Common Fund Structuring Mistakes & How to Avoid Them

Fund structuring sets the foundation for an investment vehicle’s operational, legal, and tax profile. Yet even experienced managers frequently make avoidable errors that delay launches, increase regulatory exposure, or limit access to investors. Below are the most common fund structuring mistakes and how to mitigate them.

1. Using the Wrong Legal Vehicle for the Strategy

Mistake: Choosing a structure (e.g. exempted company vs. ELP) that conflicts with the fund’s strategy, investor profile, or tax goals.

Why it matters: Each vehicle carries implications for control, tax treatment and investor suitability. For example, Cayman exempted companies are optimal for open-ended hedge funds, while closed-ended private equity funds are typically structured as exempted limited partnerships (ELPs) to achieve flow-through tax treatment.

Solution: Align the vehicle choice with the investment model. Use ELPs for capital commitment and drawdown models and exempted companies for daily or periodic subscriptions/redemptions. Always consider the tax residence of your investors.

2. Misunderstanding Regulatory Triggers

Mistake: Assuming a fund is unregulated based on investor count or structure without reviewing updated regulations.

Why it matters: Since 2020, the Cayman Islands requires all open-ended and closed-ended funds with pooled external capital to register with CIMA, closing many prior exemptions (e.g. the “15 investor” rule).

Solution: Determine whether the fund is open or closed-ended and whether it qualifies for an exemption. Engage local counsel early to confirm regulatory status under the Mutual Funds Act or Private Funds Act.

3. Delaying Key Appointments (Administrator, Auditor, AML Officers)

Mistake: Waiting to appoint service providers until after documents are finalised.

Why it matters: Cayman fund registration requires signed engagement letters from auditors and (in most cases) administrators. AML officers must be named before fundraising begins.

Solution: Confirm key appointments before drafting offering documents. Ensure the administrator can support your asset class and the auditor is approved by CIMA. If no third-party admin is used, prepare alternative solutions for asset verification and cash monitoring.

4. Skipping ICSD-Ready Structuring for Distribution

Mistake: Structuring the fund without considering ICSD accessibility, limiting institutional reach.

Why it matters: ICSDs like Euroclear and Clearstream offer automated settlement, nominee custody, and access to a global investor base. But this is only if the fund is structured for ICSD recognition.

Solution: Engage with ICSDs early. Ensure your fund is eligible for ISIN assignment, has a compliant nominee structure and that the transfer agent can interface with the ICSD platform. This significantly simplifies distribution.

5. Neglecting Post-Launch Compliance Requirements

Mistake: Treating CIMA registration as a one-time task.

Why it matters: Regulated funds must submit annual audited financials, file a Fund Annual Return, maintain up-to-date offering documents and comply with corporate governance rules.

Solution: Build a compliance calendar with clear owner responsibilities for filings and fees. Ensure your board or GP maintains oversight on valuation policies, conflicts of interest and AML procedures.

6. Poor Investor Onboarding Processes

Mistake: Handling subscriptions, capital calls, or distributions manually.

Why it matters: Manual processes increase error risk and delay execution, especially when dealing with multiple closings, true-up mechanics, or investor equalisation in PE funds.

Solution: Use an administrator or platform with straight-through processing capabilities. Consider integrating with ICSD or DTCC’s AIP platform to streamline onboarding and improve data integrity for distributors.

7. Failing to Prepare for Asset Verification in Private Funds

Mistake: Assuming no custodian is needed and failing to document asset title properly.

Why it matters: Cayman’s Private Funds Act requires asset title verification if a custodian is not appointed. Non-compliance can delay registration or expose the fund to audit findings.

Solution: Engage a third party (e.g., administrator or auditor) to verify asset ownership and document the process. Disclose this arrangement to CIMA during registration.

Conclusion

Many structuring pitfalls stem from treating fund setup as a checklist rather than a strategic process. Early coordination between legal, tax, fund admin and distribution partners can prevent costly mistakes and ensure long-term operability.

FundFront works with firms to streamline fund launches, secure institutional access and maintain post-launch compliance. If your firm is grappling with structuring or distribution issues, reach out to explore tailored solutions. Email hello@fundfront.com or complete the contact form on our website. 

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• How to Set Up a Hedge Fund in the Cayman Islands: A Step-by-Step Guide

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.