Introduction to hedge fund vehicles

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Introduction to Hedge Fund Vehicle Options in the Cayman Islands

When it comes to structuring hedge funds from an offshore perspective, there are three crucial constitutional elements to consider:

  1. Types of Vehicle Used: The choice of the fund's legal structure.

  2. Structural Configurations: How the fund is organized and operated, especially in alignment with market standards.

  3. Regulatory Treatment: How these vehicles are treated and regulated in the jurisdiction where they are established.

While these three areas interconnect, it's valuable to address each independently because they collectively define the specific nature of a hedge fund and set it apart or align it with others in the market. In the Cayman Islands, the primary consideration often revolves around the target investor base and the preferences of originators rather than investment objectives and strategy, given that the Cayman Islands' regime offers significant flexibility to accommodate various structural requirements for funds targeting sophisticated investors.

Types of Hedge Fund Vehicles in the Cayman Islands

  1. Exempted Companies (Including Segregated Portfolio Companies): Exempted companies are the most commonly used vehicles for hedge funds. Incorporation is swift and cost-effective, typically taking 24 hours upon receipt of instructions. These companies must maintain a registered office in the Cayman Islands, keep registers of directors and security interests, and maintain a shareholder register. Importantly, they can issue multiple classes of shares with redemption rights and have share capital denominated in various currencies.

    Segregated Portfolio Companies: Under the Companies Law, an exempted company can apply to be registered as an Exempted Segregated Portfolio Company (SPC). Once registered, an SPC can operate several segregated portfolios, each with its own assets and liabilities. This structure is favored for multi-class, umbrella, master-feeder hedge fund setups, and multi-issuance platforms.

  2. Exempted Limited Partnerships: These are suitable for funds where statutory limited liability is desirable, especially in scenarios where an intermediary entity would obstruct access to gains or losses as offsets against investors' gains or losses in their respective jurisdictions. Exempted limited partnerships can have single or multiple classes of limited partnership interests and are often used as feeders into corporate master funds or as standalone master funds.

    Exempted limited partnerships are highly flexible in their internal structuring and not subject to the detailed rules that apply to exempted companies. They don't possess legal entity status, and the assets and liabilities of partners are held by a general partner on trust for the limited partners.

  3. Unit Trusts: Unit trusts are preferred in jurisdictions where investors receive favorable tax treatment for acquiring units in a trust compared to shares in a company or interests in a limited partnership. They are particularly attractive to Japanese corporate and institutional investors. Cayman Islands trusts law is based on English equitable principles and common law.

    Investors' shares in unit trusts are represented by 'units' that are typically transferable, subject to any trust deed restrictions. The trustee, often a licensed Cayman Islands trust company, is responsible for overseeing trust assets and may delegate investment management to professionals.

In essence, the choice of hedge fund vehicle in the Cayman Islands depends on the specific needs of the fund, its target investor base, and the preferences of its originators. The flexibility and adaptability of the Cayman Islands' legal framework provide a versatile foundation for structuring hedge funds catering to sophisticated investors.

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