February 13, 2023

The Cayman Islands: A Hedge Fund Destination

What makes the Cayman Islands such a popular jurisdiction for hedge funds?

Over the past 25 years, the Cayman Islands has become a pre-eminent jurisdiction for the formation of alternative investment funds, attracting 80% of all new offshore fund formations. With around 13,000 regulated open-ended funds and 16,000regulated closed-ended funds, Cayman is estimated to house more than 75% of the world’s offshore hedge funds and nearly half of the industry’s estimated US$1.1trillion of assets under management. As well as being known as the preferred location for investment funds, the territory has become a leading international financial centre, known for banking, insurance and other financial services and products that are regulated in accordance with global standards. The financial services sector accounts for approximately 35% of the Cayman Islands’ GDP and is home to 100+ licensed banks from over 30 countries, including the majority of the top 50 banks worldwide.  The success of Cayman’s financial services is attributed to its sound regulatory regime, political and economic stability and tax neutral platform, supported by highly skilled and experienced service providers.

The Cayman Islands is at the forefront of the investment funds sector largely because of the structural and operational advantages it offers, including:

Stability: The Cayman Islands is a British Overseas Territory and has a history of stable government. The British government retains responsibility for internal security, defence and external affairs. Prudent economic policies and a strong financial services sector have resulted in the Islands enjoying anAa3 sovereign risk rating. The Islands enjoy a high standard of living.

Tax transparency and neutrality: A simple and transparent tax neutral regime that is a globally responsible tax model efficiently supporting the global free flow of investment capital and financing without posing tax harm to other countries’ tax bases. The Cayman Islands have no direct taxes of any kind. There are no corporation, capital gains, income, profits or withholding taxes. Under the terms of the relevant legislation, it is possible for exempted companies, unit trusts and limited partnerships to register with and apply to the Cayman Islands government for a written undertaking that they will remain tax-free for a minimum period (20 years in the case of exempted companies and 50 years in the case of unit trusts and limited partnerships).

No exchange control: There are no exchange control restrictions or regulations in the Cayman Islands. Funds can be freely transferred in and out of the Islands in unlimited amounts. The Cayman Islands dollar is tied to the US dollar and the latter is freely accepted and used within the local economy.

Reliable legal system: Cayman Islands law derives from English common law, supplemented by local legislation. The court system is well developed and experienced. Major civil cases are heard in the Grand Court with appeals to the Cayman Islands Court of Appeal and ultimately to the Privy Council in London. It is common practice for leading advocates from the UK to appear before the Cayman Islands courts on major litigation matters.

Cost effective and time efficient: As Cayman entities can be formed on the day of filing and there is no lengthy regulation or filing procedures, transactions can be brought to market very quickly. The cost of forming and maintaining Cayman entities is competitive and usually minimal in the context of most transactions.

Location and connectivity: The Cayman Islands are situated in the western Caribbean, 480 miles south of Miami and 180 miles northwest of Jamaica. The Islands are five hours behind Greenwich Mean Time in the Eastern Standard Time zone. The Islands benefit from state-of-the-art telecommunications facilities and direct flights are available from a number of major international centres.

Flexibility: There are no restrictions imposed in terms of strategy with Cayman funds being suitable for directional equity / long short equity products, equity arbitrage, equity statistical arbitrage, event driven, fixed income and fixed income arbitrage, global macro, managed futures, distressed securities and convertible arbitrage strategies, amongst others. Furthermore, there are no restrictions on investment in underlying funds.

The combination of the aforementioned factors creates an environment that is both tax efficient and secure, making it an ideal location for hedge funds looking to minimize their tax liability and operate effectively. Whether you are a new hedge fund manager or an experienced professional, the Cayman Islands is a jurisdiction that is well-equipped to support your business and help you achieve your investment objectives.


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