Legal Updates

 Cayman IslandsNovember 03, 2020

Offering, Segregation and NAV Requirements for Regulated Hedge Funds

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For further information on any of the issues discussed in this publication please contact the related contact(s) on this page.

The Cayman Islands Monetary Authority has published rules regarding the contents of offering documents, segregation of assets and the calculation of net asset values of Cayman Islands open-ended funds licenced or registered under the Mutual Funds Law (Revised). Each of these rules apply to open ended funds registered under s4(3) of the Law being the most popular Cayman hedge fund and also to closely held or limited investor funds with not more than 15 investors registered under s4(4) of the Law, administered funds registered under s4(3) and funds licensed under s4(1) of the Law.

Content of Offering Documents

The content requirements cover many of the terms which are market standard in the offering documents produced for Cayman hedge funds but also terms which are less common including the addresses of directors, the duration of the fund, the place where constitutional documents, investor reports and information on prices may be obtained or inspected, whether the fund is registered or licenced outside the Cayman Islands and the regulatory authority supervising the fund’s custodian and prime broker. In addition the rule requires the inclusion of a specific statement regarding the limitations on the obligations and liabilities of the Cayman Islands Monetary Authority for the performance of the fund or the accuracy of its offering document.

Cayman Islands open-ended funds applying to be licenced or registered under the Law will need to ensure that their offering documents comply with the law and existing Cayman Islands open-ended funds will need to ensure that any updates to their offering documents include the content requirements.

Segregation of Assets

The rule on the segregation of assets requires that Cayman Islands hedge funds appoint a service provider to ensure the safekeeping of their assets and that in the case of a licenced hedge fund that the service provider is appropriately regulated. The overriding requirement stated in this rule is that the fund must ensure that none of its service providers use the financial assets and liabilities of the fund to finance their own or any other operations in any way.

The rule clarifies that it is not intended to prohibit rehypothecation of a fund’s assets by its prime broker subject to appropriate disclosure to investors and sets out the following actions which are specified as not constituting the financing of a service provider’s operations:

  • remitting to the relevant investors redemption, withdrawal or distribution proceeds being paid on behalf of the fund;
  • paying fees, charges and expenses that are payable by an investor in connection with the purchase, conversion, holding, transfer or redemption of equity interests of the fund;
  • acquiring or disposing of assets for investment purposes in accordance with the fund’s constitutive documents and offering document;
  • paying fees, charges, expenses and taxes that are properly payable by the fund and as disclosed in and in accordance with the fund’s constitutive documents, offering document or as otherwise disclosed to investors; or
  • transfer and reuse of assets as consented to by or on behalf of the fund, provided that a description of the arrangements entered into with any service provider allowing for the possibility of transfer and reuse (and the maximum permitted level of transfer and reuse) is disclosed in the offering document or otherwise disclosed to investors before they invest, and that any material changes thereto are also disclosed to investors.

The fund’s directors, managing member, general partner or trustee are required to establish, implement and maintain (or oversee the establishment, implementation and maintenance of) strategies, policies, controls and procedures to ensure compliance with the rule consistent with the fund's offering document / marketing material and appropriate for the size, complexity and nature of the fund's activities and investors.

The rule also requires the fund’s operators to ensure that verification that the fund holds title to its assets and the maintenance of a record of those assets, is carried out by an administrator, other independent third party or, subject to the identification, management, monitoring and disclosure of potential conflicts of interest, themselves or the fund’s manager or an affiliate of either of them.

Calculation of Asset Values

The rule on the calculation of asset values requires Cayman Islands hedge funds to establish, implement, and maintain a net asset calculation policy that ensures that its net asset value is fair, complete, neutral and free from material error and is verifiable. The net asset value calculation policy is required to be based on generally accepted accounting principles of a non-high risk jurisdiction (including IFRS and US, Japanese and Swiss GAAP). The methodology used to perform the fund’s net asset value calculation must also be consistent with the accounting principles or reporting standards used to prepare the Fund’s audited financial statements.

The net asset value calculation policy must be disclosed in the fund’s offering document, require calculations of net assets values at least quarterly, state how and when the net asset value will be published and identify pricing sources. Pricing models may be used for hard to value securities for which there is no observable market price provided that they are generally applied consistently and that any deviations are disclosed to investors.

Where a fund’s manager or its directors, managing member, general partner or trustee calculate or assist in the calculation of the fund’s net asset value this should be disclosed in the fund’s offering memorandum with an explanation of why another service provider could not calculate the net asset value. The fund’s offering document is also required to describe the conflicts of interests caused by the involvement of a fund’s manager or its operators in the calculation of its net asset value and the inherent limitations of the net asset value calculation policy.

DISCLAIMER: This document is for information purposes only and does not purport to represent legal advice. If you have any queries or would like further information relating to any of the above matters, please refer to the contacts above or your usual contact in Dillon Eustace.

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