(www.hedgeco.net) – Although there are many offshore jurisdictions that cater to hedge funds, the differences between them can be hard to discern at first glance. The following is a brief descriptionof some of the salient features of three of these jurisdictions, the Cayman Islands, the British Virgin Islands and Jersey.
Cayman Islands (www.cimoney.com.ky)
Funds in the Cayman Islands are regulated by the Mutual Funds Law (2003 Revision) and fall under the auspices of the Cayman Islands Monetary Authority (CIMA). All funds operating out of the Cayman Islands are required to be registered with CIMA, with the exception that funds with no more than 15 shareholders (or partners or unit holders) are not required to be registered, provided that a majority of the investors must be capable of removing the operator of the fund (director, general partner or trustee, as the case may be). Practically speaking, this exception is most often used in relation to the master fund in a master-feeder structure. (Note also that funds with one investor and closed-end funds do not meet the definition of �mutual fund� and are, therefore, also not subject to regulation).
There are three routes to regulation: (1) successfully apply for, and maintain, a license under the Mutual Funds Law (a �Licensed Fund�); (2) engage a licensed Mutual Fund Administrator to provide the fund with its principal office in the Cayman Islands (an �Administered Fund�); or (3) register under section 4(3) of the Law by establishing that (a) the minimum investment is US$50,000 or (b) the fund is listed on an approved stock exchange or over-the-counter market (a �Registered Fund�).
Registration will require all of the fund documents to be submitted to CIMA for consideration � the licensing process can take up to a week, but the license itself will be dated as from the date of submission.
It�s important to note that CIMA has strict requirements for the ongoing duties of a registered fund. The annual fee of US$2,440 must be paid promptly, audited accounts must be submitted within six months of year end and any change in any material aspect of the fund must be notified in writing using the form MF1 within 21 days; CIMA levies hefty penalties for failure to comply with these requirements.
The Cayman Islands are generally perceived as a strictly regulated jurisdiction, with a solid infrastructure, swift turnaround time and a price tag that�s a little higher than some of its competitor jurisdictions. It�s worth noting that there is no requirement for the directors to be based in Cayman (as in, for example, Bermuda), and corporate directors are allowed but not really encouraged. Additionally, the auditing work does not need to be performed in Cayman but a local auditor must sign off on the audited accounts.
British Virgin Islands (www.bvifsc.vg)
The British Virgin Islands (BVI) licenses funds under the Mutual Funds Act, 1996 and falls under the oversight of the Financial Services Commission (FSC). Funds that operated out of, or sell to individuals based in, the BVI are required to obtain a license from the FSC; save those that do not meet the definition of a mutual fund such as funds with only one investor and closed-end funds.
The FSC issues three type of licenses to funds in the BVI: (1) a license to operate as a public fund, which has very strict requirements and is generally not considered appropriate for hedge funds; (2) a license to operate as a �Private� fund, in which case the fund must have less than 50 investors or only have investors that are brought to the fund �on a private basis�; or (3) a license to operate as a �Professional� fund, similar to a Regulated Fund in Cayman, the requirement here is that the majority of investors must make an initial investment of no less than US$100,000 and all investors must meet the definition of a �professional investor� under the Mutual Funds Act.
The FSC will need to consider all of the fund documentation prior to granting a Certificate of Recognition to the fund. In order to maintain the FSC�s approval, it�s necessary to continue paying the annual fee of US$350 for the fund and to notify them of any changes to the fund�s registered agent and registered office in the BVI, and its principal business address.
The BVI is generally perceived as a model jurisdiction for light but effective regulation, and the cost is certainly lower than many other jurisdictions. There is no requirement to file audited accounts (unless the fund is licensed as a public fund), and directors do not need to be based in the BVI, nor do they need to be personal, although it should be noted that the FSC does not encourage a board with a majority of corporate directors.
Jersey (www.jerseyfsc.org)
The Jersey Financial Services Commission (JFSC) in terms of the Collective Investment Funds act, and its correlative regulations, oversees the regulation and licensing of funds in Jersey.
There are a number of options for registration of funds under this, and other, legislation, the majority of which have been available in Jersey for many years. There is, however, only one type of fund which is relevant to this article, and that is the Jersey Expert Fund. In order to be recognized by the JFSC as an Expert Fund, all investors must meet the definition of expert investors, namely, by qualifying as professional or institutional investors, by having a net worth greater than US$1 million, or by making an investment of no less than US$100,000.
The JFSC will examine the fund documents, paying particular attention to the details and disclosures contained within the offering prospectus; the appointment of a regulated Jersey manager, administrator or trustee; an investment manager that meets their requirements; at least two directors resident in Jersey and a custodian in Jersey or a prime broker with a rating of A1/P1 or better. Registration in Jersey can take up to 6 weeks and, in spite of the many requirements prescribed, is largely discretionary and funds failing to meet these requirements can still be registered. All material changes need to be notified to the JFSC within 28 days.
Jersey is generally perceived as a highly regulated jurisdiction with close ties to the United Kingdom � it is one of the few jurisdictions to be granted �Designated Territory� status under the UK�s Financial Services Monetary Authority Act, making it highly appealing for certain managers. It is generally more expensive than other jurisdictions and has a large number of retail mutual funds.
Conclusion
Only the fund promoter can determine which jurisdiction is most suitable for a new fund, and factors to consider include the rigidity of the regulatory framework, the requirements for local or pre-approved service providers, the stability of the local government, the quality of legal advice available, the time zone, the requirement for local or non-corporate directors and, of course, the perception of the jurisdiction by investors.
A good place for more information is the websites of the regulatory authorities listed here or local law firms in each jurisdiction, which will be happy to provide you with a wealth of relevant literature.
Gordon Casey
Managing Director
Knight Hedge Ltd.
www.knighthedge.com
gordon@knighthedge.com
Knight Hedge Ltd. provides hedge funds with independent, professional and experienced directors. Contact Mr. Casey or visit the Knight Hedge website for more details.
