Uncorrelated – December 2017

A quick start guide to the Cayman master/feeder: what, why and how long does it take?

As part of our series of quick start guides for first time managers, we reviewed the pros and cons of some of the primary European and non-European jurisdictions for hedge fund structures (our previous article is available here).  In this article we review one of those key jurisdictions: the Cayman Islands.

The Cayman Islands are a world-renowned jurisdiction for establishing alternative investment funds.  The particular combination of tax and regulatory efficiency is attractive to both investors and managers alike; add to this an abundance of service providers, a common law legal system and a robust regulatory regime, and it is no wonder that the jurisdiction has become known to be the domicile of choice for establishing new funds.

New funds seeking to raise capital on a global basis often the face the dilemma of how best to accommodate U.S. investors.  One possible solution to this is the master/feeder structure.  This article will review that particular structure by explaining why it is so popular, how it works and timing considerations.

 

What is a Cayman master/feeder?

A master/feeder structure consists of a main operational vehicle through which investments are made (the “Master”), which is funded by investment from other vehicles (the “Feeders”).

The Master can take many different legal forms; it can be established as either a corporate or partnership in the Cayman Islands, though typically it is established for open ended funds using a corporate.  The legal form of the Feeders may also vary depending on investor preference, tax or regulatory requirements.  In order to accommodate investors with differing tax requirements into a single consolidated structure, multiple Feeders may be formed.  In the case of certain ‘U.S. taxable’ investors the Feeder usually takes the form of a U.S. domiciled limited partnership. In the case of ‘non-U.S. taxable’ investors and ‘rest of the world’ investors, the Feeder typically takes the form of a Cayman corporate, though other feeders are frequently used to utilise more specific tax treaties.

Why use a Cayman master/feeder?

The master/feeder structure is usually adopted because investment is expected from both U.S. and non-U.S. investors.  The use of Feeders allows U.S. and non-U.S. investors to be segregated, yet their respective investments will be pooled by both Feeders investing into the Master.  The Feeders allow for each group of investors’ tax and regulatory needs to be accommodated separately, which would not be possible if all investors invested directly into the same fund, while the Master allows for investment efficiency by combining assets.

Offshore vehicles, such as those established in the Cayman Islands, are tax transparent, which means that taxation occurs at investor level, rather than at the level of the Feeders themselves.  There is an added appeal for U.S. investors in this respect because fund managers can elect to ‘check the box’ when using a corporate vehicle as the Master Fund, meaning that the Master Fund will be treated as a partnership for U.S. tax reporting purposes.  The Cayman Islands tend to be a popular jurisdiction for a number of reasons, including the ability to obtain a grant of immunity from any change in tax law affecting any Feeder or Master established in the Cayman Islands, and its reputation for regulatory efficiency.

The Cayman Islands Monetary Authority (“CIMA”) regulates certain categories of alternative investment funds established in the Cayman Islands.  CIMA does not need to review the offering documents of alternative investment funds registered under the Mutual Funds Law of the Cayman Islands.  In contrast to the requirements of some other jurisdictions, registered funds simply need to file their offering documents and certain prescribed particulars, alongside written consent from their administrator and Cayman Islands approved auditor.  The result is an incredibly lean launch process (typically, assuming optimal timing, ten to twelve weeks) and minimal regulatory burden throughout the life of the fund.

 

How long does it take?

Your first port of call should be MJ Hudson.  We will help you with your private placement memorandum (PPM) and all ancillary legal documents. We will also negotiate and liaise with the depositary, administrator and directors.

 

Timing To Do
Assuming optimal timing, 10 to 12 weeks before the launch day (the “LD”)
  • Engage MJ Hudson
  • Start work on the PPM
  • Engage service providers, directors, auditors and tax advisers (MJ Hudson can introduce these)

 

 

LD minus 10 weeks
  • Agree PPM and provide to service providers
  • Start to negotiate service provider agreements
  • Decide on board members

 

 

LD minus 6 weeks
  • Incorporate Cayman Vehicle
  • Obtain sign off on constitutional documents

 

 

LD minus 3-6 weeks
  • Seek consent from administrator and auditor
  • Begin regulatory sign-off process

 

LD minus 1 week
  • Finalise documents
  • Hold launch board meeting
  • Arrange execution of documents

 

 

LD  Authorised

 

Uncorrelated is produced by MJ Hudson’s Hedge Fund team. We advise on all aspects of structuring, launching, and investing in hedge funds across all EU and non EU jurisdictions (including Cayman, Luxembourg, Ireland and US). We will find the ideal structure and jurisdiction for your needs.

As their trusted adviser, our clients rely on us to provide much more than legal advice. Through in-house experts and a wide network, we provide a truly integrated, multi-discipline service.