What You Need to Know Before Starting a Fund: Key Steps in Fund Formation

Introduction to Fund Formation

Setting up an investment fund requires critical decisions across regulatory frameworks, structural options, and day-to-day operations, choices that will ultimately define both your investors’ experience and your fund’s ability to grow efficiently. Fund sponsors establishing hedge funds, private equity vehicles, or family office structures for deploying private capital must navigate these decisions thoughtfully to prevent unnecessary delays, investor frustration, or regulatory complications.

This whitepaper walks through the key considerations and practical steps sponsors should address before launch, with particular emphasis on fund structures in the Cayman Islands.

Choosing the Right Jurisdiction and Structure for your Fund

The Cayman Islands is the premier jurisdiction for offshore fund formation due to its tax neutrality, legal framework and its global recognition among institutional investors. One of the first stages to fund formation is for fund sponsors to decide whether to establish an open-ended or closed-ended fund.

• Open-ended funds fall under the Mutual Funds Act and allow investors to redeem their holdings at will. These are ideal for hedge funds and mutual funds offering liquidity.
• Closed-ended funds typically raise committed capital and invest it over time without offering redemption rights. These funds are regulated under the Private Funds Act and are usually structured as Exempted Limited Partnerships (ELPs). This structure offers contractual flexibility and tax transparency. This type of structure is often favoured for private equity, venture capital and real asset strategies.

Understanding the Regulatory Environment

Open Ended Funds

Open-ended funds must register with the Cayman Islands Monetary Authority (CIMA) if they have more than one investor, unless an exemption applies. Most commonly, these funds impose a minimum initial subscription of US$100,000 to qualify for streamlined registration. Once registered, they are required to file audited financial statements, an annual Fund Annual Return (FAR) and maintain up-to-date offering documents. Directors must also be registered with CIMA and comply with corporate governance rules introduced in 2023.

Closed-ended Funds

Closed-ended funds must register with CIMA under the Private Funds Act within 21 days of accepting capital commitments and before calling any capital for investments. The registration process includes submitting constitutional documents, offering materials, service provider consents and paying applicable fees. Once registered, private funds must perform annual audits, implement written valuation policies, and ensure independent verification of asset ownership and cash monitoring procedures.

It is important to note compliance with anti-money laundering (AML), FATCA/CRS, and CIMA’s operational standards is mandatory for both fund types.

Capital Raising and Investor Onboarding

Open Ended Funds

For open-ended funds, investor subscriptions typically occur around the time of fund launch. Sponsors must ensure that offering documents, AML/KYC processes and subscription agreements are ready before opening the fund to investors. The administrator typically assists in onboarding, collecting investor data and maintaining accurate share registers.

Closed-ended Funds

Closed-ended funds follow a commitment-based model. The general partner solicits interest, admits investors via a subscription agreement or deed of adherence to the Limited Partnership Agreement (LPA) and conducts one or more closings. Investors contribute a portion of their commitment upfront, usually to cover organisational costs, while the remainder is drawn down over time through capital calls. This model allows for staggered fundraising and requires careful tracking of contributions, capital accounts and equalisation payments for later-closing investors. Proper onboarding ensures that investor rights, fund economics and regulatory disclosures are clearly documented from the outset.

Fund Registration and Launch

Following the initial investor commitments, fund sponsors must complete the formal fund formation registration process. For mutual funds, this involves submitting Form MF1, a current offering document, CIMA-approved auditor consent and paying the registration fee. Once the application is accepted, the fund receives its CIMA registration number and is subject to ongoing compliance obligations including annual audits and AML standards.

For private funds, the registration is completed through CIMA’s REEFS portal. Sponsors must submit the fund’s certificate of formation, LPA or equivalent governing document, a summary of terms, structure chart and service provider consent letters. Registration becomes effective once a complete application is filed and a Certificate of Registration is issued shortly thereafter. From this point, the fund may legally call capital and commence investments.

Enhancing Distribution with Tracker Certificates and ICSD Access

For fund sponsors targeting a global investor base, there are two distinct options that can significantly improve distribution and accessibility.

Tracker Certificates

Tracker certificates offer a flexible and efficient way to replicate the performance of an underlying portfolio or fund. These structured securities receive an ISIN, can be held in standard custody accounts, and allow investors to gain exposure through a tradeable instrument. They are especially effective for delivering private market strategies to institutions that require bookable instruments.

International Central Securities Depositories (ICSDs)

In another instance, International Central Securities Depositories (ICSDs), such as Euroclear and Clearstream, provide infrastructure that allows fund units or securities to be settled and held alongside other financial instruments. ICSD access ensures multi-currency settlement, automated transaction processing and nominee-based custody that protects the rights of beneficial owners. By listing a fund or security on ICSD platforms, sponsors can tap into thousands of connected banks and custodians worldwide, dramatically reducing onboarding friction and enabling scalable cross-border distribution.

Post-Launch Fund Maintenance

Once a fund is launched, maintaining compliance and investor confidence requires continuous attention to regulatory, financial and operational obligations. All regulated funds must undergo annual audits and submit their financial statements and FAR to CIMA within six months of financial year-end. They must also maintain AML policies, ensure timely payment of annual fees and update CIMA on any material changes to fund operations or service providers.

For closed-ended funds, periodic capital calls must be executed in accordance with the LPA, including notice periods, drawdown limits and accurate investor communications. Investment execution, title verification and performance reporting must be tracked to support audit processes and investor transparency. For open-ended funds, NAV calculations and investor liquidity must be managed daily or monthly, depending on the redemption terms. All fund types must maintain strong corporate governance practices, including regular board meetings, conflict of interest policies and internal control frameworks as required under CIMA rules.

Fund Formation Summary Notes

Launching a fund involves navigating legal frameworks, choosing the right structures, coordinating with numerous service providers and building compliant operational systems. The choices made during fund formation will influence a fund’s efficiency, investor perception and long-term growth potential. By understanding the steps outlined above and planning accordingly, fund sponsors can launch with confidence and avoid costly missteps.

FundFront works with alternative investment firms to simplify fund formation and empower global distribution through its tracker certificate securitisation framework and ICSD connectivity. If you’re evaluating a new fund or seeking to enhance your current setup, contact us to explore bespoke solutions tailored to your strategy.

Contact us on our email hello@fundfront.com or complete the contact form on our website. 

Other articles that may be of interest:

• Cayman Islands Fund Setup Checklist
• How Family Offices Can Benefit from Cayman Islands Private Funds
• Top 25 Service Providers in the Cayman Islands for Fund Managers

Disclaimer

FundFront provides operational and technological solutions for family offices, 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.