Size Matters


By: Alric Lindsay, Cayman Counsel, Independent Director

www.cidirector.com

Size matters for a new corporate offshore fund. Packaging is also important, as prospective investors may not invest in a fund unless reputable service providers are appointed and the proper infrastructure is in place. Below are two options for a start-up manager to consider for a Cayman domiciled vehicle.

Emerging Manager Platform

An emerging manager platform is designed to facilitate a quick, low cost set-up (around USD 5,000, excluding fees in relation to auditing the financial statements in respect of the relevant portfolio). Apex Fund Services runs such a platform, appropriately named the “Cayman Emerging Manager Platform” and it works as follows:

1. There is one legal entity, constituted as a segregated portfolio company.

2. Segregated portfolios are created, the terms of which are set out in a detailed supplement or offering document, tailored to the needs of each start-up manager. This includes the investment objective, strategy and risks associated with the relevant portfolio.

3. A big 4 firm is appointed as auditor, Apex acts as administrator and the investment manager is an existing entity that has a track record for several years managing similar platforms in other offshore jurisdictions. The directors are also well-known to Apex. A prime broker or custodian may also be appointed.

4. The start-up manager enters into an investment advisory agreement with the investment management entity referred to above. This engages the start-up manager with respect to the segregated portfolio specifically designated for him.

After the segregated portfolio supplement is finalized, the relevant service agreements are signed and capital is in place, investments may commence. This type of structure enables a manager with little capital to trade immediately.

Hopefully, a good track record will be established and the strategy can be sold to prospective investors (institutional, sophisticated or high net worth) who may be interested in repackaging the product into a stand-alone fund.

Stand-Alone Fund

Assuming that positive returns are achieved and the manager continues to increase assets in respect of a segregated portfolio, he may either remain on the platform or restructure into a stand-alone fund corporate Cayman fund as mentioned above. If the latter route is chosen, the opportunity may also be taken to select independent directors, change auditors or appoint other service providers. In any event, it is likely that the manager will be paying somewhere in the region of USD 10,000 in professional legal fees to set up the new fund.

Managers should anticipate having to pay this type of retainer to any boutique or mid-sized Cayman law firm. The largest firms may charge anywhere in the range of USD 10,000 to USD 20,000, depending on that particular’s firm’s assessment of the engagement. A budget should also be made to cover company registration, regulatory expenses and disbursements.

Ultimately, the benefits of domiciling in Cayman, which has an excellent infrastructure, branded service providers (including auditors, law firms and administrators) and close proximity to other major financial centres, will outweigh any initial costs. The fact that thousands of other hedge funds have also chosen Cayman as home also supports the argument that size does matter.

Next Steps

A new manager contemplating the above options should seek legal and tax advice in the relevant jurisdiction before taking any steps. If any of these aspects are ignored, then the structure may be compromised.

This article originally appeared on the South Florida Hedge Fund Managers Blog.