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Getting Started: Setting up the typical Exempt Company Hedge Fund in the Cayman Islands

11 February 2011

To start a hedge fund, the hedge fund manager needs to set up the hedge fund entity (unit trust, exempt company or partnership) and the management company. Choosing a jurisdiction is one of the very first questions that come up; and the Cayman Islands is usually at the top of the list of jurisdictions of choice.  The Cayman Islands is the world leader as a hedge fund domicile for a number of reasons including being a public/private business friendly environment with a stable government, well developed financial services laws and a mature UK based common law system.  There are no corporate gains, income or withholding taxes of any nature.  For these reasons along with several others, many funds have selected Cayman as their home.  This article is focused on the typical exempt company structure and the typical Cayman Islands Monetary Authority (CIMA) fund and management company registration.

The Hedge Fund Investment Company

The first step for the hedge fund manager is to draft the offering document which sets out the terms of the offering of the fund’s shares.  The manager should engage their onshore legal counsel for the offering document.  The offering document is then shared with Cayman counsel for comment and finalization.  The Cayman counsel should then prepare the Memorandum and Articles of Association, which will be used to set up the company, to conform to the offering document.

 The next step is to incorporate the exempt limited liability company with the Registrar of Companies and registered the fund with the CIMA.  The majority of funds are registered with CIMA under Section 4(3) of the Mutual Funds Law (2009 Revision).  Funds may be exempt from registration and the typical registration exemption includes funds with 15 or less investors.

The Registrar of Companies fees are set out below for the exempt limited liability company.

Initial set up fees:

  • US$ 731.70 - Incorporation - government filing fee payable to the Registrar of Companies in the Cayman Islands (Note that registration fees are charged by the Registrar of Companies on a tiered basis i.e. the fees depend on the amount of authorized share capital of the company.  The fee of USD 731.70 is based on standard authorized share capital of USD 50,000 (this can be divided into 5,000,000 shares of par value USD 0.01, for example).) 
  • US$ 1,829.27 – tax exemption certificate - optional (this provides that the management company will be exempt from taxes in the Cayman Islands) 
  • US$ 60.98 – register of directors 
  • US$ 365.85 – certified copies of Certificates of Incorporation 

Annual fees:

  • US$ 731.70 - Annual Return (annual fee payable to the Registrar of Companies in the Cayman Islands)

The CIMA fee for initial and annual registration is US$3,658.

The company can be set up in as little as 24 hours with the Registrar of Companies once all documentation is submitted complete and accurate.  CIMA registers the fund on the day it is submitted provided all documentation is complete and accurate.

The Hedge Fund Investment Management Company

Managers may have an investment company formed in another jurisdiction, if that is the case then that company can be used as the management company.  It is not necessary to have a Cayman management company in that case.  Should the manager not have a management company and desires to form it in Cayman, then the first step is to engage a Cayman attorney to prepare the Memorandum and Articles of Association.

The management company is also typically established as an exempt limited liability company with the Registrar of Companies and licensed by CIMA under the Securities Investment Business Law (2004 Revision) unless it qualifies for an exemption from registration.  Typically, an investment management company would seek to fall under paragraph 4 of the Fourth Schedule of the Securities Business Law (2004 Revision) which requires that the investment management company carry on securities investment business exclusively for one or more of the following classes of person:

(a)   a sophisticated person (this includes a fund registered with CIMA);

(b)   a high net worth person; or

(c)   a company, partnership or trust (whether or not regulated as a mutual fund) of which the shareholders, unit holders or limited partners are one or more persons falling within (a) or (b).

If the investment management company qualifies for an exemption, it will not need to obtain a license for investment business.  However, the company will need to file with CIMA declaring that the investment manager is an “excluded person” and pay an initial and annual CIMA filing fee of USD 4,268 (KYD 3,500).

The Registrar of Companies exempt company fees for initial set up and annual fees are the same as set out above for the hedge fund investment company.

Set up timeframe for the management company is similar to the investment company set out above.

Service Providers To Assist the Hedge Fund Manager

A company manager/formation agent can provide service in getting the companies mentioned above formed on behalf of the fund manager and will be able to discuss and assist in setting up other company structures (unit trusts and partnerships) that may be desired.  Formation agents’ fees typically range from US$800 to $1,500 (approx) for the set up of each company with the Registrar of Companies.  Formation agents also typically provide registered office (every Cayman company must maintain a registered office in the Cayman Islands – this is used for service of legal process, maintaining the statutory records of the company, etc.) with annual fees ranging from US$800 to $1,500 (approx).

Corporate secretarial services are usually provided by the company manager for a fee of approximately US$ 6,000 per annum per company.  Generally, corporate secretarial services include provision of keeping the company’s statutory books and records, holding and recording board and shareholder meetings, and handling corporate filing and publishing.

The hedge fund investment company is required to have at least one director but usually two directors are appointed.  For the management company, two directors are required and it is usually a member of the management company and one independent director.  Although the investment fund company may have a corporate director, for good corporate governance reasons and shareholder protection enhancement, the hedge fund company should have two natural person independent directors.  There is no nationality or residence requirement for directors; however, it is best practice to have at least one resident director that is knowledgeable about the local laws governing the companies.

Professional legal services in relation to both companies should be consulted and will include providing the relevant advice regarding formation, preparing, reviewing, commenting upon and finalising of detailed memorandum and articles of association, reviewing, commenting upon and assisting in the finalisation of any investment management agreement, subscription agreement, administration agreement, offering memorandum and other documentation. Legal fees typically range from US$10,000 to $25,000 in relation to investment fund company and from US$3,000 to $5,000 in relation to the management company.

Apex Fund Services (Cayman) Ltd. provides Cayman Islands company formation and fund administration services.  Apex Fund Services was formed in 2003 with 21 offices throughout the world and $16bln under administration.

The above information is provided as general information only and may not be current, legal counsel should be taken before commencing any action in relation to the above.