To download this guide as a PDF, fill out the form below.
To download this guide as a PDF, fill out the form below.
The Cayman Islands are home to more than 29,000 funds. 70% of the global hedge fund market is made up of Cayman-based funds, and 80% of all new offshore funds are registered in Cayman, with 67% of Cayman funds having US investment managers. The AUM of funds on the island has been estimated at almost $2 trillion.
With so many funds calling Cayman home, one can’t help but wonder why. After all, there are other tax-neutral jurisdictions – Luxembourg, Ireland, Jersey, Guernsey, the British Virgin Islands – and yet Cayman has more than double the number of funds of all those jurisdictions combined. There must be something to it; but how can you know if Cayman is the right place for your fund, or how to take advantage of the unique aspects of this jurisdiction?
The goal of this guide is to help fund managers understand the benefits of Cayman and the opportunities it provides as a fund domicile. We’ll discuss Cayman’s role in the global alternative asset management space and identify key considerations when setting up a Cayman-domiciled fund. We’ll also discuss how the right administrative solutions can set your Cayman fund up for success, no matter where you call home.
The Cayman Islands offer a variety of benefits to alternative fund managers. Whether an individual fund can take advantage of any or all of these benefits depends on the fund type, investors, strategy, and other considerations. These are just a few of the reasons fund managers from all over the world have chosen to establish vehicles in Cayman.
The Cayman Islands have no direct taxes of any kind. That means no corporate, capital gains, income, profits, or withholding taxes. Exempted companies can also apply for a guaranteed tax exempt period so that if taxes are ever introduced, the company will remain tax-free. Some exempt companies have had their tax exempt period endorsed by the government for 20 years, and unit trusts and limited partnerships for 50 years. This tax-free status is one reason Cayman has become the jurisdiction of choice for US-sponsored tax exempt and non-US investors as well as a destination for private wealth from around the world.
Another factor is the efficient flow of capital. Cayman has no exchange controls, meaning funds can be freely transferred into and out of the islands in unlimited amounts, and quickly. Though subject to AML and due diligence considerations (similar to other jurisdictions), the lack of limitations ensures funds won’t have to worry about their growth being stifled, and investors will appreciate the efficiency of fund transfers not being held up.
As a British Overseas Territory, the legal system in the Cayman Islands is derived from British common law and supplemented by local legislation. This makes it easy for US and UK-based managers and investors to understand aspects of the legal system that are comparable to their home countries. Being an English-speaking country and having a legal system based on English common law can make Cayman a more comfortable environment for those doing business there for the first time.
The court system is well-developed and has its own financial services division. With an established judiciary and case law, investors can have peace of mind knowing that if something does go wrong, there is somewhere for them to turn for recourse.
In addition to legal help, the Cayman Islands are home to a well-established and experienced financial sector and a wealth of professional service providers. As the fifth-largest banking center in the world, 40 of the 50 largest banks in the world are represented in Cayman.
Cayman offers a high standard of living that helps it attract some of the best talent in the world, offering professionals access to housing, roads, schools, and health care with no personal taxes. Cayman also has direct links to 18 international destinations, helping connect professionals to the rest of the world through a wide network of gateways to North America and beyond.
A self-governing British Overseas Territory, Cayman is home to a stable government and its own currency, the Cayman Islands dollar, which has a value pegged to the US dollar. Politically and financially stable, Cayman has never relied on income or capital gains taxes, yet has enjoyed budget surpluses for a number of years.
The country has also been given an Aa3 rating by Moody’s due to its low debt burden, high per-capita income, and strong institutional framework. Investors and fund managers can take comfort in Cayman’s stability with the knowledge that there are unlikely to be significant policy changes or political upheaval that could threaten markets.
Founded in 1996, the Cayman Islands Stock Exchange (CSX) is a listing facility for specialized products. Home to more than 7,000 securities, it states its market cap at over $804 billion. It is an affiliated member of the International Organization of Securities Commissions (IOSCO) and is recognized by HMRC in the UK. CSX also has a dedicated regulator, the Stock Exchange Authority.
Cost and tax efficiency are major deciding factors for fund managers choosing a jurisdiction, and the cost of forming and maintaining Cayman-based entities is competitive with other fund jurisdictions.
Cayman also allows for same-day entity incorporation. Entities can be formed the day of filing, without lengthy regulatory or filing procedures. Obtaining regulatory approval for a fund is a quick and efficient process, with private fund approvals granted in a matter of days, and mutual funds in only a few weeks. This ensures you can get to market quickly and efficiently.
Another major deciding factor for fund managers is the regulatory framework in which the fund will operate. The Cayman Islands Monetary Authority (CIMA) is well-established and provides a stable regulatory structure without being overly burdensome on the fund industry. CIMA has developed a reputation for being flexible and approachable, understanding the diverse nature of funds and their investors.
Rather than overburdening funds with unnecessary regulation, Cayman’s mature government, regulatory regime, and industry have developed rules that provide enough protection for investors but are easy to understand and meet. That way, funds won’t be slowed down as they grow, instead able to expand as quickly as possible while also allowing for necessary oversight.
Cayman has a long history of implementing best practices for AML/KYC and other due diligence, with specific legislation to combat money laundering and terror financing. This comprehensive legislative framework means procedures are tested and refined so as to operate smoothly and be easy to implement, and also show the government of the Cayman Islands cares about catching bad actors without harming the financial services industry.
The Cayman Islands are a member of the Caribbean Financial Action Task Force (CFATF), a collection of 24 states and territories “which have agreed to implement common counter-measures against money laundering and terrorism financing.” By coordinating and taking a common approach, CFATF’s member states work closely with international organizations and share information to more effectively fight money laundering across borders.
In October 2023, the Cayman Islands were officially removed from the FATF “Gray List,” reflecting an improved commitment to detection and prosecution of money laundering. The listing led to substantial improvements in AML practices and the detection of financial crime, resulting in an improved reputation as a well-regulated and secure jurisdiction.
Cayman law allows for several types of fund structures. All funds can be open-ended or closed-ended; open-ended funds are governed by the Mutual Funds Law, while closed-ended funds are governed by the Private Funds Law, and these two regimes are regulated by CIMA.
The choice of vehicle will generally be dictated by onshore tax and regulatory considerations relative to the investors, management, and trading strategy. The following are some of the most popular fund types for managers based outside of Cayman:
The most commonly-used vehicle for US-based fund managers, a Cayman Islands exempted company is generally an open-ended vehicle where operations are conducted mainly outside the country. A company must be registered to be exempt and receive a license to carry on business.
An exempted company has a flexible structure that does not require annual general meetings, Cayman-resident directors, or naming conventions. Shares may be issued with nominal or no-par value and capital may be expressed in any currency. Companies can also be transferred by way of continuation to/from another jurisdiction. As stated earlier, exempted companies may apply for a continuation of tax-free status in the event taxes are introduced at a future date.
Exempted companies are prohibited from trading in Cayman except in furtherance of business carried on outside the country unless issued a license to carry on business in the Cayman Islands. Exempted companies also cannot subscribe investors from the Cayman Islands unless listed on the Cayman Islands Stock Exchange.
An exempted company must maintain a registered office in the Cayman Islands, and must have at least one director (two if registering with the Cayman Islands Monetary Authority). Directors of companies carrying out securities investment business are required to be registered or licensed by CIMA. No audits or annual general shareholder meetings are required, and meetings can be held outside Cayman.
An SPC is an entity that allows for the creation of separate segregated portfolios. In an SPC, the assets and liabilities of individual portfolios (sometimes called “cells”) are separate from one another and separate from the general assets of the company. There is no co-mingling of assets and liabilities across segregated portfolios, and each segregated portfolio is managed separately.
An SPC must file an annal return like that of an exempted company. In addition, all SPCs must include the term “Segregated Portfolio Company” or “SPC” in the company name. The SPC can issue shares or dividends related to a single portfolio without affecting any other portfolios, making this a useful vehicle for those working across asset classes and investor bases.
An ELP is a type of partnership suited for private equity, real estate, and other closed-ended funds. An ELP has no separate legal personality, and neither the entity nor the partners are subject to taxation in the Cayman Islands. There must be a minimum of one general partner and one limited partner, with all management responsibilities vested in the general partners. The company name must include the words “Limited Partnership” or “LP.”
At least one general partner must be a “qualifying general partner,” usually a Cayman Islands exempted company, a non-Cayman company or LLC registered in Cayman as a foreign company, or a non-Cayman limited partnership registered in Cayman as a foreign limited partnership. Another ELP can also serve as a qualifying general partner. US-based managers often use a Delaware LLC as the general partner of an ELP.
An ELP must have a registered office in Cayman. The general partner must be incorporated or registered in Cayman prior to registration of the ELP. As an ELP does not have a separate legal personality, all contracts must be entered into by a general partner on behalf of the ELP. All assets are held in the name of the general partner, and any debt or obligation incurred by the GP in the course of business shall be a debt or obligation of the ELP.
Neither the ELP nor any partner is subject to any direct taxation, and the ELP can apply for an extension of tax-free status for up to 50 years. An annual registration fee must be paid every year, and all books of account must be retained for five years.
Based on a Delaware LLC and often used as the GP for an ELP, a Cayman Islands LLC combines elements of an exempted company and an ELP. Like an exempted company, it has a separate legal personality, but like an ELP, the members can determine in the LLC agreement how profits and losses are to be allocated and when distributions are to be made. Existing companies can be converted into LLCs or transferred by way of continuation to/from the Cayman Islands.
An LLC is suitable for private equity or other closed-ended funds, and can offer simplified administrative needs because of its flexibility. There is no requirement for an annual general meeting or for Cayman resident directors, capital may be expressed in any currency, and the LLC agreement can be altered without restriction. Like an ELP, an LLC can apply for an extension of tax-free status for a period of up to 50 years.
An LLC can be managed by any of its members and can also appoint a non-member manager or board of directors. Managers need not reside in Cayman, though the LLC is required to maintain a registered office in the Cayman Islands.
A popular vehicle for hedge funds, a Cayman Islands Unit Trust is often used by Japanese fund managers and investors because of its similarity to Japanese domestic trusts. A unit trust has an independent professional trustee responsible for oversight of the fund that holds legal title to the fund’s assets. This can be an attractive option for investors who appreciate having an independent fiduciary controlling the fund’s governance.
While mainly popular for attracting Asian investors, unit trusts can be a useful structure depending on the fund and its goals. As with all fund types, it’s good to think about the investors being targeted and the investment strategy when considering the type of fund structure to pursue.
The process of setting up a Cayman fund is fairly straightforward and can be accomplished quickly. The basic requirements are offering documents or marketing materials that set out key material information about the offering.
As discussed, the fund structure is crucial, and it’s important to understand the specific rules for each fund type. Working with experienced legal experts who have expertise in the Cayman legal system is necessary.
There are many choices that must be made when setting up a Cayman fund, such as the selection of legal counsel, fund administrator, banking partners, directors, and auditors. The choice of administrator is especially important because the right administrator can help guide the fund manager through the entire process.
Thinking about your fund’s growth strategy and future plans may affect how you choose to select service providers. Do you want to diversify by working with an array of providers, or consolidate services and get everything under one roof? When thinking about fund administration, there are advantages to getting a comprehensive solution that can coordinate a variety of services.
While certain aspects of Cayman are unique, one important element of selecting a fund administrator is the same all over the world: you need an administrator who understands the jurisdiction and its regulations. Your fund administrator doesn’t have to be based in Cayman, but does have to understand local laws and stay on top of regulatory changes.
Since 2020, all private funds have to be registered with CIMA and follow updated rules on Corporate Governance for Regulated Entities. This involves a governance framework, which will vary by fund size and type – there is no “one size fits all” solution.
Every fund has different needs, which is why you need an administrator that takes the time to look at each fund differently, rather than trying to sell an “out of the box” solution that either won’t meet all your needs or will include elements you don’t require.
A major decision to make at the beginning is whether you want to work with an administrator in Cayman or one based in your jurisdiction. This may depend on where your home base is. Having an administrator that works the same hours you do and speaks the same language can provide benefits from a customer service perspective. On the other hand, an on-island administrator can help with speed to market and will likely offer much greater support when it comes to understanding local regulations and changes in Cayman law, as well as the country’s business culture. A well-established fund administrator with strong ties to the local business community can also provide access to other well-established service providers.
Thanks to JTC’s global reach, there’s no need to choose between a local presence and home support. JTC has had an office in Cayman since 2013, and has longstanding relationships with many other service providers. With JTC’s coordinated approach, our fund clients benefit from on-island expertise paired with customer service in their home countries.
Another big decision is whether to spread out the many tasks required among a variety of service providers or consolidate them under one roof. While diversification will allow you to pick and choose the best option for each particular job, coordination can be an issue, as can cost. You also have to find the right provider for each service, which can be difficult.
Instead of forcing fund managers to choose between getting the best help and keeping costs down, JTC has developed an innovative way of approaching fund administration that combines our services with those of trusted partners to help guide fund clients through the entire process from beginning to end.
In the Cayman Islands, JTC provides a comprehensive range of services for international fund clients. Our services have been developed and expanded over many years in order to meet the needs of the offshore fund industry, and our knowledge of the island and its incorporation processes is complemented by a wealth of experience in providing premium administration services.
Instead of forcing clients to patch together solutions to problems as they arise, JTC’s Liaison Officer Approach guides fund managers through the entire process and anticipates their needs to make the whole process easier, consolidating all services into a coordinated system for Cayman fund management.
By working with a single provider, onboarding will be faster, and you can take advantage of JTC’s innovations in the onboarding process. Because we’re helping you from start to finish, our team gets to know your processes intimately, allowing us to quickly resolve issues, and our “One Contact, One Team” approach to client services means you’ll always know who to call.
JTC is able to work across different asset classes and provides specific solutions for each. With our customizable administration, you can add the services you need as you go, without paying for those you don’t. Beginning with fund launch, you can take advantage of our expertise in the offshore space, and our relationships in Cayman will allow us to suggest other service providers as needed.
The JTC fund administration solution is designed to improve efficiency by employing institutional-grade services to reduce overhead. The less time you spend on administrative work, the more you can spend ensuring the fund delivers on performance.
As you grow, we can help you scale by adding other services or providing expertise on expanding into new markets and asset classes. By fully integrating with your fund’s processes, we can improve efficiency and aid growth both in Cayman and beyond. At JTC, we don’t just offer a long list of solutions – we provide a dedicated team that collaborates on finding the best solutions for your fund to help you build a successful future.
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