Articles By Topic
By Topic: Cayman Islands
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From Vol. 6 No.19 (May 9, 2013)
Cayman Director Services Company Challenges CIMA’s Private Sector Consultation Process to Promote Fund Governance Reforms
On April 2, 2013, Cayman Private Manager II Limited (CPM), a Cayman director services company and an affiliate of DMS Group, which provides professional directors for many hedge funds and other private funds, filed an application in the Grand Court of the Cayman Islands. The application sought leave to apply for judicial review of its request for relief based on its allegations that the private sector consultation process used by the Cayman Islands Monetary Authority (CIMA) to reform private fund governance was flawed because CIMA did not satisfy its legal obligations with respect to the consultation process. The allegations arise out of CIMA’s publication of a consultation paper (Consultation Paper) on January 14, 2013 that outlined various proposed fund governance reforms that will invariably impact Cayman-domiciled hedge funds and other private funds. For an in-depth discussion of CIMA’s proposed reforms described in the Consultation Paper, see “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013). If the Court grants CPM leave to apply for judicial review, this could delay any decision-making by CIMA on its corporate governance reform proposals. This article provides a summary of CPM’s allegations as well as a description of the requested relief.
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From Vol. 6 No.4 (Jan. 24, 2013)
Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors
To promote confidence in Cayman-regulated financial institutions, the Cayman Islands Monetary Authority (CIMA) recently introduced proposals designed to institute enhanced corporate governance reforms for CIMA-regulated financial institutions, including hedge funds. Of most importance for hedge funds, the rule proposals include rule amendments requiring professional directors to register with CIMA; all fund directors of CIMA-regulated entities to register with CIMA; the creation of a publicly-available database containing the names of CIMA-registered and CIMA-licensed entities and their directors; and the application of delineated governance standards that have historically been inapplicable to most CIMA-registered hedge funds. Such standards outline expectations concerning, among other things, director qualifications and responsibilities. This article summarizes the proposed rule amendments and links to the documents in which they are described. See also “Eight Corporate Governance Steps That Hedge Fund Managers Should Consider in Response to Concerns Expressed by Institutional Investors,” The Hedge Fund Law Report, Vol. 4, No. 35 (Oct. 6, 2011).
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From Vol. 6 No.3 (Jan. 17, 2013)
How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two)
Some well-known hedge fund managers have launched reinsurance businesses to address the twin challenges of raising capital and obtaining uncorrelated returns. If properly structured and operated, reinsurance businesses offer hedge fund managers a steady stream of investable capital in the form of reinsurance premiums, which in turn can be invested in the manager’s other strategies. However, few hedge fund managers start with the expertise or infrastructure necessary to launch and operate a reinsurance business effectively, and reinsurance businesses present unique challenges relating to people, risk management, structuring and regulation. Moreover, running a reinsurance business alongside a hedge fund management business raises various compliance issues. In short, launching a reinsurance business can help tackle some of the more elusive challenges facing hedge fund managers, but such launches entail risks to which managers typically are not accustomed. To assist managers in capturing some of that upside while mitigating the risks, we are publishing this second article in a two-part series on the primary legal, business and risk considerations for hedge fund managers in launching reinsurance businesses. In particular, this article discusses how hedge fund managers generally approach starting a reinsurance business; the best domiciles for reinsurers; a checklist of steps required to launch a reinsurance business; how hedge fund managers invest the “float” generated by such a business; conflicts of interest raised by a hedge fund manager’s side-by-side management of a reinsurance business and an investment management business, and how managers should address such conflicts; and policies and procedures that hedge fund managers should implement to accommodate the operation of a reinsurance business. The first article in this series provided background on the reinsurance business; explained how reinsurers generate revenue; discussed how hedge fund managers can participate in the reinsurance business; and described some principal benefits and drawbacks of launching a reinsurance business. See “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).
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From Vol. 6 No.3 (Jan. 17, 2013)
In What Circumstances May Hedge Fund Investors Bring Proceedings in the Name of the Fund for a Wrong Committed Against the Fund, When Those in Control of It Refuse to Do So?
The evolution of the law relating to corporations, and in particular the doctrine of the company as a separate legal person, presented a risk from the earliest times that minority investors might be left without a remedy if those in control of the company breached their trusts or duties and destroyed the value of that investment through mismanagement, self-dealing or other misconduct. The risk of losing one’s investment in circumstances where there has been corporate wrongdoing has not abated, and in today’s hedge fund universe, the likelihood is that the shareholder will have invested a very substantial amount of capital for a minority position in a fund, the majority of whose directors and whose investment manager and other service providers are based in another country. There are over 10,000 registered Mutual Funds in the Cayman Islands alone, many of which are directed and managed out of New York or Delaware. In response to the concern that there is no remedy for the shareholder for such wrongs, many jurisdictions have sought to implement the procedural device of the derivative action as a means of affording substantive relief to investors. Wherever they are brought, derivative actions have a common theme and a universal aim: the theme is that shareholders are not being heard and cannot take action themselves; the aim is to restore value to the company in which they have invested. The mechanics for providing this substantive relief vary across the different jurisdictions. In a guest article, Christopher Russell, David Butler, Michael Swartz and Daniel Cohen compare the mechanics of how hedge fund investors may pursue derivative actions in three different jurisdictions: the Cayman Islands, Delaware and New York. Russell is a Partner in the Litigation and Insolvency Department of Appleby Cayman, and Butler is a senior Associate in the Department; Swartz is a Partner and Cohen is an Associate at Schulte Roth & Zabel LLP.
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From Vol. 5 No.48 (Dec. 20, 2012)
Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation
On November 8, 2012, international law firm Walkers Global hosted its annual Walkers Fundamentals Hedge Fund Seminar in New York City. Speakers at this event addressed various issues of current relevance to hedge fund managers, including: recent developments in fund structuring and terms; fund governance; recent Cayman legal developments (including those relating to side letter disputes); implications of the Foreign Account Tax Compliance Act for hedge fund managers; and regulatory developments, including proposed amendments to the Cayman Islands Exempted Limited Partnership Law and the impact of the EU’s Alternative Investment Fund Managers Directive. This article summarizes noteworthy points discussed during the seminar on each of the foregoing topics. For our coverage of last year’s Walkers Fundamental Hedge Fund Seminar, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds,” The Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).
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From Vol. 5 No.41 (Oct. 25, 2012)
Pitfalls and Solutions in Trading Shares in Corporate Hedge Funds in Liquidation in the Cayman Islands
When redemptions in the shares of hedge funds are suspended, including in situations where the determination of net asset value is suspended, trading in those fund shares nonetheless commonly occurs in a secondary market, with investors typically seeking to exit a fund position to cap their losses, and more speculative investors seeking to purchase positions in the hope of a better return if the fund emerges from its financial difficulties. However, in the Cayman Islands, if the fund’s difficulties give rise to a voluntary liquidation, any transfer of shares made after the commencement of the liquidation will be void unless sanctioned by the liquidators. Sellers, buyers and liquidators need to know how transfers of hedge fund shares made after the commencement of a voluntary liquidation may be preserved. In a guest article, Christopher Russell and Jeremy Snead, partner and associate, respectively, at Appleby (Cayman), highlight the pitfalls associated with such transactions and solutions for preserving these arrangements.
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From Vol. 5 No.37 (Sep. 27, 2012)
Cayman Grand Court Rejects Validity of Side Letter Entered Into Between an Investor in Investment Vehicles That Invested in the Matador Fund and a Director of the Matador Fund
A recent decision handed down by the Grand Court of the Cayman Islands (Court) emphasizes the importance of: (1) ensuring that the correct parties enter into side letters between an investor and a fund; and (2) ensuring that a fund’s governing documents permit the fund to enter into the type of side letter contemplated by the fund and the investor. This decision follows on the heels of another recent decision handed down by the Court that highlights similar principles. See “Recent Cayman Grand Court Decision Demonstrates the Practical and Legal Challenges of Investing in Hedge Funds through Nominees,” The Hedge Fund Law Report, Vol. 5, No. 29 (Jul. 26, 2012).
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From Vol. 5 No.36 (Sep. 20, 2012)
The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators
Last month marks the one-year anniversary of the decision handed down by the Grand Court of the Cayman Islands (Court) against the directors of Weavering Macro Fixed Income Fund, in which both directors were found to have breached their duties and were ordered to pay damages in the amount of USD$111 million. In the days and weeks which followed, many stakeholders offered their own critique of the decision as well as the “checklist” promulgated by Mr. Justice Andrew Jones QC of the steps which an independent non-executive director of an investment fund should take in order to properly discharge his duties. Some critiques were lucid and objective dispositions of the decision, and some were not. Perhaps it was the size of the award, or that it was the first time that directors of a failed Cayman Islands investment fund had been found liable in damages for a fund’s losses, which provoked such interest; but no doubt the views expressed by many were, and are, influenced by personal circumstances. But what has been the true impact of the decision, and what mark has it left on the laws relating to directors generally? In this article Mourant Ozannes’ Shaun Folpp, who acted for Weavering with respect to both the first instance proceedings and the recent appeal, and Mr. Ian Stokoe of PwC Corporate Finance and Recovery (Cayman) Limited, one of Weavering’s Joint Official Liquidators, explore these very issues, and reflect on one of the most talked about decisions ever to be handed down by the Court. For background on the decision, see “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).
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From Vol. 5 No.31 (Aug. 9, 2012)
Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two)
U.S. hedge fund investors are continuously seeking attractive investment opportunities and are increasingly expanding their search to incorporate Asia-based hedge fund managers. At the same time, Asia-based hedge fund managers are navigating the challenging capital raising environment by reaching beyond their borders to attract U.S. investors. However, Asia-based fund managers seeking to attract capital from U.S. investors must contend with a plethora of U.S. and foreign regulations in raising and managing such capital. As such, Asia-based fund managers must work closely with U.S., Cayman and local counsel to develop a cohesive and carefully thought out fund and management structure, intertwining the various regulatory requirements of the applicable jurisdictions, all of which must be adhered to by the fund manager, any sub-advisers and their respective affiliates. This is the first in a two-part series of guest articles designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. fund investors. The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP. This first article describes the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers. The second article in the series will detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers should consider when soliciting U.S. taxable and U.S. tax-exempt investors.
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From Vol. 5 No.29 (Jul. 26, 2012)
Cayman Islands Segregated Portfolio Companies: New Case Law Highlights Attractions for Promoters and Hedge Fund Managers
Typically, hedge fund managers use exempted companies organized in a master-feeder structure or in an umbrella fund structure to organize their funds. Presently in the Cayman Islands, approximately 70% of funds are organized using these structures. However, with the introduction in 1998 of segregated portfolio companies (SPCs) (known in other jurisdictions as “single account” or “protected cell” companies), an opportunity was given to promoters to utilize a structure that was less expensive and more efficient than the traditional structures. Although a seemingly attractive fund vehicle, SPCs have not gathered a great following in the Cayman Islands. At present, only around 10% of Cayman registered funds are SPCs, and that proportion has been relatively constant in recent years. Their use has been generally limited to single investor funds where there are a large number of participants and there is a need to have the ability to create new portfolios quickly and simply. However, with the Cayman Islands Court of Appeal (Court) handing down its decision in ABC Company (SPC) v. J & Co Ltd in June 2012, it is opportune to revisit the option available to promoters and managers of using an SPC as an attractive alternative to the vehicles more commonly used to establish hedge funds in the Cayman Islands. In a guest article, Christopher Russell and Jayson Wood, partner and counsel, respectively, in the litigation and insolvency department of Appleby (Cayman) Ltd., discuss: the purposes and the general advantages of SPCs; the reasons for the apparent unpopularity of SPCs; the facts and legal analysis of the ABC decision; and four key structuring lessons for hedge fund managers looking to use the SPC structure following the ABC decision.
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From Vol. 5 No.29 (Jul. 26, 2012)
Recent Cayman Grand Court Decision Demonstrates the Practical and Legal Challenges of Investing in Hedge Funds through Nominees
A recent decision of the Grand Court of the Cayman Islands (Court) addressed a range of relevant questions for hedge fund managers and investors, among them: Does a side letter survive a fund restructuring? Does a side letter entered into between a hedge fund and a beneficial investor bind a nominee through which the beneficial investor subsequently invests? Is a beneficial investor a party to a hedge fund’s governing documents where it invests through a nominee? What is the legal status of a side letter entered into prior to (rather than simultaneously with) an investment in a hedge fund? In short, the decision illustrates the myriad legal and practical challenges faced by investors that invest in hedge funds through nominees; the relevance of the identity of contracting parties; and the scrutiny to which governing documents are subject in the course of hedge fund restructurings. This feature-length article describes the factual background and legal analysis in the decision, and extracts two key lessons for investors that wish to invest in hedge funds via nominees. See also “Investing in Cayman Islands Hedge Funds Through a Nominee or Custodian: An Unforeseen Peril,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).
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From Vol. 5 No.28 (Jul. 19, 2012)
Hedge Fund Fletcher International Sues to Prevent Liquidators of Its Feeder Funds from Forcing It into Voluntary Liquidation
On July 2, 2012, days after it filed for bankruptcy relief in New York under Chapter 11 of the U.S. Bankruptcy Code (Bankruptcy Code), Fletcher International, Ltd. (Debtor), a master fund in a master-feeder structure, sued some of its own Cayman Islands-based feeder funds to block liquidators from disrupting its bankruptcy proceedings and forcing an asset sale. The Debtor is appealing the ruling of the Grand Court of the Cayman Islands, which appointed Ernst & Young as liquidators of the feeder funds after three Louisiana pension funds sued to redeem their interests in the feeder funds. See “Cayman Grand Court Ruling Supports Proposition That Hedge Fund Managers Do Not Have Unfettered Discretion in Making Distributions In Kind to Investors,” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012). The Debtor generally argues that the Ernst & Young liquidators lack the knowledge of its unique assets necessary to maximize returns for its creditors and shareholders in bankruptcy proceedings. This article summarizes the factual background and the allegations in the Debtor’s complaint.
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From Vol. 5 No.27 (Jul. 12, 2012)
U.K. High Court of Justice Finds Magnus Peterson Liable for Fraud in Collapse of Hedge Fund Manager Weavering Capital and Weavering Macro Fixed Income Fund
In 1998, defendant Magnus Peterson formed hedge fund manager Weavering Capital (UK) Limited (WCUK). He served as a director, chief executive officer and investment manager. One fund managed by WCUK, the open-end Weavering Macro Fixed Income Fund Limited (Fund), collapsed in the midst of the 2008 financial crisis. Peterson was accused of disguising the Fund’s massive losses by entering into bogus forward rate agreements and interest rate swaps with another fund that he controlled. In March 2009, the Fund suspended redemptions and went into liquidation when it could not meet investor redemption requests. At that time, WCUK went into administration (bankruptcy). WCUK’s official liquidators, on behalf of WCUK, brought suit against Peterson, his wife, certain WCUK employees and directors and others, seeking to recover damages for fraud, negligence and breach of fiduciary duty and seeking to recover certain allegedly improper transfers of funds by Peterson. After a lengthy hearing, the U.K. High Court of Justice, Chancery Division (Court), has allowed virtually all of those claims, ruling that Peterson did indeed engage in fraud. In a separate action, the Fund’s official liquidators recovered damages from Peterson’s brother, Stefan Peterson, and their stepfather, Hans Ekstrom, who served as Fund directors, based on their willful failure to perform their supervisory functions as directors. See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011). This article summarizes the factual background and the Court’s legal analysis in the liquidators’ action against Peterson and others.
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From Vol. 5 No.23 (Jun. 8, 2012)
Recent Cayman Islands Developments Impacting Fund Governance, Master Fund Registration and the Insolvency Regime: An Interview with Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes
Cayman Islands legislators and courts have been increasingly active in enacting reforms and deciding cases with relevance to hedge fund managers and fund investors. The Hedge Fund Law Report recently interviewed Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes’ Cayman office to get their perspective on this recent activity. Specifically, our interview covered developments and market practice with respect to: fund governance in the aftermath of the Cayman Grant Court’s decision in Weavering; recent legislative developments, including the new registration regime for Cayman-domiciled master funds; and recent judicial decisions that reshape the Cayman fund insolvency regime. This article contains the full text of our interview.
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From Vol. 5 No.23 (Jun. 8, 2012)
Cayman Court of Appeal Holds that Soft Wind-Down of One or More Segregated Portfolios of a Segregated Portfolio Company Does Not In and Of Itself Justify a Judicial Winding-Up of the Entire Company
In the wake of the 2008 financial crisis, some troubled hedge funds organized under the laws of the British Virgin Islands (BVI) and the Cayman Islands elected to suspend redemption rights and undertook “soft wind-downs” of their operations. See “Cayman Hedge Funds, Soft Wind-Downs and Disclosure,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011). In response, fund investors sought to gain leverage by petitioning to force the funds into involuntary liquidation on the ground that the funds were no longer capable of carrying out their stated business purposes. BVI and Cayman courts have taken conflicting views on whether a soft wind-down is a valid ground for an involuntary winding-up petition. The Cayman Island Court of Appeal recently addressed a novel question involving whether the winding down of the various segregated portfolios comprising a “segregated portfolio company” (SPC) would warrant winding down of the entire SPC.
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From Vol. 5 No.22 (May 31, 2012)
In What Circumstances Can U.S. and Other Foreign Judgments Be Enforced Against Cayman Islands Hedge Funds?
Parties considering bringing proceedings against Cayman Islands hedge funds in other jurisdictions should ensure that any judgment that might be obtained in a foreign jurisdiction will be recognized and enforced by the Cayman courts. On the flip side, Cayman-domiciled hedge funds facing claims in foreign jurisdictions will need to consider the safety of ignoring and not participating in those proceedings, on the assumption that any judgment obtained will not be recognized and enforced by the Cayman courts. In a guest article, Christopher Russell and Joanne Collett, Partner and Senior Associate, respectively, at Appleby, survey the landscape that informs whether Cayman courts will enforce such judgments. These issues arise in particular in the context of enforceability of judgments obtained by default where the Cayman fund does not participate in the foreign proceedings, and in particular in the context of judgments and orders obtained in insolvency proceedings in light of the increasing trend towards universality of insolvency proceedings.
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From Vol. 5 No.14 (Apr. 5, 2012)
Don Seymour Discusses Hedge Fund Governance and the Impact of the Recent SEC-CIMA Cooperation Arrangement on Hedge Fund Manager Examinations
On March 23, 2012, the U.S. Securities and Exchange Commission (SEC) announced that it had entered into a supervisory cooperation arrangement with the Cayman Islands Monetary Authority (CIMA). In its press release announcing the memorandum of understanding (MOU) embodying the supervisory cooperation arrangement, the SEC identified five categories of information that may be shared pursuant to the arrangement. Those five categories include information required to: (1) conduct routine supervision; (2) monitor risk concentrations; (3) identify emerging systemic risks; (4) better understand a globally active regulated entity’s compliance culture; and (5) conduct on-site examinations of registered entities located abroad. See “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012). Hedge fund managers, lawyers, compliance professionals and others have asked The Hedge Fund Law Report what this MOU means for their businesses. To help answer that question, we recently interviewed Don Seymour. Seymour is the founder and Managing Director of dms Management Ltd. (dms Management) and the former head of the Investment Services Division of the CIMA. At the CIMA, Seymour directed the authorization, supervision and enforcement of regulated mutual funds, including hedge funds, under the Mutual Funds Law of the Cayman Islands, and the supervision of company managers under the Cayman Companies Management Law. Seymour brought his CIMA experience to bear in explaining how the MOU will impact Cayman-domiciled hedge funds and their managers with respect to data collection and sharing, supervision, monitoring, examinations and regulatory coordination. Moreover, based on his service on the boards of several notable investment companies, Seymour offered insight on hedge fund governance issues, including: director independence; evolution in best corporate governance practices following the decision in Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom; valuation expertise required of fund directors; specific steps that directors can take to manage fund conflicts of interest; maximum number of directorships; and whether investors should have rights to appoint fund directors. This article includes the full transcript of our interview with Seymour.
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From Vol. 5 No.5 (Feb. 2, 2012)
How Safe Is It to Ignore Foreign Tax Claims or Judgments Against Cayman Islands Hedge Funds in the Context of a Winding Up of the Fund?
Cayman Islands hedge funds are subject to no Cayman Islands tax of any nature, but they may become liable to foreign tax claims – for example through trading swaps – or they may become subject to judgments for tax imposed against them in other jurisdictions. How should such claims and judgments be regarded by liquidators in the context of winding up the fund, whether in a liquidation imposed by the court, or in a voluntary liquidation? Must effect be given to such claims or judgments, or can such claims and judgments simply be ignored, and the winding up completed without regard to them? Or should the winding up only be completed once the tax claim or judgment has been abandoned by the foreign tax authority, or only with Cayman court sanction that the claim or judgment be disregarded for the purposes of the winding up? In a guest article, Christopher Russell, Partner and head of the litigation and insolvency department of Ogier, Cayman Islands, and Shaun Folpp, a Managing Associate in the litigation and insolvency department of Ogier, Cayman Islands, address these and related questions.
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From Vol. 5 No.4 (Jan. 26, 2012)
Investing in Cayman Islands Hedge Funds Through a Nominee or Custodian: An Unforeseen Peril
The advantages of investing in corporate or limited partnership hedge funds through a nominee or a custodian registered as a shareholder or a named limited partner are well known. Principally, the investor retains anonymity or some other perceived business advantage. On the other hand, investing in corporate or limited partnership hedge funds through a nominee involves the risk of misappropriation by the nominee, ignoring of instructions or the loss of or delay in recovering dividends or redemption proceeds in the event of the insolvency of the nominee. These disadvantages may of course be avoided or minimised by careful selection of the nominee, and by close regard to the terms of the nominee agreement (although, typically, the nominee will have standard terms, departure from which will be difficult, if not impossible). There is another area of potential disadvantage – and that other area is the focus of this guest article by Christopher Russell, Partner and head of the litigation and insolvency department of Ogier, Cayman Islands, and Shaun Folpp, a Managing Associate in the litigation and insolvency department of Ogier, Cayman Islands.
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From Vol. 4 No.46 (Dec. 21, 2011)
How May Hedge Fund Managers Resuscitate Expired Cayman Islands Limited Duration Exempted Limited Partnership Hedge Funds?
Many hedge funds established as Cayman Islands exempted limited partnerships expressly provide, in their partnership agreements, a fixed term for the duration of the exempted limited partnership or a termination date upon the occurrence of a specified event. The duration of the partnership term or the specific termination events are a matter of agreement between the partners, and such matters may, upon such terms as may be provided by the partnership agreement, be varied by agreement between the partners during the term of the exempted limited partnership. Hedge fund managers and general partners should carefully monitor a hedge fund’s termination dates or events because once expired, resurrecting the expired exempted limited partnership will be problematic. What if the fixed term expires by the lapse of time or the occurrence of a termination event and the partners nevertheless wish their hedge funds to continue operating? This situation may come about by oversight of the hedge fund manager or the partners in failing to heed the impending termination date or termination event or a change of heart by the hedge fund manager and the partners, after the termination date has passed or the termination event has occurred. Is it then open to the partners effectively to agree to resurrect and continue their expired limited partnership or must they, in any event, complete the winding up and dissolution of their exempted limited partnership and then form a new partnership with all the time, expense, inconvenience and negative tax and other consequences that this may entail? In a guest article, Christopher Russell and Oliver Payne, partner and associate, respectively, at Ogier, Cayman Islands, first discuss the Cayman Islands regulations that relate to limited duration exempted limited partnerships. The authors then highlight a potential course of action to extend the life of the exempted limited partnership where the partnership term has expired or a termination event has occurred.
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From Vol. 4 No.42 (Nov. 23, 2011)
Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds
On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City. Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA). This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others.
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From Vol. 4 No.31 (Sep. 8, 2011)
Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations
In a judgment with serious implications for those who serve as directors of Cayman Islands hedge funds, the Grand Court of the Cayman Islands has ruled that Stefan Peterson and Hans Ekstrom, who were the independent directors of Weavering Macro Fixed Income Fund Limited (Fund), were personally liable for $111 million of excess redemption payments that had been made by the Fund using a wildly inflated net asset value. The Court found that those directors had willfully neglected their duties to supervise the operation of the Fund and had served as little more than rubber stamps for the Fund’s founder, Magnus Peterson. They missed or ignored critical – and obvious – signs that something was seriously amiss with the Fund. The Court’s judgment, summarized in this article, provides a useful roadmap for the level of engagement, due diligence and oversight required of directors of Cayman Islands hedge funds. For our original coverage of the Fund’s collapse, see “The Weavering Blow-Up and What It May Mean for Boards of Directors of Cayman Islands Hedge Funds,” The Hedge Fund Law Report, Vol. 2, No. 13 (April 2, 2009). For a discussion of the role that non-executive directors should play in the governance of offshore hedge funds and the protection of investors, see “The Case In Favor of Non-Executive Directors of Offshore Hedge Funds with Investment Expertise, Fewer Directorships and Independence from the Manager,” The Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010), and a letter to the editor in response, “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011).
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From Vol. 4 No.22 (Jul. 1, 2011)
Enforcement in the Cayman Islands of U.S. and Other Foreign Judgments: How Safe Is It for Hedge Fund Managers to Allow Judgment to Be Entered by Default?
Cayman Islands hedge funds, their directors and service providers, are increasingly appearing as defendants in U.S. litigation, in particular in the aftermath of the Madoff fiasco. These entities are facing a variety of claims, not always structured appropriately under Cayman Islands law, and not always structured with any particularity. Broad, sweeping allegations of fraud, gross negligence, the existence of fiduciary and other duties, and clawback claims based on unjust enrichment are thrown in, not always with the application that should be displayed before launching such serious allegations. Many of these claims face motions to dismiss, often on the basis of applicable Cayman Islands law, in particular, the existence of fiduciary and other duties under Cayman Islands law, derivative claims, reflective loss and exculpation and indemnity clauses. See “Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part Two of Two),” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011). It was not uncommon for Cayman Islands lawyers in the past to advise Cayman Islands funds, and other related Cayman entities facing U.S. proceedings, that since they were Cayman Islands entities, it was safe not to participate in the U.S. proceedings, even for the purpose of challenging the jurisdiction of the U.S. court – and to allow a judgment to be entered in the U.S. court, because the U.S. judgment would not be enforceable against them in the Cayman court. Such advice, even if (rarely) appropriate in individual cases, could not be, and never was, of universal applicability. There are very clear risks in advising a Cayman entity not to challenge the jurisdiction of a U.S. or other foreign court, where such a challenge can be mounted with a sufficient prospect of success, and, whether or not such an application is made, in allowing a judgment to be entered in default by not participating to defend the proceedings, on the premise that any such judgment would not be enforceable in the Cayman Islands court. In a guest article, Chris Russell, a partner and head of the litigation and insolvency department of Ogier Cayman, and Michael Makridakis, a senior associate at Ogier, provide an overview of relevant law; identify the relevant common law rules and defenses; and discuss the enforcement of judgments in foreign insolvency proceedings.
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From Vol. 4 No.15 (May 6, 2011)
What Are the Legal and Practical Effects of a Discrepancy between the Provisions of a Cayman Hedge Fund’s Articles of Association and Offering Documentation?
Before the recent global economic crisis impacted the hedge fund world, it was not uncommon for even sophisticated investors to subscribe for shares in corporate offshore vehicles without having first scrutinized in detail the offering memorandum, the Articles of Association and the other governing documentation of the fund. The change in the economic climate has given rise to a heightened awareness of the need to review carefully, and in some cases to seek to negotiate, the terms of subscription. It has also caused those who have suffered investment losses to scrutinize subscription terms carefully in order to consider whether, based on the terms upon which they invested and the terms of the Articles of Association of the fund, they have grounds for bringing proceedings to recover damages from the fund or its directors, or other service providers. A number of the disputes that have arisen in the last few years between Cayman funds and their investors have been caused by apparent material differences in key provisions in fund documents, in particular the offering memoranda and the Articles of Association – for example, the fund’s rights to suspend redemptions, delay payment of redemption proceeds, side-pocket illiquid positions and to set aside reserves for contingent liabilities post declaration of net asset value. The question arises: What is the effect of a provision in the offering documentation which appears to be inconsistent with the wording of the Articles? Does the provision in the offering documentation constitute an enforceable right of the fund (for example, to suspend payment of redemption proceeds if such a provision is not provided for in the Articles) or a shareholder (for example, to require adherence by the fund to an investment policy specified in the offering document but not contained within the Articles)? Or does such an inconsistency constitute a misrepresentation of the terms of the Articles, which may give rise to a cause of action against the fund or its directors at the suit of an investor who relied on the misrepresentation in deciding to invest or remain invested in the fund? In a guest article, Christopher Russell and Rachael Reynolds, Partner and Managing Associate, respectively, at Ogier in the Cayman Islands, address the foregoing questions and others, and discuss relevant guidance provided by the UK Privy Council in an important recent decision.
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From Vol. 3 No.5 (Feb. 4, 2010)
Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?
With the green shoots of recovery beginning to emerge in the U.S. and significant amounts of capital withdrawn during the last twelve months beginning to be redeployed back into fund structures, should U.S. investment managers now be looking to establish offshore fund vehicles? If so, what sources of capital should U.S. investments managers be looking to attract to invest into these offshore fund vehicles? Additionally, with offshore jurisdictions subjected to more scrutiny than ever before, which jurisdictions should U.S. investment managers be looking to go to in order to domicile their offshore fund vehicles? These are all important questions which U.S. investment managers and their advisors are frequently asking and which are worthy of consideration and analysis. In a guest article, Ogier Partner Simon Schilder addresses these questions and discusses: the rationale for organizing offshore investment vehicles; potential changes to the unrelated business taxable income rules; the Alternative Investment Fund Manager Directive in the European Union; and considerations when selecting an offshore jurisdiction for organization of a hedge fund.
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From Vol. 2 No.44 (Nov. 5, 2009)
Investors Win Court-Imposed Liquidation of Cayman Islands Hedge Fund of Funds Matador Investments
Matador Investments Ltd. (Matador or the Fund) is a fund of funds organized under the laws of the Cayman Islands. Following a request by investors for redemption of their interests in Matador, the Fund first imposed a “gate” on redemptions (to stretch out redemption payments over time), and later imposed a complete freeze on redemptions. The investors brought an action against the Fund seeking a judicial liquidation of the Fund on the ground that, following their redemption requests, they had become unpaid “creditors” of the Fund. See “How Will the New Cayman Islands Insolvency Regime Affect the Winding-Up of Cayman Islands Hedge Funds?,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009). Matador, relying on the recent Strategic Turnaround decision, argued that until the redemptions were paid in full, the investors were still bound by the Fund’s governing documents, which permitted both gates and freezes on redemptions. The court disagreed, appointed a liquidator, and directed the Fund to commence winding up its affairs. We explain the parties’ arguments and how the court distinguished the Matador investors from those in the Strategic Turnaround case.
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From Vol. 2 No.42 (Oct. 21, 2009)
How Will the New Cayman Islands Insolvency Regime Affect the Winding-Up of Cayman Islands Hedge Funds?
On March 1, 2009, the Cayman Islands Legislative Assembly implemented a new insolvency regime applicable to, among others, hedge funds organized there. Market participants surveyed by The Hedge Fund Law Report agree that the new regime does not dramatically change the insolvency regime applicable to hedge funds, but may empower liquidators and courts to pursue claims by insolvent companies of fraudulent pre-petition trading. This article reviews the mechanics of the new insolvency regime that are relevant to hedge funds (including providing statutory language); the new regime’s effect on the powers of liquidators and courts; whether the outcome in the case In the Matter of Strategic Turnaround Master Partnership Limited (12 December 2008) would have been different had the new regime been in effect in December 2008, when the case was decided; the “cash flow” definition of insolvency in the Cayman Islands; when a Cayman Islands hedge fund investor becomes a creditor of the hedge fund from which the investor has redeemed; the anticipated impact of the legal changes on the number of hedge funds domiciled in the Caymans; the effect of the law on in-kind redemptions; and the likelihood that the Caymans will impose an income or capital gains tax on hedge funds or their managers to make up a budget shortfall.
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From Vol. 2 No.37 (Sep. 17, 2009)
The Evolution of Offshore Investment Funds (Part Three of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Cross-Border Regulation; Transparency in Various Offshore Financial Centers; Preferred Offshore Financial Centers for Organizing Hedge Funds; Audits and Examinations of Offshore Financial Centers by Global Regulatory Bodies; and How Hedge Fund Managers Can Access Regulatory Findings
During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco. Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar. In prior issues, we published the first two of three parts of the full transcript. This week’s issue of The Hedge Fund Law Report includes part three of three of the full transcript, in which MacKay discusses cross-border regulation; the definition of “established operations”; transparency in various offshore financial centers (including the Cayman Islands, BVI, the Channel Islands and Bermuda); which offshore financial centers are more risky for organizing hedge funds; which offshore financial centers hedge funds are likely to migrate to based on their ability to meet international standards of transparency; whether global regulatory bodies such as the Organization for Economic Cooperation and Development and the International Organization of Securities Commissions are merely promulgating standards or whether they are actively examining or auditing the regulatory and tax rules and enforcement of those rules in offshore financial centers; and how hedge funds can access the results of examination and audit work conducted by regulators.
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From Vol. 2 No.26 (Jul. 2, 2009)
Consistent With International Trends, Cayman Islands Monetary Authority May Require More Transparency from Cayman-Registered Hedge Funds
The Cayman Islands Monetary Authority is planning to increase the transparency required of hedge funds registered in the popular offshore jurisdiction. Specifically, it is contemplating extending the scope of information called for in Fund Annual Reports, and the range of uses to which such information may be put. This article reviews the existing system of disclosure in the Caymans, and the most likely changes. It also discusses the possible impact of such changes on the competitive position of the Cayman Islands vis-à-vis other offshore financial centers.
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From Vol. 2 No.3 (Jan. 21, 2009)
Cayman Court Suggests that Hedge Fund Investor does not Have Standing to Liquidate Fund
On December 12, 2008, the Cayman Islands Court of Appeal delivered a Judgment in a case titled In the Matter of Strategic Turnaround Master Partnership, Limited. The court denied standing to a redeeming investor in Strategic Turnaround Master Partnership, Limited who sought to petition for a wind up of the fund based on the fund’s inability to pay its debts. However, the court left open the possibility that the investor, Culross Global Ltd., might petition for the same relief under the “just and equitable” doctrine of Cayman Islands insolvency law. We discuss the facts, legal analysis and implications of the case for hedge funds organized in the Cayman Islands.
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From Vol. 1 No.18 (Aug. 11, 2008)
Senate Proposals and GAO Report Focus on Taxation of Cayman Islands Accounts
On the heels of continued congressional concern about tax evasion among offshore accounts, including offshore hedge funds, a spokesman for the Senate Finance Committee told The Hedge Fund Law Report that lawmakers will attempt to “move legislation this year” addressing the issue. At a recent hearing on Cayman Islands accounts, Sen. Max Baucus, chairman of the Finance Committee, outlined a series of proposals centering on strengthening rules relating to Reports of Foreign Bank and Financial Accounts. The Finance Committee hearing focused on a recent Government Accountability Office report titled “Cayman Islands: Business and Tax Advantages Attract U.S. Persons and Enforcement Challenges Exist.” The GAO report found that for many hedge funds, a primary purpose of establishing a Cayman Islands domicile is tax minimization. The GAO report noted that efforts to prevent illegal tax avoidance are hindered by the IRS’s “lack of jurisdictional authority to pursue information, difficulty in identifying beneficial owners due to the complexity of offshore financial transactions and relationships among entities,” and other factors. Cayman attorneys, however, remain confident in the robust legal and regulatory structure in the Cayman Islands and, in fact, read the GAO report as complimentary of the Cayman system.
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From Vol. 1 No.14 (Jun. 19, 2008)
Cayman Islands Monetary Authority Issues Report on Hedge Fund Statistics
Earlier this month, the Cayman Islands Monetary Authority issued the first annual Investments Statistical Digest containing statistics on 5,052 Cayman-domiciled hedge funds.
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