Accessing Capital and Marketing Considerations
However, allocations to the Cayman Islands on the part of certain types of European investors are limited. A manager wishing to raise a significant amount of capital from within Europe should carefully consider how appropriate a Cayman-only structure will be (see “Jurisdiction; Where Should the Fund be Domiciled?” below).
The Cayman Islands remains one of the most popular jurisdictions for hedge fund managers seeking to raise capital on a global basis. U.S. investors, who remain the largest source of capital for hedge funds, are familiar with Cayman Islands-domiciled fund structures, as are institutional investors in many other jurisdictions. Key Structural Considerations Open-Ended or Closed-Ended; Liquidity Funds can be open-ended or closed-ended. Open-ended funds allow investors to subscribe for and redeem their investment in the fund on a regular basis (pursuant to the terms of the fund’s governing documentation). Closed-ended funds generally limit investment to one or more initial subscription dates, and thereafter investors are generally unable to redeem their interests at will (with returns of capital being made at set intervals or at the end of the life of the fund). A hedge fund will typically be open-ended due to most strategies being relatively liquid in nature (and because hedge fund investors will expect similar liquidity in their investment terms). Closed-ended structures are more typically used for private strategies or other specialist and less-liquid strategies, including real estate, infrastructure investment or debt (including direct lending funds). In recent years, there has been some convergence between liquid and illiquid strategies, in particular in the context of credit funds. There have been different approaches to these hybrid structures, with some funds combining traditional elements of both open- ended and closed-ended structures. When setting up an open-ended fund to manage illiquid assets, managers will need to carefully manage liquidity and consider carefully how they will meet redemption requests in a range of different scenarios (e.g., through the use of run- off or liquidating classes).
Standalone or Master-Feeder Structure As discussed under “Investor Jurisdiction and Tax Preferences” above, the types of investors the fund wishes to target will determine whether the fund is structured as a standalone fund or as a master-feeder fund. U.S. taxpayers will generally require a tax transparent fund vehicle through which to invest, while non-U.S. investors and U.S. tax- exempt investors will require a tax-opaque fund vehicle. Both types of tax treatment can be accommodated in a master-feeder fund structure. The typical master-feeder structure will be comprised of a tax-transparent master fund with one or more feeder funds. Non-U.S. investors and U.S. tax-exempts will invest through a tax-opaque feeder, and U.S. taxpayers will invest through a tax-transparent feeder (or alternatively in the tax-transparent master fund directly). Other feeders, or alternative forms of the master fund, can be structured for other reasons or other types of investors, as required.
Investors - Non-US and US Tax Exempt
Investors - US Taxpayers
Onshore Feeder
Offshore Feeder
Master Fund
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