Interested in forming an offshore hedge fund or mutual fund? We can help. At HFS we have
streamlined the process and handle all of the steps from choosing the appropriate jurisdiction,
establishing the legal entity, obtaining the appropriate license and opening international bank and
investment accounts for the fund.
HFS was founded with the intent of making the process of “going offshore” simple, affordable and
understandable. Our aim has always been to provide a complete, start-to-finish service so that our
clients can establish offshore structures and accounts without so much as leaving their desks. We have
applied this same approach to establishing offshore licensed hedge funds and mutual funds. From
choosing a jurisdiction for the fund to setting up a trading account and everything in between, we make
the process of establishing an offshore fund straightforward, understandable and affordable. What’s
more, we inform our clients of exactly what the set up and annual renewal costs will be. There are no
surprises, hidden fees or unexpected expenses. The complete, start-to-finish service of establishing an
offshore licensed fund is what we provide.
The Premier Jurisdictions for Offshore Funds: The British Virgin Islands and The Cayman Islands.
Currently there are about a dozen countries around the planet that license offshore investment funds.
These countries range from the Isle of Man and Cyprus in Europe to St. Vincent & The Grenadines and
The Bahamas in the Caribbean. While these jurisdictions might have some niche benefit for random
occasions (for example establishing a fund that is only open to residents of The Ukraine) the vast
majority of the world’s offshore licensed investment funds are established in one of two offshore
financial centers: The British Virgin Islands and The Cayman Islands.
The British Virgin Islands
The BVI is the 2nd most popular jurisdiction for establishing offshore funds, accounting for approximately
25% of the world’s offshore hedge funds and mutual funds. The BVI is a popular locale for establishing
offshore investment funds for the following reasons:
- There are no restrictions on investment strategies or the type of investments or geographic
location of investments.
- There are no restrictions on use of leverage or margin.
- Neither BVI funds nor their investors pay any taxes in the BVI.
- The BVI is a stable political and economic jurisdiction with an excellent global reputation.
- The BVI offers fund types that are suitable for the whole spectrum of fund categories - from
startup funds that can be set up in a matter of days with minimal regulatory requirements to
private hedge funds and retail mutual funds for existing managers with billions in assets.
- BVI funds are not required to have local “functionaries” – directors, investment managers,
administrators, custodians or auditors.
- BVI funds are priced to be ultra-competitive, especially for smaller and startup fund
The BVI splits funds into 2 categories based primarily on the total capital controlled (under
management) by the fund.
1. “Registered” funds are designed as “starter” funds for managers who want to set up a new
fund, test a new investment strategy or for small investment groups (family offices, a tight-knit
group of investors, etc.). As such, Registered funds are much faster and easier to establish and
operate under a greatly simplified regulatory regime. But Registered funds are limited in terms
of how many investors may participate and the total amount of capital/assets that can be
managed. However, if these limits are exceeded the fund can be upgraded to the appropriate
type of fund as needed. There are two types of Registered funds, Incubator funds and Approved
funds.
Incubator Fund: The Incubator fund is the ideal vehicle for starting a new hedge fund
with minimal assets, a small number of investors, to establish a track record or to test a
new investment strategy. An Incubator fund may operate for a specific period of time
(2-3 years) to allow the manager to establish a track record and/or accept additional
investments and then upgrade to a permanent fund type. The specific requirements
and restrictions of an Incubator fund are as follows:
- Maximum of 20 investors.
- Each investor must invest at least $20,000.
- Total capital under management cannot exceed $20M.
- Investors must be presented with a written description of the
investment strategy including an outline of the risks.
- The fund can be set up in a matter of days and does not require an
offering memorandum or licensed functionaries (licensed fund
managers, administrators, auditors, etc.).
- Minimal set up and annual renewal costs.
- The fund is licensed to operate for 2 years (with a possible 1-year
extension).
- The fund may be upgraded to any of the fund types listed below (more
detailed information about these fund types follows) prior to the end of
the 2-year period if the fund manager wants to increase funds under
management or take on additional investors.
- Once the 2-year mark is reached the fund may be upgraded to one of
the following fund types that may operate into perpetuity:
- Approved fund – A maximum of 20 investors, no minimum investment requirement and maximum capital of $100M.
- Professional fund - Only for sophisticated investors who are either employees of the fund or who have a net worth of $1M and invest at least $100,000. No maximum capital.
- Private fund – A maximum of 50 investors, no maximum capital.
Approved Fund: The Approved fund is the ideal offshore investment vehicle for a family
office or a small group of investors such as an investment club. It is similar to an
Incubator fund but allows for significantly more capital. Here are the particulars of the
Approved fund:
- Maximum of 20 investors.
- No minimum investment amount for investors.
- Total capital under management cannot exceed $100M.
- The fund can be set up in a matter of days and does not require an
offering memorandum or licensed functionaries (licensed fund
managers, auditors, etc.).
- Minimal set up and annual renewal costs.
- Must have a Fund Administrator. But the Fund Administrator does not
have to be licensed or located in the BVI and may simply be the client.
- May be upgraded to any of the “Recognized” funds listed below if the
manager wants to increase funds under management or take on
additional investors.
2. “Recognized” funds have no restrictions on the total capital the fund can manage and
therefore are subject to greater regulatory scrutiny. There are three types of Recognized funds.
Professional Fund: This fund is designed for sophisticated investors. Investors must
either be “professional” investors with a net worth of $1 million and must invest a
minimum of $100,000. Or an investor must be an “Exempt” investor, meaning a fund
employee, manager, administrator, promoter or underwriter. For “Exempt” investors,
who are assumed to be knowledgeable and sophisticated concerning investments, there
is no net worth or minimum investment requirement.
Private Fund: This fund is designed for a small to medium size number of private
investors. There is no limit on the total capital the fund can manage, which is true of all
“Recognized” funds. But the fund is limited to either a total of 50 investors or to
bringing on new investors only through private means (i.e. no public advertising).
Public Fund: This fund is designed primarily for established fund managers who wish to
create an offshore fund through which they may publically solicit an unlimited number
of investors and capital. A Public fund may advertise publicly and has no capital or
investor restrictions or minimums.
To begin the process of setting up a BVI Fund please Contact Us. We would be happy to discuss the
options, make a recommendation and then for a Recognized fund (Professional, Private or Public)
provide a customized quote including setting up the BVI entity, applying for the fund license and
assistance with establishing bank and investment accounts for the fund. To establish a Registered fund
(Incubator or Approved), we offer a complete package that is a start-to-finish service including
establishment of the fund as well as bank and investment accounts.
The Cayman Islands
The Cayman Islands is the leading jurisdiction for establishing offshore hedge funds and offshore
mutual funds. It is estimated that over 70% of the world’s offshore funds are located in the Caymans.
The Caymans have many strategic advantages that have made it the preferred choice for offshore fund
formation. Some of the advantages include:
- Flexible and straightforward regulatory framework.
- There are no restrictions on investment strategies or the type of investments or geographic location of investments.
- There are no restrictions on use of leverage or margin.
- Numerous licensed fund service providers operate in the Caymans including agents,
administrators, auditors, banks and brokerages – many of whom are local branches of
multinational corporations. Accordingly, all needed services can be handled locally by
competent and experienced offshore fund professionals.
Neither Cayman funds nor their investors pay taxes in the Caymans.
- The Caymans are a stable political and economic jurisdiction.
- The Caymans are on the OECD “White List” of jurisdictions that have signed tax exchange
agreements with nearly two dozen other countries.
- Competitive global fee structure which keeps set up and ongoing operating costs low.
- Fund options are designed to be specifically attractive for the formation of hedge funds, mutual
funds and private equity funds.
Cayman Unregistered (Exempt) and Registered Funds
The Caymans has essentially two categories of funds, Registered and Unregistered (also referred to as
Exempt), as well as the distinction of a fund being either “open-ended” or “close-ended”. An openended fund is one in which investors may redeem (sell) their investment at any time – this is how most
mutual funds operate. A close-ended Cayman fund is one in which investors cannot redeem their
investment until a specific point in time or until an investment within the fund has sold or been
liquidated. As such closed-ended funds are most suitable for funds that invest in real estate,
infrastructure or private equity and have medium to long term time horizons.
Cayman Unregistered (Exempt) Funds
A fund that has less than 15 investors does not need to register with the local Cayman regulator, the
Cayman Islands Monetary Authority, or “CIMA”. Thus, it is an “Unregistered” fund and is not regulated
and does not need to appoint an investment administrator or auditor. Because such funds are exempt
from registration and regulation by CIMA, they are also referred to “Exempt” funds.
A fund that is close-ended (a fund in which investors don’t have the right to redeem or sell their
investment at any time but must wait for a specific condition – for example the sale of real estate held
by the fund or the completion of an infrastructure project) regardless of how many investors it has,
likewise does not need to register with CIMA and is therefore an Unregistered/Exempt fund
Cayman Registered Fund
Simply put, if a Cayman fund is expected to have more than 15 investors AND it will be open-ended
(investors have the right to redeem/sell their investment in the fund at any time) then it will need to be
registered and regulated by CIMA and it is therefor a “Registered” fund.
To begin the process of setting up a Cayman Fund, please Contact Us. We would be happy to discuss
the options and make a recommendation. We offer complete start-to-finish packages for establishing
Cayman funds that include everything from setting up the legal entity and drafting the private
placement memorandum to opening bank and investment accounts.