How to Start a Hedge Fund in the Cayman Islands
Updated on Monday 22nd February 2021
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A great location for the registration of a hedge fund startup is the Cayman Islands. Currently, the country is one of the leading jurisdictions at a global level on the registration of offshore funds investing in the banking industry. Those who are interested in opening an investment fund in the Cayman Islands should know that this country provides numerous advantages, including on taxation matters. At the same time, investors can benefit from several legal entities that can be used for the registration of an investment fund.
Our team of affiliates in the Cayman Islands can assist any foreign investor with advice on the procedures established for the registration of a hedge fund startup and can provide in-depth information on the overall costs necessary for the incorporation of a fund in this jurisdiction, which can depend on the type of vehicle that was selected by the investors.
Legal framework for hedge funds in the Cayman Islands
The legislative framework for investors interested in how to start a hedge fund or any other investment fund is the Mutual Funds Law. Its implementation falls under the supervision of the Cayman Islands Monetary Authority (CIMA), the main regulatory body for investment vehicles registered here. A wide category of investment funds has to be registered with CIMA, such as mutual funds, exempted companies, or offshore funds.
Legal forms under which a hedge fund can be created in the Cayman Islands
Before setting up any type of investment fund in the Cayman Islands, an investor must consider a few aspects. One of them is related to choosing a business form under which the fund will operate, and which needs to be incorporated with the Companies House. Among these, we can mention the following:
- the limited liability company,
- the limited partnership,
- the unit trust.
These are the most common corporate and non-corporate legal forms for creating a hedge fund in the Caymans.
Each type of entity can be created as a fund or can be registered as part of a fund (umbrella fund). The manager does need to be a Cayman Islands resident. Also, after registering the legal entity and setting up the fund, the authorization must be obtained with the Monetary Authority in the Cayman Islands (CIMA).
If you are interested in creating a hedge fund or any other type of investment fund in the Cayman Islands, our affiliates there can help you. They can also advise on the types of structures you can use and register them on your behalf.
Why open an investment fund in the Cayman Islands?
Prior to deciding on the jurisdiction in which the fund should operate, foreign investors should take into consideration the competitive advantages that are available in the Cayman Islands. One of the main reasons for opening an investment fund in the Cayman Islands is given by the wide range of funds that are registered here. For example, it is necessary to know that the country is the leading destination for offshore funds, as 80% of the world’s offshore funds are set up here. Besides this, the Cayman Islands offers the following:
- the regulators of the investment fund market in the Cayman Islands are very flexible and efficient;
- the Cayman Islands is included on the “White List” of the Organization for Economic Cooperation and Development (OECD);
- the country is a contracting state of 19 tax information exchange agreements;
- it benefits from a stable economy and flexible investment legislation.
You can find out the steps for opening a hedge fund in the Cayman Islands from the infographic below:
The hedge funds in the Cayman Islands can be registered under one of the following legal entities: company, unit trust or a partnership. As a general rule, most of the hedge fund startups in the Cayman Islands are registered as open-ended alternative investment funds, which refer to the fact that the investors will be allowed to redeem their investment. Investors may find out more details on the advantages of open-ended and closed-ended structures from our magazine.
What are the main types of mutual funds in the Cayman Islands?
Most of the funds that are registered in the Cayman Islands fall under the regulations prescribed by the Mutual Funds Law. As a general rule, it is important to know that the majority of the hedge fund startups registered in the Cayman Islands are regulated by this law, which is also applicable in the case of open-ended investment funds (this legislation does not regulate closed-ended funds).
The Cayman Islands provides four main categories of mutual funds – exempt mutual funds, registered mutual funds, administered mutual funds, licensed mutual funds. Our specialists can provide more details on how to start a fund operating under one of the above-mentioned vehicles and may also advise on the main documents that have to be submitted in each case.
What are the statistics on funds in the Cayman Islands?
As we presented earlier in this article, investors can set up a wide range of investment funds in the Cayman Islands. Those who are interested in opening a hedge fund startup or another type of fund in this country should know that the market is very diversified at the moment, being represented by the following types of funds:
- in 2017, the country had a total of 7,331 registered funds;
- in 2018, the number of registered funds grew at 7,654;
- in 2017, there were 2,816 master funds operating in the Cayman Islands;
- by 2018, the number of master funds increased, reaching 2,946;
- at the level of 2010, the total number of funds operating in the Cayman Islands was of 9,438;
- by 2017, the total number increased to 10,559, while in 2018, it reached 10,992.
Why register a hedge fund in the Cayman Islands?
There are a number of reasons for which the registration of a hedge fund startup is recommended in the Cayman Islands. For example, investors can rely on the high quality of services that are delivered by specialists in the field, which can refer to attorneys, fund managers, accountants, fund administrators, and others.
Another important advantage is given by the fact that the formation of a fund is very fast compared to other jurisdictions, as the fund can be registered in one working day, once the company’s statutory documents are drafted and signed. Besides these, investors can benefit from a set of tax exemptions, as a set of taxes are not applicable in the Cayman Islands.
It is worth knowing that the country does not impose an income tax, corporate tax, capital gains tax, or withholding tax. Investors must also consider that they can easily transfer their funds registered here to other jurisdictions since the country does not impose any restrictions on the transfer of such funds.
Additional advantages can be found in the fact that there are no residency requirements for the management of the fund; this means that the fund’s directors or officers can have any nationality and they do not have to provide any papers stating their Cayman Islands nationality/residency.
This regulation is extended to the fund’s administrators and custodians, with the exception of those that administer funds that were incorporated under the Mutual Funds Law. Here, we mention that the accounts of the funds registered under this law have to be audited by a local audit company.
With regards to the annual general meeting, there are no legal requirements to have this meeting organized in the Cayman Islands; more importantly, the local legislation does not stipulate any requirement for holding an annual general meeting in the case of a fund that operates as an exempted company in the Cayman Islands.
What are the taxes for the registration of a hedge fund in the Cayman Islands?
Businessmen who are interested in how to open an investment fund in the Cayman Islands have to consider the taxes and fees associated with the registration of the structure. Although a hedge fund startup benefits from numerous tax exemptions, investors have to expect the payment of various registration fees; the basic fees are presented below:
- the incorporation of the fund has an initial set-up fee of $731,70;
- the issuance of a tax exemption certificate has a fee of $1,890.27;
- the fund must appoint directors and their registration with the local institutions requires the payment of a fee of $91,46;
- another fee that must be paid during the registration of the fund is the stamp duty, which is imposed at a value of $60,98;
- the issuance of certified copies of the certificate of incorporation of the fund costs $365,85;
- the administrative fee that must be paid with CIMA upon incorporation is of $365,85;
- the registration fee requested by CIMA is $4,268, which must be paid on an annual basis.
What are the requirements for appointing directors in the Cayman Islands?
When referring to the fund’s directors, it is necessary to know that they are regulated under the Directors Registration and Licensing Law and the Directors Registration and Licensing Regulations; these rules of law stipulate that the fund’s directors and any proposed directors have to be registered with CIMA.
This is a legal requirement in the process of appointing Directors in a local hedge fund. Provided that the fund will operate as a regulated fund, investors must appoint at least two directors; in the case of unregulated funds, the directors can be appointed without the prior approval of the institution.
The following video offers a short presentation on how to start a hedge fund in the Cayman Islands:
Taxation of hedge funds in the Cayman Islands
As mentioned above, the Cayman Islands offer plenty of advantages from a taxation point of view, and these extend to hedge funds. It should be noted that the authorities here do not levy any corporate, capital or withholding taxes when it comes to corporate entities used for the creation of any type of fund. On the other hand, there are no inheritance taxes when it comes to non-corporate entities such as trusts.
With respect to the entities used to create hedge funds, these can also benefit from other tax exemptions for at least 20 years in the case of companies and 50 years for limited partnerships and trusts. However, it should be noted that the Cayman Islands do not have any double taxation agreements, therefore there are no tax exemptions or deductions under such treaties. This is the main reason why the authorities here compensate here through their own tax benefits offered to foreign investors.
When it comes to hedge fund managers, there are two aspects to consider and they have to do with the residency of the administrator, as the income of the fund which is handled by a foreign manager will be taxed in the home country of the manager or investor in the case of foreign citizens or companies, while the income of Cayman Islands residents will be subject to the tax treatment applicable here.
Any tax issue related to the levies imposed on hedge funds, investors and managers can explained by our partners in the Caymans.
Hedge fund managers in the Cayman Islands
Apart from the legislation related to the number of managers of any type of investment fund in the Cayman Islands, there is also the matter of whether the administrators can be natural persons or companies. Luckily, the rules here allow both individuals and management companies resident in any country of the world to provide their professional services and act as hedge fund managers. These can be either lawyers or accountants or firms that operate in these fields, however, they must comply with the regulations imposed by the Securities Investment Business Act.
Such managers must obtain a securities investment business license which is subject to an annual fee of at least 10,000 USD, however, exemptions from this license can also be obtained under certain circumstances.
When it comes to the taxation of Cayman Islands hedge fund managers, it should be noted that there is a zero-tax policy that applies to hedge fund managers not registered in the Cayman Islands operating as exempt companies, limited partnerships, or exempt trusts. The exemption is granted based on a declaration of the manager that the services provided by the company are mainly located outside the country. However, these must consider the laws imposed in their home countries where different tax rules apply and income, capital gains or withholding taxes many be enforceable.
With respect to resident managers and management companies, these will not be subject to any tax that falls within the limits of the law, as presented above. This is why, natural persons who want to provide investment fund advisory services can apply for work permits and relocate to the Cayman Islands where they can benefit from the available tax exemptions as residents.
If you have any questions about the taxation of hedge fund managers and management companies in the Cayman Islands, you can discuss them with our local partners who can also provide updated information on these matters.
How can one register an open-ended hedge fund in the Cayman Islands?
Businessmen interested in the procedure on how to start a hedge fund in the Cayman Islands should know that the vehicle must have a maximum of 15 investors, following the regulations prescribed in Section 4 (4) of the Mutual Funds Law. In this particular case, the investment vehicle is not required to register with the CIMA. At the same time, the fund is not legally required to submit its audited documents.
However, investment funds that fall under the regulations available in Section 4 (3) will be required to register with CIMA. At the same time, investors will need to draw up the company’s statutory documents and to set up an initial investment capital established at $100,000. If the fund is set up as a registered fund (the Cayman Islands offers the possibility of registering other classes of funds – administered funds and licensed funds), the minimum capital requirement per each investor will be $100,000.
More information on the legal requirements that have to be met when starting a hedge fund here can be provided by our team of affiliates in the Cayman Islands. Investors searching for a suitable jurisdiction for hedge fund startup are invited to visit our online magazine for further information related to this topic, as our editors will provide new information referring to investment funds on a regular basis.