Cayman investment funds may be established as either Cayman exempted companies, exempted limited partnerships or exempted unit trusts and, depending on their characteristics, may be subject to regulation by the Cayman Islands Monetary Authority (CIMA).
Investment funds established in the Cayman Islands fall into two broad categories: open ended funds, which provide investors with voluntary redemption or repurchase rights, and closed ended funds, which do not provide investors with voluntary redemption or repurchase rights.
Open ended investment funds are referred to as ‘mutual funds’ under the Cayman Islands Mutual Funds Law (MFL) and, save for exempted funds, are subject to regulation by CIMA.
Closed ended funds are not defined under the MFL; however, CIMA has suggested that closed ended funds are those that have ‘no regular redemption date, redemptions in limited circumstances or extensive lock-up periods’.
Accordingly funds with these characteristics are not subject to regulation in the Cayman Islands. However, Cayman Islands entities that are established as closed ended funds must have a registered office in the Cayman Islands provided by a regulated entity and, if they have a separate advisor or manager which is itself a Cayman Islands entity, then that entity will be subject to regulation or exemption under the Securities Investment Business Law (SIBL).
Harneys helps clients select the most effective Cayman funds for their individual business goals. The following represent the most popular fund choices available:
Section 4(3) Registered Funds
The most common category of regulation, Section 4(3) Registered Funds, account for 70.5 per cent of all Cayman mutual funds. To qualify for registration, a mutual fund must meet one of the following criteria:
- A minimum aggregate equity investment of CI$80,000 (US$100,000, or its equivalent in any other currency)
- Its equity interests listed on a recognised stock exchange approved by CIMA
This is the second most popular category of regulation of the MFL accounting for approximately 25.1 per cent of Cayman Islands funds.
A master fund is a vehicle that facilitates the investment by a regulated feeder fund (which is a regulated mutual fund conducting more than 51 per cent of its investing through a master fund) to invest into the underlying assets to pursue a particular investment strategy. Master-feeder structures are typically used by hedge funds to pool investment capital raised by US and overseas investors into one central master fund with each investor group investing through a separate feeder fund for tax and/or regulatory reasons.
A master fund must be registered with CIMA under the following circumstances:
- It is established or incorporated in the Cayman Islands
- It issues equity interests to one or more investors
- It holds investments and conducts trading activities for the principal purpose of implementing the overall investment strategy of a regulated feeder fund
- It has one or more regulated feeder funds established to invest in the master fund
A Cayman Islands master fund with one or more unregulated feeder funds, none of which are themselves required to register with CIMA under the MFL, would not have to register with CIMA under the MFL.
Administered funds are the third most popular category of regulation under the MFL, though they account for just 3.5 per cent of Cayman Islands funds. Under this category, the mutual fund designates a principal office in the Cayman Islands at the office of a Cayman Islands based licensed mutual fund administrator. The responsibility for regulatory oversight for Administered Funds is largely delegated to the licensed mutual fund administrator who must maintain certain principles of sound reputation.
Licensed funds are the rarest under the MFL with only 0.9 per cent of Cayman regulated funds registered under this category. A fund promoter manager would usually choose this category if the fund was intended to be a retail fund offered generally to the public outside the Cayman Islands, with its administrator and/or manager and other key service providers located outside the Cayman Islands. A Cayman Islands mutual fund that is not eligible for regulation as a section 4(3) registered fund or an administered fund and is not exempt from regulation must be licensed under section 5 of the MFL.
Licensed funds are rarely encountered in practice as retail investment funds are normally set up as onshore funds in accordance with the regulatory requirements of their relevant home jurisdictions. However, one of the main exceptions to this practice has been in Japan, where the use of licensed funds structured as Cayman Islands exempted unit trusts has been historically popular. This type of category is usually only chosen by well-known financial institutions.
Certain Cayman Islands mutual funds that would otherwise be subject to registration or licensing are exempt from the requirements of the MFL if they fall within the scope of the available exemptions.
The categories of mutual funds that are exempt from registration or licensing are:
Cayman Islands Mutual Funds (other than master funds)
- The equity interests may not be held by not more than 15 investors
- A majority of investors are capable of appointing or removing the operator (ie the directors, trustee or general partner) of the fund
Mutual Funds Not Incorporated or Established in the Cayman Islands
- Make an invitation to the public to subscribe for equity interests in the Cayman Islands by or through a person who is the holder of a licence under the SIBL for a regulated activity specified by CIMA for the purposes of the exemption
- Those interests are listed on an approved stock exchange or the fund is regulated by a non-Cayman Islands regulator approved by CIMA for the purposes of the exemption.