises regulated investment funds via the Mutual Funds Law, which regulates open-ended funds such as the classic Cayman hedge fund. Closed-ended funds by contrast are not regulated under the Mutual Funds Law, although they can choose to be.
For funds where the investor is able to choose whether to redeem (ie cash-in) their investment on a regular basis, the Mutual Funds Law offers 3 types of regulated funds and a useful exemption in certain circumstances where there are 15 or fewer investors.
For many managers, having a fund which is regulated and subject to overreaching powers of a regulator (whether the British Virgin Islands Financial Services Commission (FSC) or The Cayman Islands Monetary Authority (CIMA)) can be advantageous or essential when attracting investors. On the other hand, a manager seeking to establish a track record whose investors comprise only friends and family, may see advantages in having an unregulated fund, without any of the ongoing obligations that would apply if it were regulated.
Whichever camp you fall into, you will want to know how to structure your fund to ensure the appropriate level of regulation for your purposes. Continue reading
The term “offshore” is colloquially used in a very wide ranging number of sectors, including the mining industry, the sailing community and more frequently in the increasing hunt for renewable energy. But in relation to the world of funds, where exactly are we referring to when we say “offshore” and why are funds established there?
Where is “offshore”
The funds industry uses the term “Offshore” to mean a tax-neutral jurisdiction with a sophisticated financial services infrastructure which provides a wide ranging number of products and services to non-residents. The majority of the established offshore jurisdictions globally are either British Crown Dependencies (Jersey, Guernsey and the Isle of Man) or British Overseas Territories (such as the British Virgin Islands, Cayman Islands and Bermuda). Our focus in this blog is on the two leading offshore fund jurisdictions, the British Virgin Islands and the Cayman Islands.
As 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: Continue reading