The Hedge Fund Law Report

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By Topic: Cayman Islands

  • From Vol. 10 No.2 (Jan. 12, 2017)

    Loss of Substratum: Steps to Ensure a Fund’s Soft Wind-Down Does Not Result in a Winding-Up Order (Part Two of Two)

    Conflicting cases in the Cayman Islands mean that funds intending to operate during a soft wind-down are susceptible to an investor petition for a court-appointed liquidator to commence a winding-up of the fund due to loss of substratum (i.e., its purpose for existence). For more on soft wind-downs of Cayman funds, see “Cayman Hedge Funds, Soft Wind-Downs and Disclosure” (Feb. 25, 2011). Fund managers and their advisers are forced to navigate conflicting statements in the case law on this issue, while recent cases have further highlighted the need for the Cayman Islands Court of Appeal to finally resolve this issue. In this guest article, the second in a two-part series, Tony Heaver-Wren and Sebastian Said, partner and counsel, respectively, at Appleby (Cayman), detail the competing Cayman standards for considering a fund’s business when identifying loss of substratum, as well as practical steps that fund managers can take to avoid having a court reach such a determination when conducting a soft wind-down. The first article set forth the history of the Cayman Islands law on loss of substratum, as well as the divergent standards – the “impossibility test” and the “non-viability test” – currently being used by the Cayman Islands courts. For Cayman court considerations concerning loss of substratum, see “Cayman Islands Grand Court Rules That Investor in Hedge Fund Wyser-Pratte EuroValue Fund Is Entitled to Court-Imposed Liquidation of Fund, Even Though Fund Is Solvent, but Gives Fund Time to Complete Liquidation on Its Own” (Nov. 19, 2010).

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  • From Vol. 10 No.1 (Jan. 5, 2017)

    Loss of Substratum: Analysis of the Conflicting Cayman Islands Standards (Part One of Two)

    In two recent winding-up petitions issued against investment funds on the just and equitable basis, the Financial Services Division of the Grand Court of the Cayman Islands has revisited the controversial question of the appropriate test for winding up a company on the grounds of loss of substratum (i.e., loss of the purpose for purpose for its existence). Considered in the context of earlier Cayman authorities on the test for loss of substratum, the law is now in a considerable state of confusion and is therefore ripe for clarification by the Cayman Islands Court of Appeal – particularly because of its significance for Cayman’s financial services industry. In this guest article, the first in a two-part series, Tony Heaver-Wren and Sebastian Said, partner and counsel, respectively, at Appleby (Cayman), describe the history of the Cayman Islands loss of substratum and the competing current approaches – the “impossibility test” and the “non-viability test” – being used by the courts. The second article will analyze how the impossibility test can be properly applied in the context of a fund proposing a soft wind-down, and how the potentially valid policy factors identified by courts concerning its usage can appropriately be addressed. For additional insight from Appleby (Cayman) attorneys, see “Changes to Redeeming Investor Distribution Priority and Other Ramifications of the Primeo Appellate Decision for Cayman Islands Hedge Funds” (Sep. 15, 2016); “How Can Service Providers to Cayman Islands Hedge Funds Enforce Rights to Contracts to Which They Are Not Parties?” (Jun. 19, 2014); and the two-part series entitled “How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or at the End of Its Life?”: Part One (Dec. 5, 2013); and Part Two (Dec. 12, 2013).

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  • From Vol. 9 No.48 (Dec. 8, 2016)

    How Fund Managers May Deploy the Cayman Islands LLC Structure

    Since the introduction of the Cayman Islands Limited Liability Companies Law on July 8, 2016, over 150 Cayman Islands limited liability companies (Cayman Islands LLCs or LLCs) have been registered. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In a guest article, Walkers partners Tim Buckley and Melissa Lim, along with senior counsel Andrew Barker, review: (1) some of the key features of Cayman Islands LLCs, including how they differ from their Delaware counterparts and other Cayman Islands entities; (2) how LLCs are currently being used; and (3) possible future developments with respect to LLCs. For additional insight from Lim on the Cayman Islands LLC, see “Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers” (Jul. 21, 2016). For further commentary from Buckley, see “Annual Walkers Fundamentals Seminar Discusses How Managers Attract Investors in a Challenging Market by Tailoring Fund Structures and Governance Policies” (Dec. 1, 2016); and “Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation” (Dec. 20, 2012).

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  • From Vol. 9 No.45 (Nov. 17, 2016)

    U.S., U.K. and Cayman Regulators Address Upcoming Areas of Focus, Passporting Concerns and Intra-Agency Collaboration

    The role of regulators increasingly extends beyond conducting examinations and includes sharing data-driven expertise with their regulatory counterparts domestically or abroad to achieve their common goals of protecting investors, preventing problems (such as risk from hedge funds entering the commercial banking space) and facilitating smooth resolution of known issues. These were prominent themes of a panel at Hedgeopolis New York, the annual conference of the Hedge Fund Association (HFA). Moderated by Martin Cornish, a partner at MJ Hudson, the panel featured Jennifer A. Duggins, co-head of the Private Funds Unit in the SEC Office of Compliance Inspections and Examinations; Robert Taylor, head of the Hedge Fund Management Department at the U.K. Financial Conduct Authority (FCA); and Garth Ebanks, deputy head of the Investments and Securities Division of the Cayman Islands Monetary Authority (CIMA). This article presents key takeaways from the panel discussion. For coverage of HFA’s May 2016 Global Regulatory Briefing panel, see our two-part series: “Best Ways for Hedge Fund Managers to Approach Regulation” (May 12, 2016); and “Cybersecurity, AML, AIFMD, Advertising and Liquidity Issues Affecting Hedge Fund Managers” (May 19, 2016). For guidance from CIMA, see “CIMA Enumerates Best Practices for Hedge Fund Manager AML Programs” (Mar. 17, 2016). For additional commentary from the FCA, see “FCA Director Emphasizes Regulator’s Focus on Firm’s Culture of Compliance” (Jul. 21, 2016); and “FCA Enforcement Director Emphasizes Responsibilities Under Senior Managers Regime” (Jun. 2, 2016). 

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  • From Vol. 9 No.42 (Oct. 27, 2016)

    Former Law Firm Partner and Current Independent Director Provides Perspective on Hedge Fund Governance Issues, Regulatory Matters and Allocator Concerns

    Julian Fletcher recently joined Carne Group Financial Services (Carne) as an independent director in its Cayman Islands office after previously practicing as a partner in Mourant Ozannes’ investment funds group. Fletcher has the vantage point of a former practicing attorney when considering issues, regulations and trends in the hedge fund industry in his new capacity as a fund director. For more on fund directors, see “SEC Chair Outlines Expectations for Fund Directors” (Apr. 7, 2016); “Irish Central Bank Issues Guidance on Fund Director Time Commitments” (Jul. 9, 2015); and “Cayman Court of Appeal Overturns Decision Holding Weavering Fund Directors Personally Liable” (Feb. 26, 2015). In connection with his move to Carne, The Hedge Fund Law Report recently interviewed Fletcher about topics relevant to hedge fund managers, including the future of corporate governance; trends in the structuring of boards of directors of hedge funds; how directors consider different components of a hedge fund’s operations; the future of the Cayman Islands hedge fund industry in light of the introduction of the Cayman LLC vehicle and the decision not to extend the Alternative Investment Fund Managers Directive passport; and critical considerations confronting allocators at this time. For additional analysis from Carne, see “Luxembourg Funds Offer Options for Hedge Fund Managers to Access European and Global Investors” (Feb. 11, 2016); and “Identifying and Addressing the Primary Conflicts of Interest in the Hedge Fund Management Business” (Jan. 17, 2013).

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  • From Vol. 9 No.36 (Sep. 15, 2016)

    Changes to Redeeming Investor Distribution Priority and Other Ramifications of the Primeo Appellate Decision for Cayman Islands Hedge Funds

    On July 19, 2016, the Cayman Islands Court of Appeal (CICA) delivered an important decision in the litigation between liquidators of the Herald Fund SPC and the Primeo Fund, each of which were directly or indirectly feeder funds in the Ponzi scheme run by Bernard Madoff. The CICA’s ruling changes the law on priorities in insolvencies, clarifying where redeemed investors rank relative to outside creditors. However, the decision also calls into question the scope and application of the Cayman Islands statute governing redemptions by fund investors. It is vital for managers of – and investors in – Cayman Islands hedge funds facing liquidity problems to consider the CICA’s findings going forward. In a guest article, Jeremy Walton and Paul Kennedy, partner and senior associate, respectively, at Appleby (Cayman), provide an overview of the history and holding of the case, analysis of potential issues created by the ruling and practical advice for hedge fund managers and investors in light of the decision. For additional commentary from Appleby attorneys, see “Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters” (May 28, 2015); and “How May Investors in Cayman Islands Hedge Funds in Liquidation Protect Their Interests If Dissatisfied With the Liquidators’ Conduct of the Liquidation?” (Sep. 11, 2014). For coverage of another hedge fund forced to liquidate due to its investment in Madoff feeder funds, see “BVI Court Rules on the Validity of the Appointment of Hedge Fund Liquidators by a Hedge Fund Manager Subject to SEC and CFTC Enforcement Actions” (Mar. 28, 2013).

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  • From Vol. 9 No.29 (Jul. 21, 2016)

    Despite Fiduciary Duty Questions, Cayman LLCs Can Offer Savings and Other Advantages to Hedge Fund Managers

    On July 13, 2016, the highly anticipated Cayman Islands Limited Liability Companies Law, 2016, came into effect, making the limited liability company (LLC) fully available in that jurisdiction. Widely attributed to the demands of U.S. investors seeking an offshore equivalent to the Delaware LLC, the Cayman LLC has been met with positive reactions from onshore and offshore lawyers, though some have raised concerns about the vehicle’s governance. See “New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers” (Mar. 10, 2016). In an effort to help our readers understand structural, regulatory and registration issues of the Cayman LLC, The Hedge Fund Law Report has interviewed partners of law firms at the forefront of interactions with both the onshore financial sector and the Cayman Islands authorities regarding the law’s development. We present our findings in this article. For analysis of other recent developments in Cayman law, see “Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters” (May 28, 2015); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors” (Jan. 24, 2013).

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  • From Vol. 9 No.11 (Mar. 17, 2016)

    CIMA Enumerates Best Practices for Hedge Fund Manager AML Programs

    The Cayman Islands Monetary Authority (CIMA) recently published the first edition of its bi-annual Supervisory Issues & Information Circular (Circular). Aiming to “raise awareness, in the industry, of common regulatory and thematic issues identified through our off-site and on-site supervisory practices and highlight regulatory developments for the financial sector,” the Circular identifies several regulatory initiatives important for hedge fund managers and other licensees. In addition, CIMA outlined the minimum elements it expects to be included in hedge fund managers’ anti-money laundering programs. This article explores the guidance contained in the Circular. For guidance from CIMA on fund governance, see “CIMA-Sponsored Survey Highlights Hedge Fund Industry Views on Cayman Islands Corporate Governance Practices and Suggested Reforms” (Jul. 11, 2013); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors” (Jan. 24, 2013).

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  • From Vol. 9 No.10 (Mar. 10, 2016)

    New Cayman Islands LLC Structure Offers Flexibility to Hedge Fund Managers

    On December 18, 2015, Cayman Islands authorities published a bill for a new law that allows for the formation of Cayman Islands limited liability companies (Cayman LLCs). Similar to a Delaware limited liability company, the Cayman LLC provides managers with additional flexibility and options for forming hedge funds in the Cayman Islands. In a recent interview with The Hedge Fund Law Report, Jude Scott, the Chief Executive Officer of Cayman Finance; Henry Smith, a partner at Maples and Calder and Chair of the International Relations Committee of Cayman Finance; and Hon. Wayne Panton, Minister of Financial Services, Commerce and Environment for the Cayman Islands Government, discussed the Cayman LLC, detailing the new vehicle’s requirements, potential uses and implications for hedge fund managers. In addition, Scott, Smith and Minister Panton discussed the possibility of the AIFMD marketing passport being extended to the Cayman Islands. For other issues relating to structuring Cayman Islands hedge funds, see “Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors” (Mar. 28, 2014); and “Cayman Islands Segregated Portfolio Companies: New Case Law Highlights Attractions for Promoters and Hedge Fund Managers” (Jul. 26, 2012).

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  • From Vol. 9 No.8 (Feb. 25, 2016)

    Operational Considerations Hedge Fund Managers Must Address When Redomiciling Their Hedge Funds (Part Two of Two)

    When making the decision to redomicile its hedge fund to a more favorable jurisdiction, a manager must consider more than the potential marketing or other advantages the move promises. Redomiciliation involves potential regulatory burdens, conflicts of interest and operational issues, including investor notification and redemption obligations. In a recent interview with The Hedge Fund Law Report, Jonathan Law and Donnacha O’Connor, partners at Dillon Eustace, discussed the prime reasons hedge fund managers consider redomiciliation of their hedge funds. This article, the second in a two-part series, details the potential drawbacks and operational considerations of redomiciliation. The first article addressed the regulatory implications of, and potential conflicts of interest inherent in, the decision to redomicile. For more on redomiciliation, see “Redomiciling Offshore Investment Funds to Ireland, the European Gateway” (Mar. 4, 2011). For additional commentary from Law and O’Connor’s colleague, Derbhil O’Riordan, see “Four Strategies for Hedge Fund Managers for Accessing E.U. Capital Under the AIFMD” (Feb. 13, 2014).

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  • From Vol. 9 No.7 (Feb. 18, 2016)

    Regulatory Considerations Hedge Fund Managers Must Address When Redomiciling Their Hedge Funds (Part One of Two)

    Hedge fund managers in search of marketing or other advantages may consider redomiciling their hedge funds to a more favorable jurisdiction. However, such managers must consider the implications of the move, including potential increased regulatory burdens and conflicts of interest created by the transition. In a recent interview with The Hedge Fund Law Report, Jonathan Law and Donnacha O’Connor, partners at Dillon Eustace, discussed the prime reasons hedge fund managers consider redomiciliation of their hedge funds, along with the legal and operational considerations that attend that decision. This article, the first in a two-part series, addresses the regulatory implications of, and potential conflicts of interest inherent in, the decision to redomicile. The second article will detail the potential drawbacks and operational considerations of redomiciliation. For more on redomiciliation, see “Benefits and Burdens of Redomiciling a Hedge Fund to an E.U. Jurisdiction” (Oct. 27, 2011). For additional insight from Dillon Eustace, see “Irish Central Bank Issues Proposed Rules to Enable Private Funds to Originate Loans” (Sep. 11, 2014).

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  • From Vol. 8 No.35 (Sep. 10, 2015)

    Redeemed Investors Have Priority With Respect to Payment from Liquidating Cayman Islands Hedge Fund

    A recent decision of the Grand Court of the Cayman Islands has provided much-needed clarity on the rights of redeemed but unpaid investors in an insolvency scenario and the circumstances in which a liquidator of a Cayman Islands company may alter investors’ rights to receive distributions.  The decision confirms that investors who have been redeemed pursuant to the company’s articles of association are entitled to be paid those redemption proceeds ahead of unredeemed investors, and that distributions to unredeemed investors must be made in accordance with Cayman Islands law.  In a guest article, Peter Hayden, Rocco Cecere and Christopher Levers of Mourant Ozannes discuss the ruling, including the case’s background, matters considered by the Court and the impact of the decision on the hedge fund industry.  For additional insight from the firm, see “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators,” The Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012); and “Cayman Islands Developments Impacting Fund Governance, Master Fund Registration and the Insolvency Regime: An Interview with Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes,” The Hedge Fund Law Report, Vol. 5, No. 23 (Jun. 8, 2012).  For discussion of other recent Cayman Islands cases, see “Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters,” The Hedge Fund Law Report, Vol. 8, No. 21 (May 28, 2015); and “Cayman Court of Appeal Overturns Decision Holding Weavering Fund Directors Personally Liable,” The Hedge Fund Law Report, Vol. 8, No. 8 (Feb. 26, 2015).

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  • From Vol. 8 No.21 (May 28, 2015)

    Cayman Islands Decision Highlights Three Questions That May Affect the Enforceability of Fund Side Letters

    Investment managers, funds and investors – particularly high value investors – often wish to enter into arrangements (side letters) relating to a specific investment conferring rights more beneficial than the raft of rights given to all investors, as an inducement to invest.  However, several cases in the Cayman Islands Grand Court in recent years, as well as a decision of the Cayman Islands Court of Appeal in April 2015, have raised questions as to the enforceability and legality of these side letters.  In a guest article, Christopher Russell and Jeremy Snead of Appleby (Cayman) examine the practical considerations for funds, managers and investors in crafting side letters, including the three fundamental questions that must be considered when entering into a side letter, in light of the Cayman Islands case law.  For additional insight from Russell and Snead, see “How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or At the End of Its Life? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013); and Part Two of Two, Vol. 6, No. 47 (Dec. 12, 2013); “Pitfalls and Solutions in Trading Shares in Corporate Hedge Funds in Liquidation in the Cayman Islands,” The Hedge Fund Law Report, Vol. 5, No. 41 (Oct. 25, 2012); and “Fund Misrepresentations Inducing Investment: Claims and Remedies Available to Fund Investors and Protections Available to Promoters, Fund Managers and Directors,” The Hedge Fund Law Report, Vol. 5, No. 35 (Sep. 13, 2012).

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  • From Vol. 8 No.8 (Feb. 26, 2015)

    Cayman Court of Appeal Overturns Decision Holding Weavering Fund Directors Personally Liable

    Governance of Cayman hedge funds in general, and the duties and qualifications of their directors in particular, have been hot topics in the industry for several years.  See “Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 7, No. 12 (Mar. 28, 2014); and “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  One important source of that concern arose out of the 2009 collapse of Weavering Capital.  In a landmark decision following that collapse, the Cayman Grand Court held the fund’s independent directors personally liable for the fund’s losses by reason of their “wilful neglect” of their duties.  See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations ,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  The Cayman Court of Appeal has recently overturned that ruling on the ground that, although the directors had breached their duties to the fund, their conduct did not rise to the level of “wilful neglect or default.”  This article summarizes the Court of Appeal’s analysis.

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  • From Vol. 8 No.6 (Feb. 12, 2015)

    Walkers Fundamentals Hedge Fund Seminar Addresses Fund Structuring Trends, Governance Best Practices, Fee and Liquidity Terms, Irish Vehicles, Marketing in Asia and FATCA

    Walkers Global recently held its Fundamentals Hedge Fund Seminar in New York City, where experts addressed a range of pressing issues in the industry, including recent developments in fund structuring and common Cayman fund terms; updates on fund governance regulations introduced by the Cayman Islands Monetary Authority and trends in hedge fund governance; implications of the Foreign Account Tax Compliance Act for hedge fund managers; and global hedge fund investment and regulatory trends, particularly in Asia and Ireland.  This article summarizes the key points discussed at the conference on each of the foregoing topics.  For the HFLR’s coverage of Walkers Fundamentals Hedge Fund Seminars from prior years, see: 2013 Seminar; 2012 Seminar; 2011 Seminar; and 2009 Seminar.

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  • From Vol. 7 No.34 (Sep. 11, 2014)

    How May Investors in Cayman Islands Hedge Funds In Liquidation Protect Their Interests If Dissatisfied with the Liquidators’ Conduct of the Liquidation?

    Investors are rarely happy to learn that the Cayman Islands hedge fund in which they have invested is entering liquidation.  That dissatisfaction can be exacerbated by the conduct of the liquidator.  Causes of such dissatisfaction include lack of transparency, delay, cost, fire sales, failure to bring claims, failure on the part of the liquidators to consider a restructuring, etc.  However, the Cayman corporate liquidation process is structured to protect shareholders and creditors in liquidations, and the Cayman liquidation framework provides safeguards relating to court and voluntary liquidations.  In a guest article, Christopher Russell and Paul Kennedy, partner and associate, respectively, in the Litigation and Insolvency practice group at Appleby, Cayman Islands, enumerate specific strategies whereby investors in liquidating Cayman hedge funds that are not satisfied with the conduct of the liquidator may protect their interests.  See also “When and How Can Hedge Fund Managers Close Hedge Funds in a Way that Preserves Opportunity, Reputation and Investor Relationships?  (Part Two of Two),” The Hedge Fund Law Report, Vol. 7, No. 21 (Jun. 2, 2014).

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  • From Vol. 7 No.33 (Sep. 4, 2014)

    Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands

    There has been much talk recently about the formation of reinsurance companies by hedge fund managers.  Indeed, in the Cayman Islands (Cayman), there has been significant increase of interest in the establishment of reinsurance vehicles.  The first open market reinsurance vehicle with a physical presence was established in Cayman in 2004, and now, several years later, conditions are such that others are following suit.  Anecdotal evidence shows that many service providers across the financial services community in Cayman have been advising or otherwise speaking with fund manager clients about setting up reinsurers in Cayman.  This article highlights some key reasons driving interest in Cayman as a domicile for the establishment of reinsurance vehicles.  The authors of this article are Tim Frawley, a partner in the Cayman Islands office of Maples and Calder, and Karey B. Dearden, an Executive Director in Ernst & Young LLP’s Financial Services Office, International Tax Services practice in New York City.  For background on the opportunities and risks associated with hedge fund managers establishing reinsurance vehicles, see “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” The Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013).

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  • From Vol. 7 No.24 (Jun. 19, 2014)

    How Can Service Providers to Cayman Islands Hedge Funds Enforce Rights to Contracts to Which They Are Not Parties?

    In the hedge fund world, as in all commercial spheres, exclusion and limitation of liability of, and the right of indemnity for, service providers, is a key element in the structure.  See “Indemnification Provisions in Agreements between Hedge Fund Managers and Placement Agents: Reciprocal, But Not Necessarily Symmetrical,” The Hedge Fund Law Report, Vol. 3, No. 41 (Oct. 22, 2010).  This structure creates a tension between two competing commercial factors: the need to attract service providers of sufficient quality, and who expect such terms, and commercial acceptability, in particular to prospective investors.  A particular problem has been the enforcement of such terms by service providers or their associates, who are intended to be covered by the protection afforded by such terms, but who are not themselves parties to the contract that creates those terms.  The new Cayman Islands statute, The Contracts (Rights of Third Parties) Law 2014 (the 2014 Law), which came into force on May 21, 2014, directly impacts, and assists, in this area.  In a guest article, Christopher Russell and Jonathan Bernstein, partner and senior associate, respectively, at Appleby, Cayman Islands, provide a thorough analysis of the 2014 Law and its consequences for the allocation of risk among hedge fund service providers, managers and investors.  On hedge fund service providers generally, see “Evolving Operational Due Diligence Trends and Best Practices for Due Diligence on Emerging Hedge Fund Managers,” The Hedge Fund Law Report, Vol. 7, No. 15 (Apr. 18, 2014) (section entitled “Due Diligence on Service Providers”).

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  • From Vol. 7 No.12 (Mar. 28, 2014)

    Cayman Islands Government Introduces Bill That Would Require Registration and Licensing of Certain Hedge Fund Directors

    For at least the last four years, the Cayman Islands legislative, regulatory and judicial authorities have been focused on improving fund governance.  Three noteworthy examples of this focus include the August 2011 Weavering decision, the January 2013 Statement of Guidance on fund governance and the January 2014 issues paper on statutory codification of directors’ duties.  On the last, see “What Are the Duties of Directors of Cayman Islands Hedge Funds, and Should Those Duties Be Codified?,” The Hedge Fund Law Report, Vol. 7, No. 6 (Feb. 13, 2014).  The latest action by Cayman authorities on fund governance is a bill (Bill), gazetted on March 21, 2014, with the short title “Directors Registration and Licensing Law, 2014.”  The Bill generally requires directors of “covered entities” to be registered and requires professional directors of covered entities to be licensed.  This article explains the mechanics of the proposed registration and licensing regime, the regime’s application to non-resident directors, the proposed phase-in schedule, disciplinary provisions, insurance requirements and the “register of directors” referenced in the Bill.

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  • From Vol. 7 No.6 (Feb. 13, 2014)

    What Are the Duties of Directors of Cayman Islands Hedge Funds, and Should Those Duties Be Codified?

    Corporate governance reform has been on the radar of the Cayman Islands for several years.  The landmark 2011 decision by the Financial Services Division of the Cayman Islands Grand Court, Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom, held that a fund’s directors had willfully neglected their duties to supervise a fund’s operations when they acted as little more than figureheads or rubber stamps of manager actions.  See “The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators,” The Hedge Fund Law Report, Vol. 5, No. 36 (Sep. 20, 2012).  In January 2013, the Cayman Islands Monetary Authority (CIMA) issued proposed rule amendments and proposed revised governance standards – spelled out in the revised Statement of Guidance on fund Governance (Governance SOG) – for hedge funds and their directors.  See “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  In December 2013, CIMA adopted the final Governance SOG.  Cayman directors’ duties have traditionally been derived primarily from common law principles of care, skill and diligence, and good faith, loyalty and other fiduciary duties.  The CIMA governance standards mentioned above were one effort to codify some of those principles with respect to directors of CIMA-regulated entities.  In another step towards governance reform, the Cayman Islands Law Reform Commission recently released an “Issues Paper” exploring the duties of Cayman directors and asking whether there would be any improvement in corporate governance if those duties were enumerated and codified in Cayman statutes.  This article summarizes the key points from the Issues Paper.

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  • From Vol. 7 No.1 (Jan. 9, 2014)

    2013 Walkers Fundamentals Hedge Fund Seminar Highlights Trends in Cayman Fund Structures and Terms, Cayman and Irish Fund Governance Developments, Conflicts of Interest, Use of Advisory Boards and Fund Borrowing

    On November 5, 2013, international law firm Walkers Global held its annual Walkers Fundamentals Hedge Fund Seminar in New York City.  At the seminar, Walkers partners offered insights on trends in structures and terms for new funds organized in Cayman; developments in Cayman and Irish fund governance; regulatory focus on conflicts of interest; the use of advisory boards; and trends in fund borrowing.  This article summarizes key points raised during the seminar.  For the HFLR’s coverage of Walkers Fundamentals Hedge Fund Seminars from prior years, see: 2012 Seminar; 2011 Seminar; and 2009 Seminar.

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  • From Vol. 6 No.47 (Dec. 12, 2013)

    How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or At the End of Its Life? (Part Two of Two)

    This is the second article in a two-part series on how a hedge fund investor can maximize the protection of its investment in a fund at three distinct stages towards and at the end of its commercial life.  This article addresses measures available to investors during the third stage: when the fund is placed into formal liquidation, either by a court or by voluntary winding up.  The first installment addressed measures available to investors during the first two stages: where there are warning signs that the fund may be heading into financial difficulty or when the fund is placed into management wind down.  See “How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or At the End of Its Life? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 46 (Dec. 5, 2013).  The authors of this series are Christopher Russell, Jonathan Bernstein and Jeremy Snead.  Russell and Snead are, respectively, a partner and an associate in the litigation department of Appleby Cayman; Bernstein is a senior associate in the corporate and investment funds department.

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  • From Vol. 6 No.46 (Dec. 5, 2013)

    How Can Investors in Cayman Hedge Funds Maximize Protection of Their Investments When the Fund Is Near or At the End of Its Life? (Part One of Two)

    Investment risk takes many forms, and one often overlooked by many hedge fund investors is: How will I protect my investment in the event that the fund fails or decides to cease doing business?  The fund investors that do not adopt a head-in-the-sand approach have various options available to help them maximize the return of and return on such investments.  This is the first article in a two-part guest article series highlighting the various measures available to investors who have made an investment in a fund that is at one of three distinct stages towards or at the end of its commercial life.  This article addresses investor options during the first two stages: where there are warning signs that the fund may be heading into financial difficulty or when the fund is placed into management wind down.  The second article in the series will address measures available to investors during the third stage: when the fund is placed into formal liquidation, either by the court or by voluntary winding up.  The authors of this series are Christopher Russell, Jonathan Bernstein and Jeremy Snead.  Russell and Snead are, respectively, a partner and an associate in the litigation department of Appleby Cayman; Bernstein is a senior associate in the corporate and investment funds department.

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  • From Vol. 6 No.44 (Nov. 14, 2013)

    Cayman Grand Court Enforces Side Letter between Hedge Fund and Beneficial Owner of Fund Shares, Even Though the Letter Was Not Signed by the Shareholder of Record

    The Grand Court of the Cayman Islands, Financial Services Division, recently ruled that a side letter between a Cayman hedge fund and beneficial owner of certain fund shares was enforceable, even though the side letter was not signed by the registered shareholder.  See “Can an Investor Who Invests Through a Nominee Shareholder in a Cayman Islands Hedge Fund Rely on a Side Letter To Which Its Nominee Is Not a Party?,” The Hedge Fund Law Report, Vol. 6, No. 39 (Oct. 11, 2013).  This article summarizes the background of the dispute, the circumstances surrounding the side letter and the reasoning underpinning the Court’s decision.  For more on structuring and negotiating side letters, see “Proskauer Partner Christopher Wells Discusses Challenges and Concerns in Negotiating and Administering Side Letters,” The Hedge Fund Law Report, Vol. 6, No. 5 (Feb. 1, 2013).

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  • From Vol. 6 No.39 (Oct. 11, 2013)

    Can an Investor Who Invests Through a Nominee Shareholder in a Cayman Islands Hedge Fund Rely on a Side Letter To Which Its Nominee Is Not a Party?

    It is a fundamental rule of common law legal systems that, absent statutory intervention, a person who is not a party to a contract, even if the contract is made for that party’s benefit, cannot rely on or enforce the terms of that contract; this is the so-called “privity of contract” rule.   Its origins lie in the common law’s centuries old regard for the notion of bargain, whereby only a party who himself contributes value to an agreement can enforce it, in preference to regard for the intentions of the parties that a third party should benefit.  Many jurisdictions provide a statutory entitlement for a third party to a contract made for its benefit to enforce the benefit of that contract, subject to conditions.  The Cayman Islands have, as yet, no such legislation.  The current position, accordingly, gives rise to issues of the enforceability of side letters between a Cayman Islands fund and an underlying investor who invests through a nominee shareholder, and recent cases reveal a sharp divergence of judicial view – should the court hold the investor to the legal structure it has set up for its own benefit and reasons, and refuse to allow its nominee to enforce a side letter to which it is not a party, or should the court have regard to the perceived commercial reality that the underlying investor and its nominee are effectively one entity, and are to be treated as such, with the consequence that the nominee can enforce the side letter even though not a party to it?  Judicial clashes between observance of legal correctness, and perceived commercial reality, are not uncommon and the common law has over the centuries endeavoured, by various devices, to circumvent the privity of contract rule, in particular by the devices of collateral contracts, trusts of a promise and agency.  These devices are sometimes described as exceptions to the privity rule, but in reality they are not true exceptions, but the application of different legal principles.  Such a judicial clash appears to currently be taking place in the Grand Court of the Cayman Islands as can be seen in the judgments in three recent cases.  In a guest article, Christopher Russell and Sebastian Said, partner and senior associate, respectively, in the Litigation & Insolvency Practice Group of Appleby (Cayman) Ltd, discuss the background and ruling in each of these cases and outline important lessons and recommendations for hedge fund managers arising out of the decisions.

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  • From Vol. 6 No.36 (Sep. 19, 2013)

    Cayman Grand Court Evaluates Whether a Trade Counterparty Is an Undisputed “Creditor” That Is Permitted to Petition for the Liquidation of a Purported Hedge Fund Debtor

    Under Cayman law, only a creditor (whose status as such is undisputed) is permitted to petition for the liquidation of a debtor.  The Grand Court of the Cayman Islands, Financial Services Division (Court), recently clarified whether there was ambiguity as to the creditor status of a trade counterparty of a hedge fund where the trade counterparty petitioned the Court to liquidate the hedge fund.  The petitioner was a counterparty of a hedge fund pursuant to various commodities contracts.  The fund failed to take delivery of – or to pay for – copper cathodes that it had contracted to buy from the petitioner.  The petitioner claimed it was a creditor of the fund and petitioned the Court to appoint liquidators for the fund.  The fund challenged the petitioner’s standing as a creditor to bring the winding-up petition.  This article summarizes the background of the case, the legal analysis and the Court’s ruling.

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  • From Vol. 6 No.27 (Jul. 11, 2013)

    CIMA-Sponsored Survey Highlights Hedge Fund Industry Views on Cayman Islands Corporate Governance Practices and Suggested Reforms

    As part of its corporate governance reform process, the Cayman Islands Monetary Authority (CIMA) recently surveyed hedge fund managers, investors, directors and service providers regarding their views on corporate governance at Cayman Islands hedge funds.  See “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  Specifically, the survey solicited the views of respondents on what elements comprise robust corporate governance at a Cayman fund; the strengths and weaknesses of Cayman boards; the adequacy of the current Cayman governance regime; the types of information that would assist in evaluating the robustness of a fund’s governance standards; and the areas in which Cayman corporate governance standards can be improved.  Among other things, the survey also drilled down on issues such as whether there should be a limit placed on the number of directorships that may be held by a single director and whether it would be beneficial to require disclosure of the total number of directorships held by each director.  This article summarizes the noteworthy findings from the survey.  For more on Cayman corporate governance issues, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation,” The Hedge Fund Law Report, Vol. 5, No. 48 (Dec. 20, 2012).

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  • From Vol. 6 No.19 (May 9, 2013)

    Cayman Director Services Company Challenges CIMA’s Private Sector Consultation Process to Promote Fund Governance Reforms

    On April 2, 2013, Cayman Private Manager II Limited (CPM), a Cayman director services company and an affiliate of DMS Group, which provides professional directors for many hedge funds and other private funds, filed an application in the Grand Court of the Cayman Islands.  The application sought leave to apply for judicial review of its request for relief based on its allegations that the private sector consultation process used by the Cayman Islands Monetary Authority (CIMA) to reform private fund governance was flawed because CIMA did not satisfy its legal obligations with respect to the consultation process.  The allegations arise out of CIMA’s publication of a consultation paper (Consultation Paper) on January 14, 2013 that outlined various proposed fund governance reforms that will invariably impact Cayman-domiciled hedge funds and other private funds.  For an in-depth discussion of CIMA’s proposed reforms described in the Consultation Paper, see “Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors,” The Hedge Fund Law Report, Vol. 6, No. 4 (Jan. 24, 2013).  If the Court grants CPM leave to apply for judicial review, this could delay any decision-making by CIMA on its corporate governance reform proposals.  This article provides a summary of CPM’s allegations as well as a description of the requested relief.

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  • From Vol. 6 No.4 (Jan. 24, 2013)

    Cayman Islands Monetary Authority Introduces Proposals to Apply Revised Governance Standards to CIMA-Regulated Hedge Funds and Require Registration and Licensing of Fund Directors

    To promote confidence in Cayman-regulated financial institutions, the Cayman Islands Monetary Authority (CIMA) recently introduced proposals designed to institute enhanced corporate governance reforms for CIMA-regulated financial institutions, including hedge funds.  Of most importance for hedge funds, the rule proposals include rule amendments requiring professional directors to register with CIMA; all fund directors of CIMA-regulated entities to register with CIMA; the creation of a publicly-available database containing the names of CIMA-registered and CIMA-licensed entities and their directors; and the application of delineated governance standards that have historically been inapplicable to most CIMA-registered hedge funds.  Such standards outline expectations concerning, among other things, director qualifications and responsibilities.  This article summarizes the proposed rule amendments and links to the documents in which they are described.  See also “Eight Corporate Governance Steps That Hedge Fund Managers Should Consider in Response to Concerns Expressed by Institutional Investors,” The Hedge Fund Law Report, Vol. 4, No. 35 (Oct. 6, 2011).

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  • From Vol. 6 No.3 (Jan. 17, 2013)

    How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two)

    Some well-known hedge fund managers have launched reinsurance businesses to address the twin challenges of raising capital and obtaining uncorrelated returns.  If properly structured and operated, reinsurance businesses offer hedge fund managers a steady stream of investable capital in the form of reinsurance premiums, which in turn can be invested in the manager’s other strategies.  However, few hedge fund managers start with the expertise or infrastructure necessary to launch and operate a reinsurance business effectively, and reinsurance businesses present unique challenges relating to people, risk management, structuring and regulation.  Moreover, running a reinsurance business alongside a hedge fund management business raises various compliance issues.  In short, launching a reinsurance business can help tackle some of the more elusive challenges facing hedge fund managers, but such launches entail risks to which managers typically are not accustomed.  To assist managers in capturing some of that upside while mitigating the risks, we are publishing this second article in a two-part series on the primary legal, business and risk considerations for hedge fund managers in launching reinsurance businesses.  In particular, this article discusses how hedge fund managers generally approach starting a reinsurance business; the best domiciles for reinsurers; a checklist of steps required to launch a reinsurance business; how hedge fund managers invest the “float” generated by such a business; conflicts of interest raised by a hedge fund manager’s side-by-side management of a reinsurance business and an investment management business, and how managers should address such conflicts; and policies and procedures that hedge fund managers should implement to accommodate the operation of a reinsurance business.  The first article in this series provided background on the reinsurance business; explained how reinsurers generate revenue; discussed how hedge fund managers can participate in the reinsurance business; and described some principal benefits and drawbacks of launching a reinsurance business.  See “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part One of Two),” The Hedge Fund Law Report, Vol. 6, No. 2 (Jan. 10, 2013).

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  • From Vol. 6 No.3 (Jan. 17, 2013)

    In What Circumstances May Hedge Fund Investors Bring Proceedings in the Name of the Fund for a Wrong Committed Against the Fund, When Those in Control of It Refuse to Do So?

    The evolution of the law relating to corporations, and in particular the doctrine of the company as a separate legal person, presented a risk from the earliest times that minority investors might be left without a remedy if those in control of the company breached their trusts or duties and destroyed the value of that investment through mismanagement, self-dealing or other misconduct.  The risk of losing one’s investment in circumstances where there has been corporate wrongdoing has not abated, and in today’s hedge fund universe, the likelihood is that the shareholder will have invested a very substantial amount of capital for a minority position in a fund, the majority of whose directors and whose investment manager and other service providers are based in another country.  There are over 10,000 registered Mutual Funds in the Cayman Islands alone, many of which are directed and managed out of New York or Delaware.  In response to the concern that there is no remedy for the shareholder for such wrongs, many jurisdictions have sought to implement the procedural device of the derivative action as a means of affording substantive relief to investors.  Wherever they are brought, derivative actions have a common theme and a universal aim: the theme is that shareholders are not being heard and cannot take action themselves; the aim is to restore value to the company in which they have invested.  The mechanics for providing this substantive relief vary across the different jurisdictions.  In a guest article, Christopher Russell, David Butler, Michael Swartz and Daniel Cohen compare the mechanics of how hedge fund investors may pursue derivative actions in three different jurisdictions: the Cayman Islands, Delaware and New York.  Russell is a Partner in the Litigation and Insolvency Department of Appleby Cayman, and Butler is a senior Associate in the Department; Swartz is a Partner and Cohen is an Associate at Schulte Roth & Zabel LLP.

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  • From Vol. 5 No.48 (Dec. 20, 2012)

    Speakers at Walkers Fundamentals Hedge Fund Seminar Discuss Recent Trends in Hedge Fund Terms, Corporate Governance, Side Letters, FATCA and Cayman Fund Regulation

    On November 8, 2012, international law firm Walkers Global hosted its annual Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various issues of current relevance to hedge fund managers, including: recent developments in fund structuring and terms; fund governance; recent Cayman legal developments (including those relating to side letter disputes); implications of the Foreign Account Tax Compliance Act for hedge fund managers; and regulatory developments, including proposed amendments to the Cayman Islands Exempted Limited Partnership Law and the impact of the EU’s Alternative Investment Fund Managers Directive.  This article summarizes noteworthy points discussed during the seminar on each of the foregoing topics.  For our coverage of last year’s Walkers Fundamental Hedge Fund Seminar, see “Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds,” The Hedge Fund Law Report, Vol. 4, No. 42 (Nov. 23, 2011).

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  • From Vol. 5 No.41 (Oct. 25, 2012)

    Pitfalls and Solutions in Trading Shares in Corporate Hedge Funds in Liquidation in the Cayman Islands

    When redemptions in the shares of hedge funds are suspended, including in situations where the determination of net asset value is suspended, trading in those fund shares nonetheless commonly occurs in a secondary market, with investors typically seeking to exit a fund position to cap their losses, and more speculative investors seeking to purchase positions in the hope of a better return if the fund emerges from its financial difficulties.  However, in the Cayman Islands, if the fund’s difficulties give rise to a voluntary liquidation, any transfer of shares made after the commencement of the liquidation will be void unless sanctioned by the liquidators.  Sellers, buyers and liquidators need to know how transfers of hedge fund shares made after the commencement of a voluntary liquidation may be preserved.  In a guest article, Christopher Russell and Jeremy Snead, partner and associate, respectively, at Appleby (Cayman), highlight the pitfalls associated with such transactions and solutions for preserving these arrangements.

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  • From Vol. 5 No.37 (Sep. 27, 2012)

    Cayman Grand Court Rejects Validity of Side Letter Entered Into Between an Investor in Investment Vehicles That Invested in the Matador Fund and a Director of the Matador Fund

    A recent decision handed down by the Grand Court of the Cayman Islands (Court) emphasizes the importance of: (1) ensuring that the correct parties enter into side letters between an investor and a fund; and (2) ensuring that a fund’s governing documents permit the fund to enter into the type of side letter contemplated by the fund and the investor.  This decision follows on the heels of another recent decision handed down by the Court that highlights similar principles.  See “Recent Cayman Grand Court Decision Demonstrates the Practical and Legal Challenges of Investing in Hedge Funds through Nominees,” The Hedge Fund Law Report, Vol. 5, No. 29 (Jul. 26, 2012).

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  • From Vol. 5 No.36 (Sep. 20, 2012)

    The Cayman Islands Weavering Decision One Year Later: Reflections by Weavering’s Counsel and One of the Joint Liquidators

    Last month marks the one-year anniversary of the decision handed down by the Grand Court of the Cayman Islands (Court) against the directors of Weavering Macro Fixed Income Fund, in which both directors were found to have breached their duties and were ordered to pay damages in the amount of USD$111 million.  In the days and weeks which followed, many stakeholders offered their own critique of the decision as well as the “checklist” promulgated by Mr. Justice Andrew Jones QC of the steps which an independent non-executive director of an investment fund should take in order to properly discharge his duties.  Some critiques were lucid and objective dispositions of the decision, and some were not.  Perhaps it was the size of the award, or that it was the first time that directors of a failed Cayman Islands investment fund had been found liable in damages for a fund’s losses, which provoked such interest; but no doubt the views expressed by many were, and are, influenced by personal circumstances.  But what has been the true impact of the decision, and what mark has it left on the laws relating to directors generally?  In this article Mourant Ozannes’ Shaun Folpp, who acted for Weavering with respect to both the first instance proceedings and the recent appeal, and Mr. Ian Stokoe of PwC Corporate Finance and Recovery (Cayman) Limited, one of Weavering’s Joint Official Liquidators, explore these very issues, and reflect on one of the most talked about decisions ever to be handed down by the Court.  For background on the decision, see “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).

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  • From Vol. 5 No.31 (Aug. 9, 2012)

    Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two)

    U.S. hedge fund investors are continuously seeking attractive investment opportunities and are increasingly expanding their search to incorporate Asia-based hedge fund managers.  At the same time, Asia-based hedge fund managers are navigating the challenging capital raising environment by reaching beyond their borders to attract U.S. investors.  However, Asia-based fund managers seeking to attract capital from U.S. investors must contend with a plethora of U.S. and foreign regulations in raising and managing such capital.  As such, Asia-based fund managers must work closely with U.S., Cayman and local counsel to develop a cohesive and carefully thought out fund and management structure, intertwining the various regulatory requirements of the applicable jurisdictions, all of which must be adhered to by the fund manager, any sub-advisers and their respective affiliates.  This is the first in a two-part series of guest articles designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. fund investors.  The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP.  This first article describes the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers.  The second article in the series will detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers should consider when soliciting U.S. taxable and U.S. tax-exempt investors.

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  • From Vol. 5 No.29 (Jul. 26, 2012)

    Cayman Islands Segregated Portfolio Companies: New Case Law Highlights Attractions for Promoters and Hedge Fund Managers

    Typically, hedge fund managers use exempted companies organized in a master-feeder structure or in an umbrella fund structure to organize their funds.  Presently in the Cayman Islands, approximately 70% of funds are organized using these structures.  However, with the introduction in 1998 of segregated portfolio companies (SPCs) (known in other jurisdictions as “single account” or “protected cell” companies), an opportunity was given to promoters to utilize a structure that was less expensive and more efficient than the traditional structures.  Although a seemingly attractive fund vehicle, SPCs have not gathered a great following in the Cayman Islands.  At present, only around 10% of Cayman registered funds are SPCs, and that proportion has been relatively constant in recent years.  Their use has been generally limited to single investor funds where there are a large number of participants and there is a need to have the ability to create new portfolios quickly and simply.  However, with the Cayman Islands Court of Appeal (Court) handing down its decision in ABC Company (SPC) v. J & Co Ltd in June 2012, it is opportune to revisit the option available to promoters and managers of using an SPC as an attractive alternative to the vehicles more commonly used to establish hedge funds in the Cayman Islands.  In a guest article, Christopher Russell and Jayson Wood, partner and counsel, respectively, in the litigation and insolvency department of Appleby (Cayman) Ltd., discuss: the purposes and the general advantages of SPCs; the reasons for the apparent unpopularity of SPCs; the facts and legal analysis of the ABC decision; and four key structuring lessons for hedge fund managers looking to use the SPC structure following the ABC decision.

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  • From Vol. 5 No.29 (Jul. 26, 2012)

    Recent Cayman Grand Court Decision Demonstrates the Practical and Legal Challenges of Investing in Hedge Funds through Nominees

    A recent decision of the Grand Court of the Cayman Islands (Court) addressed a range of relevant questions for hedge fund managers and investors, among them: Does a side letter survive a fund restructuring?  Does a side letter entered into between a hedge fund and a beneficial investor bind a nominee through which the beneficial investor subsequently invests?  Is a beneficial investor a party to a hedge fund’s governing documents where it invests through a nominee?  What is the legal status of a side letter entered into prior to (rather than simultaneously with) an investment in a hedge fund?  In short, the decision illustrates the myriad legal and practical challenges faced by investors that invest in hedge funds through nominees; the relevance of the identity of contracting parties; and the scrutiny to which governing documents are subject in the course of hedge fund restructurings.  This feature-length article describes the factual background and legal analysis in the decision, and extracts two key lessons for investors that wish to invest in hedge funds via nominees.  See also “Investing in Cayman Islands Hedge Funds Through a Nominee or Custodian: An Unforeseen Peril,” The Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).

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  • From Vol. 5 No.28 (Jul. 19, 2012)

    Hedge Fund Fletcher International Sues to Prevent Liquidators of Its Feeder Funds from Forcing It into Voluntary Liquidation

    On July 2, 2012, days after it filed for bankruptcy relief in New York under Chapter 11 of the U.S. Bankruptcy Code (Bankruptcy Code), Fletcher International, Ltd. (Debtor), a master fund in a master-feeder structure, sued some of its own Cayman Islands-based feeder funds to block liquidators from disrupting its bankruptcy proceedings and forcing an asset sale.  The Debtor is appealing the ruling of the Grand Court of the Cayman Islands, which appointed Ernst & Young as liquidators of the feeder funds after three Louisiana pension funds sued to redeem their interests in the feeder funds.  See “Cayman Grand Court Ruling Supports Proposition That Hedge Fund Managers Do Not Have Unfettered Discretion in Making Distributions In Kind to Investors,” The Hedge Fund Law Report, Vol. 5, No. 19 (May 10, 2012).  The Debtor generally argues that the Ernst & Young liquidators lack the knowledge of its unique assets necessary to maximize returns for its creditors and shareholders in bankruptcy proceedings.  This article summarizes the factual background and the allegations in the Debtor’s complaint.

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  • From Vol. 5 No.27 (Jul. 12, 2012)

    U.K. High Court of Justice Finds Magnus Peterson Liable for Fraud in Collapse of Hedge Fund Manager Weavering Capital and Weavering Macro Fixed Income Fund

    In 1998, defendant Magnus Peterson formed hedge fund manager Weavering Capital (UK) Limited (WCUK).  He served as a director, chief executive officer and investment manager.  One fund managed by WCUK, the open-end Weavering Macro Fixed Income Fund Limited (Fund), collapsed in the midst of the 2008 financial crisis.  Peterson was accused of disguising the Fund’s massive losses by entering into bogus forward rate agreements and interest rate swaps with another fund that he controlled.  In March 2009, the Fund suspended redemptions and went into liquidation when it could not meet investor redemption requests.  At that time, WCUK went into administration (bankruptcy).  WCUK’s official liquidators, on behalf of WCUK, brought suit against Peterson, his wife, certain WCUK employees and directors and others, seeking to recover damages for fraud, negligence and breach of fiduciary duty and seeking to recover certain allegedly improper transfers of funds by Peterson.  After a lengthy hearing, the U.K. High Court of Justice, Chancery Division (Court), has allowed virtually all of those claims, ruling that Peterson did indeed engage in fraud.  In a separate action, the Fund’s official liquidators recovered damages from Peterson’s brother, Stefan Peterson, and their stepfather, Hans Ekstrom, who served as Fund directors, based on their willful failure to perform their supervisory functions as directors.  See “Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations,” The Hedge Fund Law Report, Vol. 4, No. 31 (Sep. 8, 2011).  This article summarizes the factual background and the Court’s legal analysis in the liquidators’ action against Peterson and others.

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  • From Vol. 5 No.23 (Jun. 8, 2012)

    Recent Cayman Islands Developments Impacting Fund Governance, Master Fund Registration and the Insolvency Regime: An Interview with Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes

    Cayman Islands legislators and courts have been increasingly active in enacting reforms and deciding cases with relevance to hedge fund managers and fund investors.  The Hedge Fund Law Report recently interviewed Neal Lomax, Simon Dickson and Simon Thomas of Mourant Ozannes’ Cayman office to get their perspective on this recent activity.  Specifically, our interview covered developments and market practice with respect to: fund governance in the aftermath of the Cayman Grant Court’s decision in Weavering; recent legislative developments, including the new registration regime for Cayman-domiciled master funds; and recent judicial decisions that reshape the Cayman fund insolvency regime.  This article contains the full text of our interview.

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  • From Vol. 5 No.23 (Jun. 8, 2012)

    Cayman Court of Appeal Holds that Soft Wind-Down of One or More Segregated Portfolios of a Segregated Portfolio Company Does Not In and Of Itself Justify a Judicial Winding-Up of the Entire Company

    In the wake of the 2008 financial crisis, some troubled hedge funds organized under the laws of the British Virgin Islands (BVI) and the Cayman Islands elected to suspend redemption rights and undertook “soft wind-downs” of their operations.  See Cayman Hedge Funds, Soft Wind-Downs and Disclosure,” The Hedge Fund Law Report, Vol. 4, No. 7 (Feb. 25, 2011).  In response, fund investors sought to gain leverage by petitioning to force the funds into involuntary liquidation on the ground that the funds were no longer capable of carrying out their stated business purposes.  BVI and Cayman courts have taken conflicting views on whether a soft wind-down is a valid ground for an involuntary winding-up petition.  The Cayman Island Court of Appeal recently addressed a novel question involving whether the winding down of the various segregated portfolios comprising a “segregated portfolio company” (SPC) would warrant winding down of the entire SPC.

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  • From Vol. 5 No.22 (May 31, 2012)

    In What Circumstances Can U.S. and Other Foreign Judgments Be Enforced Against Cayman Islands Hedge Funds?

    Parties considering bringing proceedings against Cayman Islands hedge funds in other jurisdictions should ensure that any judgment that might be obtained in a foreign jurisdiction will be recognized and enforced by the Cayman courts.  On the flip side, Cayman-domiciled hedge funds facing claims in foreign jurisdictions will need to consider the safety of ignoring and not participating in those proceedings, on the assumption that any judgment obtained will not be recognized and enforced by the Cayman courts.  In a guest article, Christopher Russell and Joanne Collett, Partner and Senior Associate, respectively, at Appleby, survey the landscape that informs whether Cayman courts will enforce such judgments.  These issues arise in particular in the context of enforceability of judgments obtained by default where the Cayman fund does not participate in the foreign proceedings, and in particular in the context of judgments and orders obtained in insolvency proceedings in light of the increasing trend towards universality of insolvency proceedings.

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  • From Vol. 5 No.14 (Apr. 5, 2012)

    Don Seymour Discusses Hedge Fund Governance and the Impact of the Recent SEC-CIMA Cooperation Arrangement on Hedge Fund Manager Examinations

    On March 23, 2012, the U.S. Securities and Exchange Commission (SEC) announced that it had entered into a supervisory cooperation arrangement with the Cayman Islands Monetary Authority (CIMA).  In its press release announcing the memorandum of understanding (MOU) embodying the supervisory cooperation arrangement, the SEC identified five categories of information that may be shared pursuant to the arrangement.  Those five categories include information required to: (1) conduct routine supervision; (2) monitor risk concentrations; (3) identify emerging systemic risks; (4) better understand a globally active regulated entity’s compliance culture; and (5) conduct on-site examinations of registered entities located abroad.  See “Is This an Inspection or an Investigation? The Blurring Line Between Examinations of and Enforcement Actions Against Private Fund Managers,” The Hedge Fund Law Report, Vol. 5, No. 13 (Mar. 29, 2012).  Hedge fund managers, lawyers, compliance professionals and others have asked The Hedge Fund Law Report what this MOU means for their businesses.  To help answer that question, we recently interviewed Don Seymour.  Seymour is the founder and Managing Director of dms Management Ltd. (dms Management) and the former head of the Investment Services Division of the CIMA.  At the CIMA, Seymour directed the authorization, supervision and enforcement of regulated mutual funds, including hedge funds, under the Mutual Funds Law of the Cayman Islands, and the supervision of company managers under the Cayman Companies Management Law.  Seymour brought his CIMA experience to bear in explaining how the MOU will impact Cayman-domiciled hedge funds and their managers with respect to data collection and sharing, supervision, monitoring, examinations and regulatory coordination.  Moreover, based on his service on the boards of several notable investment companies, Seymour offered insight on hedge fund governance issues, including: director independence; evolution in best corporate governance practices following the decision in Weavering Macro Fixed Income Fund Limited v. Stefan Peterson and Hans Ekstrom; valuation expertise required of fund directors; specific steps that directors can take to manage fund conflicts of interest; maximum number of directorships; and whether investors should have rights to appoint fund directors.  This article includes the full transcript of our interview with Seymour.

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  • From Vol. 5 No.5 (Feb. 2, 2012)

    How Safe Is It to Ignore Foreign Tax Claims or Judgments Against Cayman Islands Hedge Funds in the Context of a Winding Up of the Fund?

    Cayman Islands hedge funds are subject to no Cayman Islands tax of any nature, but they may become liable to foreign tax claims – for example through trading swaps – or they may become subject to judgments for tax imposed against them in other jurisdictions.  How should such claims and judgments be regarded by liquidators in the context of winding up the fund, whether in a liquidation imposed by the court, or in a voluntary liquidation?  Must effect be given to such claims or judgments, or can such claims and judgments simply be ignored, and the winding up completed without regard to them?  Or should the winding up only be completed once the tax claim or judgment has been abandoned by the foreign tax authority, or only with Cayman court sanction that the claim or judgment be disregarded for the purposes of the winding up?  In a guest article, Christopher Russell, Partner and head of the litigation and insolvency department of Ogier, Cayman Islands, and Shaun Folpp, a Managing Associate in the litigation and insolvency department of Ogier, Cayman Islands, address these and related questions.

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  • From Vol. 5 No.4 (Jan. 26, 2012)

    Investing in Cayman Islands Hedge Funds Through a Nominee or Custodian: An Unforeseen Peril

    The advantages of investing in corporate or limited partnership hedge funds through a nominee or a custodian registered as a shareholder or a named limited partner are well known.  Principally, the investor retains anonymity or some other perceived business advantage.  On the other hand, investing in corporate or limited partnership hedge funds through a nominee involves the risk of misappropriation by the nominee, ignoring of instructions or the loss of or delay in recovering dividends or redemption proceeds in the event of the insolvency of the nominee.  These disadvantages may of course be avoided or minimised by careful selection of the nominee, and by close regard to the terms of the nominee agreement (although, typically, the nominee will have standard terms, departure from which will be difficult, if not impossible).  There is another area of potential disadvantage – and that other area is the focus of this guest article by Christopher Russell, Partner and head of the litigation and insolvency department of Ogier, Cayman Islands, and Shaun Folpp, a Managing Associate in the litigation and insolvency department of Ogier, Cayman Islands.

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  • From Vol. 4 No.46 (Dec. 21, 2011)

    How May Hedge Fund Managers Resuscitate Expired Cayman Islands Limited Duration Exempted Limited Partnership Hedge Funds?

    Many hedge funds established as Cayman Islands exempted limited partnerships expressly provide, in their partnership agreements, a fixed term for the duration of the exempted limited partnership or a termination date upon the occurrence of a specified event.  The duration of the partnership term or the specific termination events are a matter of agreement between the partners, and such matters may, upon such terms as may be provided by the partnership agreement, be varied by agreement between the partners during the term of the exempted limited partnership.  Hedge fund managers and general partners should carefully monitor a hedge fund’s termination dates or events because once expired, resurrecting the expired exempted limited partnership will be problematic.  What if the fixed term expires by the lapse of time or the occurrence of a termination event and the partners nevertheless wish their hedge funds to continue operating?  This situation may come about by oversight of the hedge fund manager or the partners in failing to heed the impending termination date or termination event or a change of heart by the hedge fund manager and the partners, after the termination date has passed or the termination event has occurred.  Is it then open to the partners effectively to agree to resurrect and continue their expired limited partnership or must they, in any event, complete the winding up and dissolution of their exempted limited partnership and then form a new partnership with all the time, expense, inconvenience and negative tax and other consequences that this may entail?  In a guest article, Christopher Russell and Oliver Payne, partner and associate, respectively, at Ogier, Cayman Islands, first discuss the Cayman Islands regulations that relate to limited duration exempted limited partnerships.  The authors then highlight a potential course of action to extend the life of the exempted limited partnership where the partnership term has expired or a termination event has occurred.

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  • From Vol. 4 No.42 (Nov. 23, 2011)

    Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds

    On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City.  Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA).  This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others.

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  • From Vol. 4 No.31 (Sep. 8, 2011)

    Cayman Grand Court Holds Independent Directors of Failed Hedge Fund Weavering Macro Fixed Income Fund Personally Liable for Losses Due to their Willful Failure to Supervise Fund Operations

    In a judgment with serious implications for those who serve as directors of Cayman Islands hedge funds, the Grand Court of the Cayman Islands has ruled that Stefan Peterson and Hans Ekstrom, who were the independent directors of Weavering Macro Fixed Income Fund Limited (Fund), were personally liable for $111 million of excess redemption payments that had been made by the Fund using a wildly inflated net asset value.  The Court found that those directors had willfully neglected their duties to supervise the operation of the Fund and had served as little more than rubber stamps for the Fund’s founder, Magnus Peterson.  They missed or ignored critical – and obvious – signs that something was seriously amiss with the Fund.  The Court’s judgment, summarized in this article, provides a useful roadmap for the level of engagement, due diligence and oversight required of directors of Cayman Islands hedge funds.  For our original coverage of the Fund’s collapse, see “The Weavering Blow-Up and What It May Mean for Boards of Directors of Cayman Islands Hedge Funds,” The Hedge Fund Law Report, Vol. 2, No. 13 (April 2, 2009).  For a discussion of the role that non-executive directors should play in the governance of offshore hedge funds and the protection of investors, see “The Case In Favor of Non-Executive Directors of Offshore Hedge Funds with Investment Expertise, Fewer Directorships and Independence from the Manager,” The Hedge Fund Law Report, Vol. 3, No. 50 (Dec. 29, 2010), and a letter to the editor in response, “The Case in Favor of Focused, Experienced and Independent Hedge Fund Directors,” The Hedge Fund Law Report, Vol. 4, No. 3 (Jan. 21, 2011).

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  • From Vol. 4 No.22 (Jul. 1, 2011)

    Enforcement in the Cayman Islands of U.S. and Other Foreign Judgments: How Safe Is It for Hedge Fund Managers to Allow Judgment to Be Entered by Default?

    Cayman Islands hedge funds, their directors and service providers, are increasingly appearing as defendants in U.S. litigation, in particular in the aftermath of the Madoff fiasco.  These entities are facing a variety of claims, not always structured appropriately under Cayman Islands law, and not always structured with any particularity.  Broad, sweeping allegations of fraud, gross negligence, the existence of fiduciary and other duties, and clawback claims based on unjust enrichment are thrown in, not always with the application that should be displayed before launching such serious allegations.  Many of these claims face motions to dismiss, often on the basis of applicable Cayman Islands law, in particular, the existence of fiduciary and other duties under Cayman Islands law, derivative claims, reflective loss and exculpation and indemnity clauses.  See “Exculpation and Indemnity Clauses in the Hedge Fund Context: A Cayman Islands Perspective (Part Two of Two),” The Hedge Fund Law Report, Vol. 4, No. 1 (Jan. 7, 2011).  It was not uncommon for Cayman Islands lawyers in the past to advise Cayman Islands funds, and other related Cayman entities facing U.S. proceedings, that since they were Cayman Islands entities, it was safe not to participate in the U.S. proceedings, even for the purpose of challenging the jurisdiction of the U.S. court – and to allow a judgment to be entered in the U.S. court, because the U.S. judgment would not be enforceable against them in the Cayman court.  Such advice, even if (rarely) appropriate in individual cases, could not be, and never was, of universal applicability.  There are very clear risks in advising a Cayman entity not to challenge the jurisdiction of a U.S. or other foreign court, where such a challenge can be mounted with a sufficient prospect of success, and, whether or not such an application is made, in allowing a judgment to be entered in default by not participating to defend the proceedings, on the premise that any such judgment would not be enforceable in the Cayman Islands court.  In a guest article, Chris Russell, a partner and head of the litigation and insolvency department of Ogier Cayman, and Michael Makridakis, a senior associate at Ogier, provide an overview of relevant law; identify the relevant common law rules and defenses; and discuss the enforcement of judgments in foreign insolvency proceedings.

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  • From Vol. 4 No.15 (May 6, 2011)

    What Are the Legal and Practical Effects of a Discrepancy between the Provisions of a Cayman Hedge Fund’s Articles of Association and Offering Documentation?

    Before the recent global economic crisis impacted the hedge fund world, it was not uncommon for even sophisticated investors to subscribe for shares in corporate offshore vehicles without having first scrutinized in detail the offering memorandum, the Articles of Association and the other governing documentation of the fund.  The change in the economic climate has given rise to a heightened awareness of the need to review carefully, and in some cases to seek to negotiate, the terms of subscription.  It has also caused those who have suffered investment losses to scrutinize subscription terms carefully in order to consider whether, based on the terms upon which they invested and the terms of the Articles of Association of the fund, they have grounds for bringing proceedings to recover damages from the fund or its directors, or other service providers.  A number of the disputes that have arisen in the last few years between Cayman funds and their investors have been caused by apparent material differences in key provisions in fund documents, in particular the offering memoranda and the Articles of Association – for example, the fund’s rights to suspend redemptions, delay payment of redemption proceeds, side-pocket illiquid positions and to set aside reserves for contingent liabilities post declaration of net asset value.  The question arises: What is the effect of a provision in the offering documentation which appears to be inconsistent with the wording of the Articles?  Does the provision in the offering documentation constitute an enforceable right of the fund (for example, to suspend payment of redemption proceeds if such a provision is not provided for in the Articles) or a shareholder (for example, to require adherence by the fund to an investment policy specified in the offering document but not contained within the Articles)?  Or does such an inconsistency constitute a misrepresentation of the terms of the Articles, which may give rise to a cause of action against the fund or its directors at the suit of an investor who relied on the misrepresentation in deciding to invest or remain invested in the fund?  In a guest article, Christopher Russell and Rachael Reynolds, Partner and Managing Associate, respectively, at Ogier in the Cayman Islands, address the foregoing questions and others, and discuss relevant guidance provided by the UK Privy Council in an important recent decision.

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  • From Vol. 3 No.5 (Feb. 4, 2010)

    Offshore Fund Vehicles: Do U.S. Investment Managers Need Them?

    With the green shoots of recovery beginning to emerge in the U.S. and significant amounts of capital withdrawn during the last twelve months beginning to be redeployed back into fund structures, should U.S. investment managers now be looking to establish offshore fund vehicles?  If so, what sources of capital should U.S. investments managers be looking to attract to invest into these offshore fund vehicles?  Additionally, with offshore jurisdictions subjected to more scrutiny than ever before, which jurisdictions should U.S. investment managers be looking to go to in order to domicile their offshore fund vehicles?  These are all important questions which U.S. investment managers and their advisors are frequently asking and which are worthy of consideration and analysis.  In a guest article, Ogier Partner Simon Schilder addresses these questions and discusses: the rationale for organizing offshore investment vehicles; potential changes to the unrelated business taxable income rules; the Alternative Investment Fund Manager Directive in the European Union; and considerations when selecting an offshore jurisdiction for organization of a hedge fund.

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  • From Vol. 2 No.44 (Nov. 5, 2009)

    Investors Win Court-Imposed Liquidation of Cayman Islands Hedge Fund of Funds Matador Investments

    Matador Investments Ltd. (Matador or the Fund) is a fund of funds organized under the laws of the Cayman Islands.  Following a request by investors for redemption of their interests in Matador, the Fund first imposed a “gate” on redemptions (to stretch out redemption payments over time), and later imposed a complete freeze on redemptions.  The investors brought an action against the Fund seeking a judicial liquidation of the Fund on the ground that, following their redemption requests, they had become unpaid “creditors” of the Fund.  See “How Will the New Cayman Islands Insolvency Regime Affect the Winding-Up of Cayman Islands Hedge Funds?,” The Hedge Fund Law Report, Vol. 2, No. 42 (Oct. 21, 2009).  Matador, relying on the recent Strategic Turnaround decision, argued that until the redemptions were paid in full, the investors were still bound by the Fund’s governing documents, which permitted both gates and freezes on redemptions.  The court disagreed, appointed a liquidator, and directed the Fund to commence winding up its affairs.  We explain the parties’ arguments and how the court distinguished the Matador investors from those in the Strategic Turnaround case.

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  • From Vol. 2 No.42 (Oct. 21, 2009)

    How Will the New Cayman Islands Insolvency Regime Affect the Winding-Up of Cayman Islands Hedge Funds?

    On March 1, 2009, the Cayman Islands Legislative Assembly implemented a new insolvency regime applicable to, among others, hedge funds organized there.  Market participants surveyed by The Hedge Fund Law Report agree that the new regime does not dramatically change the insolvency regime applicable to hedge funds, but may empower liquidators and courts to pursue claims by insolvent companies of fraudulent pre-petition trading.  This article reviews the mechanics of the new insolvency regime that are relevant to hedge funds (including providing statutory language); the new regime’s effect on the powers of liquidators and courts; whether the outcome in the case In the Matter of Strategic Turnaround Master Partnership Limited (12 December 2008) would have been different had the new regime been in effect in December 2008, when the case was decided; the “cash flow” definition of insolvency in the Cayman Islands; when a Cayman Islands hedge fund investor becomes a creditor of the hedge fund from which the investor has redeemed; the anticipated impact of the legal changes on the number of hedge funds domiciled in the Caymans; the effect of the law on in-kind redemptions; and the likelihood that the Caymans will impose an income or capital gains tax on hedge funds or their managers to make up a budget shortfall.

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  • From Vol. 2 No.37 (Sep. 17, 2009)

    The Evolution of Offshore Investment Funds (Part Three of Three): In Interview with The Hedge Fund Law Report, Ogier Partner Colin MacKay Discusses Cross-Border Regulation; Transparency in Various Offshore Financial Centers; Preferred Offshore Financial Centers for Organizing Hedge Funds; Audits and Examinations of Offshore Financial Centers by Global Regulatory Bodies; and How Hedge Fund Managers Can Access Regulatory Findings

    During this past spring and summer, global law firm Ogier hosted its Second Annual Ogier Global Investment Funds Seminar, titled “The Evolution of Offshore Investment Funds,” for over 300 hedge fund professionals in New York, Boston, the Cayman Islands, Chicago and San Francisco.  Colin MacKay, one of the presenting partners at the seminar, spoke at length to The Hedge Fund Law Report about the most important issues addressed in the seminar.  In prior issues, we published the first two of three parts of the full transcript.  This week’s issue of The Hedge Fund Law Report includes part three of three of the full transcript, in which MacKay discusses cross-border regulation; the definition of “established operations”; transparency in various offshore financial centers (including the Cayman Islands, BVI, the Channel Islands and Bermuda); which offshore financial centers are more risky for organizing hedge funds; which offshore financial centers hedge funds are likely to migrate to based on their ability to meet international standards of transparency; whether global regulatory bodies such as the Organization for Economic Cooperation and Development and the International Organization of Securities Commissions are merely promulgating standards or whether they are actively examining or auditing the regulatory and tax rules and enforcement of those rules in offshore financial centers; and how hedge funds can access the results of examination and audit work conducted by regulators.

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  • From Vol. 2 No.26 (Jul. 2, 2009)

    Consistent With International Trends, Cayman Islands Monetary Authority May Require More Transparency from Cayman-Registered Hedge Funds

    The Cayman Islands Monetary Authority is planning to increase the transparency required of hedge funds registered in the popular offshore jurisdiction.  Specifically, it is contemplating extending the scope of information called for in Fund Annual Reports, and the range of uses to which such information may be put.  This article reviews the existing system of disclosure in the Caymans, and the most likely changes.  It also discusses the possible impact of such changes on the competitive position of the Cayman Islands vis-à-vis other offshore financial centers.

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  • From Vol. 2 No.3 (Jan. 21, 2009)

    Cayman Court Suggests that Hedge Fund Investor does not Have Standing to Liquidate Fund

    On December 12, 2008, the Cayman Islands Court of Appeal delivered a Judgment in a case titled In the Matter of Strategic Turnaround Master Partnership, Limited.  The court denied standing to a redeeming investor in Strategic Turnaround Master Partnership, Limited who sought to petition for a wind up of the fund based on the fund’s inability to pay its debts.  However, the court left open the possibility that the investor, Culross Global Ltd., might petition for the same relief under the “just and equitable” doctrine of Cayman Islands insolvency law.  We discuss the facts, legal analysis and implications of the case for hedge funds organized in the Cayman Islands.

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  • From Vol. 1 No.18 (Aug. 11, 2008)

    Senate Proposals and GAO Report Focus on Taxation of Cayman Islands Accounts

    On the heels of continued congressional concern about tax evasion among offshore accounts, including offshore hedge funds, a spokesman for the Senate Finance Committee told The Hedge Fund Law Report that lawmakers will attempt to “move legislation this year” addressing the issue. At a recent hearing on Cayman Islands accounts, Sen. Max Baucus, chairman of the Finance Committee, outlined a series of proposals centering on strengthening rules relating to Reports of Foreign Bank and Financial Accounts. The Finance Committee hearing focused on a recent Government Accountability Office report titled “Cayman Islands: Business and Tax Advantages Attract U.S. Persons and Enforcement Challenges Exist.” The GAO report found that for many hedge funds, a primary purpose of establishing a Cayman Islands domicile is tax minimization. The GAO report noted that efforts to prevent illegal tax avoidance are hindered by the IRS’s “lack of jurisdictional authority to pursue information, difficulty in identifying beneficial owners due to the complexity of offshore financial transactions and relationships among entities,” and other factors. Cayman attorneys, however, remain confident in the robust legal and regulatory structure in the Cayman Islands and, in fact, read the GAO report as complimentary of the Cayman system.

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  • From Vol. 1 No.14 (Jun. 19, 2008)

    Cayman Islands Monetary Authority Issues Report on Hedge Fund Statistics

    Earlier this month, the Cayman Islands Monetary Authority issued the first annual Investments Statistical Digest containing statistics on 5,052 Cayman-domiciled hedge funds.

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