The Cayman Islands have not become the leading hedge fund administration jurisdiction by accident. For years Cayman has thrived from banking and client confidentiality laws and hedge fund managers saw Cayman as a natural place to have their funds administered as the jurisdiction provided confidentiality of their trading strategies and offshore shareholder records.
As hedge funds grew in size and numbers, existing service providers embraced the opportunity to promote this industry. Government worked closely with the private sector and moved swiftly to enact necessary legislation required by the industry and global community. Today, there are over 6000 Cayman registered hedge funds, over half of all registered hedge funds globally.
However, while hedge fund managers are highly experienced in security trading, they often do not have the infrastructure or knowledge to properly administer their own funds. Cayman fund administrators have the advantage of dedicated and cutting-edge processes and specialised software to handle Net asset Valuation calculations and reporting needs.
Fund administrators handle share registration, NAV calculation, communication with shareholders, Know-Your-Customer documentation, compliance with statutory requirements, new fund setups and liaison with lawyers and auditors.
Administrators have become even more important as pension money and institutional investors use hedge funds to increase portfolio returns. These types of investors are performing their own due diligence on fund administrators, requiring the administrator to meet due diligence requirements and demonstrate an environment of controls, giving the investor confidence in valuation and reporting processes. Otherwise the investor will take his money elsewhere.
In addition, there has been a global increase in anti-money laundering and KYC legislation, e.g. the USA PATRIOT Act, which requires the administrator to stay abreast of related regulatory requirements. Cayman’s own AML and due diligence requirements have been years ahead of the industry globally and as such, Cayman fund administrators are well positioned to comply with new legislation and requirements enacted by other jurisdictions.
Generally, a fund manager already manages one or several domestic funds and needs to setup an offshore fund to appeal to certain clients. The fund manager will discuss such issues as structure, investment strategy, anticipated growth, subscription and redemption policies and target investors with his domestic legal counsel, who will then work with Cayman counsel to create an Offering Memorandum, form a company, find an administrator and audit firm and then register the company as a mutual fund with the Cayman Islands Monetary Authority (CIMA). Legal fees associated with company and fund setups can vary greatly depending on the complexities of the fund and certain annual fees will be incurred.
Administration fees are usually based on a percentage of fund net assets and vary depending on activity and complexity of the fund and administration services provided.
The reputation of Cayman Islands is held in such high regard that many fund managers choose Cayman as the domicile of their funds to add investor confidence. Whether managers choose Cayman for its low costs, ease of fund setups or reputation value, selecting a Cayman fund administrator is the right choice.
