The Cayman Islands entered the current era of alternative investment with its Mutual Funds Law passed in 1993. This law paved the way for development of the broad range of investment and securities businesses now offered in and from the Islands.
On November 29, 2005, the Cayman Islands registered its 10,000th fund, which also happened to be one of the numerous funds transferred from other jurisdictions to take advantage of exemptions Cayman has under the European Union Savings Tax Directive (EUSD) [see detail below].
By the end of 2006, the number of registered funds was around 12,000, approximately 8,000 of which were active. An estimated 95% of these funds are categorised as hedge funds. With over 55% of the world’s active hedge funds now registered in the jurisdiction, this makes the Cayman Islands the world’s foremost domicile for hedge funds.
The vast majority of Cayman’s fund industry comprises funds marketed to sophisticated and high net worth investors. Only a tiny fraction of its funds are marketed to the general public as retail funds.
Hedge fund assets are now estimated to total more than US$1 trillion worldwide amounting to two per cent of global investment assets. This means that over US$500bn worth of hedge fund assets are domiciled in the Cayman Islands.
Factors that have contributed to Cayman’s ascent in the fund industry include:
- No direct taxes or exchange controls
- Exemptions under the European Union Savings Tax Directive
- No VAT/GST that service providers in other jurisdictions have to charge
- Fund vehicles and the securities offered are internationally recognised and accepted
- Funds can be brought to market very quickly [entities formed on the day of filing]
- Professional services for hedge funds are readily available in the Cayman Islands
- The Cayman Islands Stock Exchange [CSX] enables funds to be listed locally
- CSX listings may also be traded on London Stock Exchange International Equity Market
- Regulation is light but effective
- No regulatory consent is required in respect of
- Investment policy
- Prime broker arrangements
- Content of offering memorandum
- Circulation of offering memorandum
There is a statutory requirement for full and proper disclosure in the offering documents of all information necessary to enable a prospective investor to make an informed decision both in respect of the investment and the involvement of service providers. This arrangement reduces the need for regulatory consent.
The legislation governing hedge funds and mutual funds is the Mutual Funds Law and this was drafted on the clear principle of "caveat emptor" [buyer beware] or acceptance of risk by the investor. This is not unusual. The same principle applies to real estate investment in most common law countries, including the Cayman Islands and the UK.
Any fund that carries on business in or from the Cayman Islands must either comply with one of three registration alternatives or be within the class of funds that is exempt from this requirement. Most hedge funds register under section 4(3) of the Mutual Funds Law where the minimum investment per investor is not less than US$100,000 or where the equity interests are listed on a recognised stock exchange, including the Cayman Islands Stock Exchange.
The minimum investment was raised at the end of 2006 from US$50,000 to US$100,000. This was to address concerns raised by the International Monetary Fund (IMF) and the International Organisation of Securities Commissions (IOSCO) to bring the Cayman Islands into line with the rules in many other jurisdictions. However, pre-existing funds are not affected by the change. Furthermore, pre-existing funds can become segregated portfolio companies or otherwise make further share offers with a minimum investment of US$50,000.
European Union Savings Tax Directive – Exemptions
Approximately 98 percent of funds domiciled in Cayman are exempted from the reporting obligations of the EUSD.
The EUSD obligations require that paying agents provide information for EU tax authorities on the amount of interest payments on savings income to or for an individual who is a tax resident of an EU member state, together with details of the recipient. However, persons who are not resident for tax purposes within the EU, including corporate persons, certain trusts, partnerships, investment vehicles and institutions that do not fall within the narrow scope of the definition, are unaffected.
These specific exemptions [negotiated as terms for application of the EUSD to funds domiciled in Cayman] have increased Cayman’s attractiveness compared to jurisdictions like Bermuda and the Bahamas that are not subject to the EUSD.
In particular, Switzerland’s rules as to how the directive is applied mean that it is far easier for Swiss banks to invest in jurisdictions that are subject to the EUSD. Cayman’s combination of being subject to the directive yet largely exempted through concession agreements [particularly for hedge funds] allows the best of possible worlds. Swiss institutions can establish funds or invest in an international financial centre without significant burdens that would otherwise apply to Swiss financial institutions.