Hedge Fund Domiciles: A Quick Start Guide For First Time Managers

When deciding on the most favourable jurisdiction for the fund, there are a number of key considerations. One of the primary drivers is the location and preference of the investors, both seed and target market. The fundamental legal aspect to consider is where the manager intends to market the fund, as to market non-European funds to investors in certain European jurisdictions is more challenging than it is to market a European fund.

We assume for this article that our hypothetical manager, as a first time manager, will not have sufficient assets under management (in the short to medium term after launch) for the manager to be a 'full-scope' AIFM (the threshold is described in our prior article). Further, we assume that the fund's investment strategy is such that regulation under the UCITS regime is unsuitable.

Also, 'European' in this article means countries within the European Economic Area (and so excludes the Channel Islands).

Cayman Islands

The Cayman Islands are the classic hedge fund jurisdiction. The laws and structures are familiar to investors both in Europe and the United States. According to recent research by GPP and AIMA, 50% of hedge funds launched are established in the Cayman Islands.

The Cayman Islands as a funds jurisdiction has the benefit of mature supporting industries of directors, corporate secretarial services and other key providers that benefit from scale and so help lower the Fund's operating expenses.

Cayman Islands funds can be limited partnerships or corporations, and segregated sub-fund structures are also available if a manager wishes to manage multiple investment strategies under one structure with isolated liabilities.

UK managers with AUM below the AIFMD threshold are able to manage Cayman Islands funds without having to be a full-scope AIFM, lowering operating expenses for the fund and the compliance costs of the manager.

The inconsistent implementation of AIFMD in European states means that the ability to easily market Cayman Islands funds is uncertain in a number of jurisdictions. Advice should be take on a case by case basis.

ESMA, the European regulator, has consulted on extending the AIFMD marketing passport to certain non-European jurisdictions, which would allow, for example, a UK manager with a Cayman Islands fund to market that fund more easily. However that exercise has effectively been put on hold pending the resolution of the Brexit negotiations.

Ireland

Ireland has a well-established and...

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