How to Set Up a Hedge Fund in the Cayman Islands

Are you considering starting a hedge fund in the Cayman Islands?

Here is a guide to show you the entire process of how to set up a hedge fund in the Cayman Islands. Covering everything from selecting the ideal fund structure to launching your fund and onboarding investors. 

The Cayman Islands is a leading jurisdiction for hedge funds, hosting over 70% of the world’s offshore funds. However, setting up a fund here can be complex, given the involvement of multiple stakeholders, high investor expectations and time-sensitive market demands. Proper preparation is the key to success.

Why set up a hedge fund in the Cayman Islands?

With over 29,000 registered funds, the Cayman Islands is a leading jurisdiction for hedge fund formation, drawing fund managers and institutional investors from around the world. The Cayman Islands is renowned for its business-friendly environment, tax neutrality and strong regulatory framework. It offers a sophisticated infrastructure designed specifically for the alternative investment industry. For more than two decades, it has been the domicile of choice for hedge funds, offering a regulatory environment that is an expertly balanced blend of investor protection and operational flexibility.

Its elite status attracts many of the world’s top talent and service providers. From leading legal and tax experts to financial service providers, banks and other legal specialists. This opens up exciting opportunities for partnerships and collaborations to ensure the smooth establishment and ongoing operation of your fund. 

The Cayman Islands’ proximity to the US also makes it a top offshore jurisdiction for US fund managers looking to establish master-feeder structures to target international investors. 

 

Best structure for a hedge fund in the Cayman Islands?

Before setting up your fund, one of the first important steps is to choose the correct legal structure. This decision comes down to several factors, including investor preferences, your fund’s investment objectives, where the fund will be close-ended or open-ended, the expected duration, and finally the number of investors involved. The Cayman Island offers a range of fund structures, each designed to meet the varying needs of investors and fund strategies. 

The main fund structures available are:

#1 Exempted Company

#2 Exempted Limited Partnership

#3 Limited Liability Company (LLC)

#4 Segregated Portfolio Company (SPC)

#5 Master-Feeder Structure

#6 Unit Trust

 

Exempted Company

The exempted company is the most popular structure to start a hedge fund in the Cayman Islands. It allows the company to conduct business outside the Cayman Islands with minimal regulatory burden. The key features include:

Of these options the exempted company is one of the most popular options for new hedge funds in the Cayman Islands. This means that a company can conduct its business outside of the Cayman Islands with minimal regulatory restrictions. The key features of this type of structure include:

• Limited liability for investors. Liability is limited to the amount they invest. 
• The company is classed as its own legal entity, which means that they can enter into contracts and own assets. 
• The structure is fairly flexible which means it can support a wider range of investment strategies and classes. 
• As with most Cayman Island funds, shareholder information will not be publicly available.

When to use an Exempted Company structure?

Funds typically favour an Exempted Company structure due to its operational flexibility and ease of setup. This type of structure would suit both single-manager hedge funds and more complex fund-of-fund structures. This means that managers can balance investor security with administrative simplicity. 

 

Exempted Limited Partnership

The Exempted Limited Partnership (ELP) stands as one of the most established fund structures in the Cayman Islands, particularly favored by hedge funds and institutional investors. At its core, the ELP operates through a dual partnership structure:

General partners take on the fund management responsibilities and carry unlimited liability for the partnership’s obligations. Limited partners, who are the investors, enjoy liability protection up to their invested capital.

Why use an Exempted Limited Partnership?

ELPs operate under the Exempted Limited Partnership Law, offering substantial operational freedom in crucial areas such as:

• Profit sharing mechanisms
• Partner withdrawal 
• Fund dissolution

The structure proves especially valuable for investment managers seeking to balance robust governance with operational flexibility.

When to use an Exempted Limited Partnership structure?

Private equity and venture capital funds frequently choose the ELP structure because it naturally accommodates:

• Extended investment horizons
• Flexible capital commitments
• Institutional investor requirements
• Those seeking tax optimisation

The structure particularly suits managers raising capital from sophisticated investors who value both liability protection and tax transparency.

 

Limited Liability Company (LLC)

The Cayman LLC represents a newer addition to the jurisdiction’s legal framework, drawing inspiration from Delaware’s LLC model. This structure bridges the gap between partnerships and corporations, delivering unique advantages:

Management Flexibility

The LLC framework gives managers considerable latitude in designing governance structures. Members can craft operating agreements that precisely match their fund’s requirements while maintaining professional standards.

Capital Structure Benefits 

Unlike traditional companies, LLCs bypass the complexities of share capital. This streamlined approach simplifies both profit distribution and member relationships, while still protecting members through limited liability provisions.

Tax Considerations 

For U.S. investors, Cayman LLCs offer familiar territory. The structure typically qualifies for pass-through taxation under U.S. rules, maintaining tax efficiency without sacrificing operational flexibility or investor protection.

When to use a Limited Liability Company structure?

The LLC structure particularly appeals to American investment managers who want to mirror their domestic operations in an offshore context. Its versatility makes it the go-to choice for funds that need room to evolve their governance over time.

U.S. managers often select this model not just for its operational advantages, but because it slots easily into their existing business framework. The structure’s flexibility proves especially valuable as funds grow and adapt their investment approach.

 

Segregated Portfolio Company (SPC)

The SPC structure stands out in Cayman’s fund landscape by enabling multiple investment portfolios (sometimes referred to as cells) to operate independently under one corporate umbrella. Each portfolio functions as its own distinct entity, maintaining separate books and records while benefiting from shared corporate oversight.

This innovative framework delivers three key advantages:

Legal Segregation 

The structure creates ironclad barriers between portfolios, ensuring complete separation of assets and liabilities. This robust segregation means that any issues affecting one portfolio cannot spill over to impact others within the same SPC – a crucial safeguard for investors.

Cost-Effective Management 

Running multiple strategies through an SPC dramatically streamlines operations. Rather than maintaining separate legal entities, funds can consolidate their administrative functions while preserving strategy independence. This approach typically yields significant cost savings compared to operating standalone funds.

Strategic Agility 

The SPC framework excels at accommodating growth. Launching new investment strategies simply requires creating additional portfolios within the existing structure – a far more efficient process than establishing entirely new fund vehicles.

When to use a Segregated Portfolio Company structure?

SPCs are particularly favoured for umbrella fund structures, where multiple sub-funds or strategies are managed under a single entity. 

The structure proves especially valuable for managers who anticipate launching multiple products over time, as it provides a scalable foundation for growth while maintaining clear boundaries between different investment approaches.

 

Master-Feeder Structure

The Master-Feeder structure represents one of the most sophisticated approaches to international fund management in the Cayman Islands, particularly for hedge funds bridging U.S. and global investors. This framework creates a unified investment vehicle while respecting diverse regulatory and tax requirements.

The structure operates through a two-tier system:

• A central master fund executes all investment activities
• Multiple feeder funds channel capital into the master fund

U.S. investors typically flow through a domestic feeder, while international investors access the fund through a Cayman-based offshore feeder. This dual-channel approach ensures optimal tax treatment for both investor groups.

When to use a Master-Feeder Structure?

Fund managers should consider the Master-Feeder structure when their strategy demands:

Scale 

By consolidating assets from multiple feeders into a single master fund, managers achieve the scale needed to execute sophisticated investment strategies effectively. This pooling of resources often translates into better trading terms and reduced transaction costs.

Tax Optimisation 

The structure elegantly handles varying tax requirements. U.S. investors maintain their pass-through benefits through the domestic feeder, while international investors benefit from the tax neutrality of the Cayman feeder – all while participating in the same underlying investment strategy.

International Reach 

For U.S. managers expanding globally, the Master-Feeder structure provides a tested framework for attracting international capital without compromising operational efficiency. It proves particularly valuable for established hedge funds seeking to broaden their investor base across borders.

This arrangement works exceptionally well for substantial hedge fund operations where streamlined portfolio management matters as much as tax efficiency and global accessibility.

 

Unit Trust

The Unit Trust is a distinctive fund structure in the Cayman Islands, operating under a trustee-based framework rather than a corporate model. Under this arrangement, trustees hold and manage the assets of the fund.

Although less widely used than other Cayman structures, Unit Trusts have carved out an important niche, particularly with investors from Asian markets where trust structures are already well-established in the investment landscape.

When to use a Unit Trust Structure?

Unit Trusts serve a specific purpose in fund structuring, proving most valuable when:

• Targeting investors from markets with strong trust-based traditions
• Seeking to benefit from specific tax treaty advantages
• Operating in jurisdictions that favour trust structures over corporate entities

The structure particularly appeals to fund managers who understand their target market’s preferences and need a vehicle that aligns with local investment customs and regulatory frameworks.

 

Regulatory framework of the Cayman Islands

The Cayman Islands Monetary Authority (CIMA) stands as the cornerstone of fund regulation in the jurisdiction. As the primary watchdog, CIMA maintains robust oversight of the hedge fund industry, balancing market freedom with investor protection and global compliance standards.

Compliance requirements

Fund managers operating in the Cayman Islands must navigate two key regulatory areas:

Licensing and Registration

Most hedge funds fall under the Mutual Funds Act, requiring either licensing or registration with CIMA. The specific requirements depend largely on the fund’s structure, investor base, and investment approach.

Ongoing Obligations

Once established, funds must maintain strict compliance with CIMA’s ongoing requirements. This includes:

• Submitting annual returns and audited financials to CIMA
• Following comprehensive anti-money laundering protocols
• Engaging qualified service providers for critical functions like audit, administration, and custody

These requirements ensure Cayman funds meet the highest standards of transparency and professional management while maintaining the jurisdiction’s reputation as a premier financial center.

 

Step by step guide to set up a hedge fund in the Cayman Islands

Step 1: Select Your Fund Structure

Your choice of structure lays the groundwork for everything that follows. Consider carefully how your investment strategy, investor profile, and regulatory needs align with different options. For instance, an exempted company might better serve a diverse investor base, while an LLC could better suit U.S. investors seeking tax efficiency.

Step 2: Engage Your Legal Team

Experienced legal counsel proves invaluable in navigating Cayman’s regulatory landscape. Your lawyers will guide you through compliance requirements and help structure relationships with key service providers, from administrators to auditors.

Step 3: Secure Core Service Providers 

Early partnership with service providers shapes your fund’s operational framework. Key relationships to establish include:

Corporate Services

• Fund Administrator
• Audit Firm
• Onshore Counsel (if needed)
• Bank/Custodian
• Prime Broker

These providers not only support daily operations but also contribute crucial input for your offering documents.

Here is a list of top 25 service providers in the Cayman Islands.

Step 4: Prepare Fund Documentation

Your legal team will draft essential documents including:

• Offering Memorandum
• Subscription Agreement
• Articles of Association

These documents must precisely reflect your fund’s structure while meeting Cayman legal requirements.

Step 5: Complete CIMA Registration

Registering with CIMA involves submitting the fund’s documents along with the appropriate fees. The registration process typically takes a few weeks, depending on the complexity of the fund and the accuracy of the submissions.

Step 6: Establish Operating Framework 

Set up your operational infrastructure by:

• Opening necessary bank accounts
• Finalising prime brokerage relationships
• Confirming service provider appointments
• Setting up custody arrangements

Step 7: Fund Launch 

With your foundation in place, proceed to:

• Open the initial offering period
• Process incoming subscriptions
• Implement compliance procedures

 

Benefits of setting up a hedge fund in the Cayman Islands

The Cayman Islands has earned its position as a leading fund jurisdiction through several compelling advantages:

Tax Efficiency

The jurisdiction’s tax neutral stance means funds avoid corporate, income, and capital gains taxes. This streamlines operations and maximizes returns for investors while simplifying fund accounting and reporting.

Privacy Protection

Robust confidentiality laws safeguard investor and manager privacy without compromising necessary transparency. This balance particularly appeals to institutional investors who value discretion in their investment activities.

Legal Certainty

Built on English common law principles, Cayman’s legal system provides the bedrock of certainty that sophisticated investors demand. 

Structural Freedom

Cayman’s regulatory framework offers remarkable flexibility in fund design while maintaining high standards. This adaptability, combined with global recognition, helps managers attract international capital more effectively.

Conclusion

Cayman’s commitment to evolving alongside global markets ensures its continued leadership in offshore fund formation. The jurisdiction consistently refines its regulatory approach to meet changing investor needs while preserving the core benefits that attract fund managers.

For managers seeking a proven jurisdiction that combines operational efficiency with investor appeal, the Cayman Islands delivers a compelling package of advantages that few other locations can match.

Contact our team to explore how these benefits align with your fund strategy.

 

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.