Australian investment funds series: Regulation of investment funds in the Cayman Islands

This is the second article in our series on the usage of Cayman Islands structures by Australian fund managers. Our previous article addressed why Australian fund managers are increasingly using Cayman Islands vehicles. Here, we explore the key features of Cayman Islands mutual funds and private funds, including their respective regulatory regimes, registration requirements, and practical considerations for Australian fund managers.

Introduction

The Cayman Islands is one of the world’s leading offshore jurisdictions for the establishment of investment funds.

Regulated investment funds established in the Cayman Islands fall into two broad categories: open-ended “mutual” funds and closed-ended “private” funds. Open-ended funds provide investors with voluntary redemption or repurchase rights and therefore open-ended funds will typically invest in liquid assets which can be readily realised to fund redemption requests.

Closed-ended funds do not permit investor redemptions during the life of the fund, so closed-ended funds will generally invest in non-liquid assets that require time to liquidate or realise their value.

Regulation of investment funds 

The Mutual Funds Act (as amended) (the Mutual Funds Act) and the Private Funds Act (as amended) (the Private Funds Act) are the principal pieces of legislation relevant to the regulation of mutual funds and private funds respectively in the Cayman Islands.

All regulated investment funds must also comply with various other regulatory regimes, which we will address in future articles, including anti-money laundering legislation and regulation, FATCA, CRS, beneficial ownership, and economic substance regimes. The Cayman Islands Monetary Authority (CIMA) is the regulatory body responsible for compliance with these regulations and has broad powers to ensure the protection of investors.

Mutual funds 

A mutual fund is defined by the Mutual Funds Act as a company, unit trust or partnership incorporated or otherwise carrying on business in the Cayman Islands that issues equity interests¹, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to receive profits or gains from investments.

The scope of regulation extends to Cayman Islands established or incorporated master funds which have one or more CIMA regulated feeder funds and hold investments and conduct trading activities for the principal purpose of implementing the overall investment strategy of the regulated feeder fund.

The following vehicles are excluded from the scope of the Mutual Funds Act:

• single investor funds, which fall outside the definition of a ‘mutual fund’ as there is no pooling of investor funds; and
• single asset investment funds, which fall outside the definition of a ‘mutual fund’ as there is no spreading of investment risk.

Mutual funds are required to file their offering document with CIMA, together with the prescribed particulars. Any offering document filed with CIMA must contain the information required under the CIMA Rule on the Contents of Offering Documents for Regulated Mutual Funds. Master funds, which have no offering document, need only submit certain prescribed particulars to CIMA.

Private funds 

A private fund is defined by the Private Funds Act as a company, unit trust or partnership that offers or issues or has issued investment interests², the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:

• the holders of investment interests do not have day-to-day control over acquisition, holding, management or disposal of the investments; and
• the investments are managed by or on behalf of the operator of the private fund, directly or indirectly, but does not include any non-fund arrangements.

Single investor funds will also fall outside the definition of a ‘private fund’ as there is no pooling of investor funds. Additionally, the definition of ‘private fund’ excludes certain non-fund arrangements which are listed in the Private Funds Act and further defined in the related CIMA Statement of Guidance on Non-Fund Arrangements.

These include, among others:

• Pension funds
• Securitisation SPVs
• Joint ventures
• Proprietary vehicles
• Holding vehicles
• Individual investment management arrangements
• Debt issues and debt issuing vehicles
• Structured finance vehicles
• Sovereign wealth funds
• Single family offices

Private funds registering with CIMA must file one of an offering memorandum, a summary of terms, or marketing materials, which outline the terms of the offer to investors. Such document filed with CIMA must contain the information required under the CIMA Rule on the Contents of Marketing Materials for Registered Private Funds.

Conclusion

The Mutual Funds Act and the Private Funds Act establish the regulatory framework to enable the Cayman Islands to remain as one of the leading jurisdictions for offshore investment fund formation. At the same time, oversight by CIMA ensures investor protection, transparency, and compliance with international standards.

Australian investment funds series – what’s next? 

In the next article in our Australian investment funds series, we will set out the ongoing requirements for mutual funds and private funds once they are registered with CIMA.

Key contacts

Our Asia team, based across Australia, Singapore and Hong Kong, delivers responsive Cayman Islands and British Virgin Islands legal advice, providing real-time support to clients across Australia and the Asia-Pacific region.

If you have any questions on the issues covered in this article, please get in touch.