The Cayman Islands remains the gold standard jurisdiction for start-up and emerging hedge funds when it comes to legal and fund structuring considerations, offering a “tried and tested” environment for new launches, according to speakers on the opening panel of this year’s hedgeweekLIVE European Emerging Managers Summit.
Kicking off the discussion, which took place at the Reform Club in London, panel moderator Thomas Deinet, executive director at SBAI, said legal and fund structuring can often prove a daunting theme for emerging managers, which he described as the “lifeblood” of the global hedge fund industry.
The session explored the current trends within the structuring sphere – a perennially-important and often tricky consideration for start-ups of all stripes – and examined how the Covid-19 pandemic is shaping the legal and structuring landscape. A key theme was the advantages offered by the Cayman Island as a domicile for hedge funds, particularly its global distribution reach.
Harjit Kaur, partner at Maples Group, described Cayman as a “tried and tested” and “very sophisticated” jurisdiction, noting how more than 12,000 open-ended funds are registered there, which she believes is testament to its popularity.
“Cayman is one of the easiest places to set up a hedge fund,” Kaur told the session.
Setting out the different jurisdictions on offer, the panel heard how Cayman offers a very well-developed legal system, with lots of flexibility and is based on English common law. In contrast, those hedge fund managers targeting mainly European institutional investors may not necessarily want to focus on Cayman, and may instead opt for a European alternative.
Lucian Firth, partner, hedge funds at Simmons and Simmons, acknowledged the broad spectrum of choices on offer to start-up managers, adding that questions around the fund structure typically stem from whether managers want to run a European or offshore vehicle in the initial stages. “The vast majority of start-ups still tend to launch offshore funds,” Firth observed.
Mario Russo, founder and chief investment officer at Conditor Asset Management, explained how his firm looked at alternatives to Cayman – including not just the main European alternatives Luxembourg and Ireland, but also minor jurisdictions such as Malta and Liechtenstein, which have increasingly come into the conversation post-Brexit. Ultimately, though, there was “no doubt” that the firm would go with Cayman, he added.
While Cayman had experienced something of a “wobble” last year when the European Union added the domicile to a tax haven blacklist of non-cooperative territories, the panel pointed to the Cayman authorities’ willingness to engage with the EU, and address the concerns surrounding the blacklist, which proved to be a key distinguishing feature of the jurisdiction. The EU later removed Cayman from the list.
Expanding the discussion, the panel also considered whether emerging managers should launch an onshore European version of their strategy in line with a Cayman offering – with speakers decidedly cool on any such move.
Firth explained that most start-up and emerging hedge funds are time-constrained, adding that launching two structures on day one is a lot of work. “I don’t see it as practical – you have to choose one or the other,” he said.
Russo agreed, adding that two structures is extremely challenging for newly-launched managers, adding: “It’s sensible to take one step at a time.”
Elsewhere, attendees heard about the various processes and sequencing of setting up a hedge fund, as panelists discussed what service providers fledgling managers should talk to. For open-ended Cayman funds, an administrator and an auditor are two “absolute must-haves”, according to Kaur. Meanwhile, Russo reflected on his fund’s launch during the coronavirus pandemic, and said one key lesson learned was to grow the business “as organically as possible”.
As the discussion drew to a close, talk turned to recent trends emerging from the Covid-19 pandemic, and the outlook for the year ahead.
Firth pointed to a growing interest in co-investments among allocators, while Kaur said the pandemic had seen larger managers take the opportunity to set up funds focused on certain sectors such as distressed assets and crypto, as well as increase in interest surrounding ESG.
“The thing about the hedge fund space is that a downside for someone is an upside for someone else,” she noted.
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Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.