Structuring of mutual funds

There are three vehicles available in the Cayman Islands through which to operate a mutual fund

1. CORPORATE VEHICLES

Corporate mutual funds are commonly established as exempted companies, under the Companies Law (as Revised). Mutual funds may also be established as segregated portfolio companies.

Under the segregated portfolio structure separate and distinct “pots” or “pools” of assets (referred to as “Portfolios”) are created. The assets and liabilities of one Portfolio are legally segregated and protected from those of every other Portfolio and are also separate and distinct from a segregated portfolio company’s non-portfolio assets.

Typical structures include:

(i) Single/Two Class Structures - either:

(a) a single class of redeemable shares issued to all investors with all shareholders having the right to vote; or

(b) a two or more share class structure with a small class of voting shares usually held by the manager or promoter and one or more classes of non-voting redeemable shares offered to investors at an initial subscription price and thereafter at net asset value per share

(ii) Side by Side Structures – where an investment manager typically provides services to both e.g. an United States domestic limited partnership, which receives investments from United States investors and, in addition, to a Cayman Islands exempted company, which receives investments from non-United States investors

(iii) Umbrella Funds - multiple classes of shares with separate investment funds established for each class of shares. The articles of association of these funds typically ‘ring fence’ assets and liabilities internally between classes of shares - i.e. the assets of one class of shares cannot be claimed by the holders of another class of shares in the event of a diminution in value of one class of shares. These arrangements however do not protect the fund as a whole from claims from outside creditors unless the fund uses the segregated portfolio structure.

(iv) Master/Feeder Funds - usually established with a Cayman Islands exempted company as the Master Fund, into which the investment portfolios of separate feeder funds, established as domestic limited partnerships in the United States and as offshore corporate funds in the Cayman Islands

2. PARTNERSHIP STRUCTURES

Offshore funds are by investor preference generally limited liability companies issuing one or more classes of shares to investors - this is because outside of the United States partnerships are not well known or understood, whereas the concept of limited liability corporations is universally accepted. Nonetheless partnership structures have certain advantages including the following:

(i) investment performance is allocated to each partner’s capital account in proportion to his investment from the date of investment to the date of redemption or withdrawal

(ii) incentive fees are calculated on each partner’s capital account and are charged to that account, generally at fiscal year end and at each withdrawal date

3. UNIT TRUSTS

A unit trust may be registered as a mutual fund if each trust unit is redeemable at the option of the investor. Provided that none of the investors of the unit trust are or are likely to become resident or domiciled in the Cayman Islands, they may also be registered as exempted trusts under the Trusts Law (as Revised) which will entitle them to apply for a 50 year tax undertaking.