Cayman Islands Fund Structures: Understanding the Mutual Funds Act vs. Private Funds Act

For decades, the Cayman Islands has remained the go-to jurisdiction for global investment funds, thanks to its advantageous tax environment and adaptable regulatory framework. Today’s fund managers, however, must carefully distinguish between two distinct regulatory categories:

• Open-ended funds governed by the Mutual Funds Act (MFA)
• Closed-ended funds falling under the Private Funds Act (PFA)

Mastering the nuances between these frameworks is crucial for proper fund structuring, maintaining CIMA compliance, and delivering on investor commitments.

Mutual Funds Act: Open-Ended Funds (Hedge Funds & Liquid Strategies)

The Mutual Funds Act applies to investment vehicles offering redemption rights to investors on demand. These structures, predominantly hedge funds, require CIMA registration or licensing except in rare exemption cases.

The typical hedge fund operates as a registered mutual fund – a designation available to funds with minimum investor contributions of US$100,000 or those with listings on recognised exchanges.

The focus of the MFA is on investor protection, disclosure, and financial oversight, requiring funds to:

• Register with CIMA before accepting investor subscriptions
• Appoint a Cayman-based auditor and file annual audited financial statements
• Maintain proper governance, including appointing at least two directors for corporate funds

In the past, smaller hedge funds with 15 or fewer investors could operate without CIMA oversight. However, a 2020 legal change eliminated this exemption, meaning all multi-investor open-ended funds must now be registered.

Managers using master-feeder structures must also consider whether their master fund needs to register. If any Cayman feeder fund is regulated under the MFA, the master fund must also register to ensure transparency across the structure.

Private Funds Act: Closed-Ended Funds (Private Equity, Real Estate & Private Credit)

In contrast to their hedge fund counterparts, strategies like private equity, venture capital, real estate, and private credit typically employ closed-ended structures. These funds lock investor capital for predetermined timeframes, with returns distributed only when underlying assets generate income. 

The regulatory landscape for these vehicles underwent a significant transformation in 2020. Previously operating with minimal oversight in the Cayman Islands, closed-ended funds now fall under the Private Funds Act (PFA), which mandates CIMA registration for virtually all such investment vehicles, barring a handful of narrowly defined exemptions.

This regulatory shift brought closed-ended funds into alignment with the compliance standards long established for open-ended structures, creating a more comprehensive governance framework across the Cayman investment ecosystem.

The key compliance requirements for private funds include:

• Timely registration – Funds must register with CIMA within 21 days of accepting capital commitments and before drawing down investor funds
• Annual audits – Funds must appoint a CIMA-approved auditor and submit audited financial statements
• Valuation and custody oversight – Private funds must have clear asset valuation policies, and where applicable, appoint a custodian or independent title verifier to ensure asset security
• Cash flow monitoring – Funds must designate a responsible party to oversee investor contributions and fund transactions

The Private Funds Act introduced these rules to increase transparency and investor protection, aligning Cayman’s standards with global expectations.

Are Any Cayman Funds Still Unregulated?

While most funds must now register with CIMA, some structures remain exempt:

• Single-investor funds – If a vehicle has only one investor, it is not considered a fund under Cayman law.
• Family office structures – Investment entities that exclusively manage a single family’s wealth are exempt from the PFA.
• Joint ventures and holding companies – Provided that all investors actively participate in management, these structures are not considered passive investment funds.

However, fund managers should be cautious—if a structure looks and operates like an investment fund, CIMA may still classify it as such, requiring compliance under the MFA or PFA.

Choosing the Right Fund Structure

For fund managers setting up Cayman vehicles, the first question is whether the fund will be open-ended or closed-ended.

• If investors will have redemption rights, the fund must be registered under the Mutual Funds Act.
• If capital is locked in, the fund must be registered under the Private Funds Act (unless an exemption applies).

Other considerations include:

• Investor base – Some structures require minimum investment thresholds, while others allow for broader participation.
• Fund liquidity – Private funds operate on longer investment horizons, while mutual funds offer periodic liquidity.
• Compliance burden – While both fund types require audits and oversight, private funds must also implement valuation, custody, and cash monitoring controls.

Final Thoughts

Despite regulatory evolution, the Cayman Islands continues to hold its position as the gold standard for alternative investment funds. The era of minimal oversight has given way to a more structured environment, with both private equity vehicles and boutique hedge funds now subject to formal CIMA registration procedures.

Fund managers who grasp the fundamental differences between the Mutual Funds Act and Private Funds Act frameworks gain a strategic advantage in designing structures that satisfy both regulatory imperatives and sophisticated investor demands. Partnering with seasoned advisors ensures ongoing compliance without sacrificing the operational flexibility that has long made Cayman the jurisdiction of choice for investment professionals worldwide.

For more information on Cayman Islands fund structures, reach out to our team at hello@fundfront.com or complete the contact form on our website here. 

Disclaimer

FundFront provides operational and technological solutions for fund structuring, securitisation and management. We do not provide legal, tax or financial advice. We recommend that you consult with professional legal or financial advisors to ensure compliance and appropriateness for your specific situation.