How to set up a Hedge Fund or Cayman Investment Fund. This guide provides an overview of the requirements. However, please contact our professional team to discuss your specific requirements: info@bellrockgroup.com

1. Cayman Fund Formation
Bell Rock Group
Legal Transaction Structuring Services
www.bellrockgroup.com

2. The Cayman Islands is one of the world’s leading jurisdictions for the formation of hedge funds,
private equity funds and offshore funds generally. In this guide, we cover the Law governing all
investment fund that may be launched. When we refer to mutual funds, we include hedge
funds also, as set-out below. For the avoidance of any doubt, hedge funds in the Cayman
Islands are subject to the Mutual Funds Law.
We assist clients seeking to launch Cayman Islands hedge funds across all strategies, private
equity funds, real estate funds, master-feeder fund structures, umbrella multi-strategy funds,
retail focused funds and investment management companies.
The following guide does not constitute legal or tax advice and is provided as a summary
overview only.
What are the key statutes and regulations that govern hedge funds and mutual funds in the
Cayman Islands? Which regulatory bodies regulate hedge funds and mutual?
The primary legislation regulating hedge funds in the Cayman Islands is the Mutual Funds Law
(2015 Revision) (the "Funds Law") and accompanying regulations.
What is a "mutual fund"?
The Funds Law defines a "mutual fund" as follows:
"a company, unit trust or partnership that issues equity interests, the purpose or effect
of which is the pooling of investor funds with the aim of spreading investment risks and
enabling investors in the mutual fund to receive profits or gains from the acquisition,
holding, management or disposal of investments but does not include a person
licensed under the Banks and Trust Companies Law (2009 Revision) or the Insurance
Law (2008 Revision), or a person registered under the Building Societies Law (2010
Revision) or the Friendly Societies Law (1998 Revision)".
Accordingly, investment funds which are established for a sole investor and do not involve the
pooling of investor funds fall outside the regulatory framework of the Funds Law. Nonetheless,
a mutual fund with a single investor can apply for voluntary registration to, among other things,
benefit from the status of being a fund registered with and regulated by Cayman Islands
Monetary Authority (the "Monetary Authority").

3. Will the mutual fund issue "equity interests"?
As can be seen from the definition of "mutual fund" above, the Funds Law applies only to
investment funds which issue "equity interests". Equity interests are defined in the Funds Law
as: "a share, trust unit or partnership interest that-
(a) carries an entitlement to participate in the profits or gains of the company, unit
trust or partnership; and
(b) is redeemable or repurchasable at the option of the investor…..before the
commencement of winding-up or the dissolution of the company, unit trust or
partnership, but does not include debt,…"
Accordingly, private equity funds and other closed-ended funds (e.g. real estate funds) which
do not give investors the right to redeem their shares, units or interests from the fund at the
investor's option do not fall within the scope of the provisions of the Funds Law.
The law as set out herein therefore applies only in respect of investment funds of any asset
class which satisfies the definition of "equity interests" above. For present purposes we will
refer to these funds as "Mutual Funds".

4. INVESTMENT FUNDS FLOW CHART
NO
Are there less than 15 investors capable of
removing the operator of the fund?
NO
Is the fund promoted by a large and
reputable institution?
NO
As of 14 November 2006 the initial
minimum subscription for Section 4(3)
funds will be greater than US $100,000
Are the equity interests listed on an
approved stock exchange?
NO
Fund must either apply for a Mutual Fund
Licence or apply to be
REGULATED AS AN ADMINISTERED
MUTUAL FUND
NO REGULATION IS REQUIRED
UNDER THE MUTUAL FUNDS LAW
YES
Fund must apply to be
REGULATED AS A REGISTERED
MUTUAL FUND
(no Cayman Islands administrator
required but local auditor required)
Registered Office
required in Cayman Islands
Promoters
Each person who causes the preparation
or distribution of an offering document
(other than a professional adviser acting
for such person) is required to satisfy
CIMA of good reputation
Administrator
Required to satisfy CIMA of the
appropriate expertise of the Promoter of
the Fund and to be satisfied in regard of
the mutual fund in accordance with
section 16 of the Mutual Funds Law
Directors
Required to satisfy CIMA that they are "fit
and proper" persons
Auditors
As of 14 November 2006 auditors are
obliged to notify CIMA on suspicion of
fraud or where a Fund may be
operating in a prejudicial manner
Principal Office
Licensed mutual fund administrator
("Administrator") is required to
provide principal office in the
Cayman Islands
Promoters
Each person who causes the
preparation or distribution of an
offering document (other than a
professional adviser acting for such
person) is required to satisfy
Administrator of good reputation
Administrator
Required to satisfy CIMA of
appropriate expertise of the
Promoter
Directors
Required to satisfy Administrator
that they are "fit and proper"
persons
File Form MF1, offering
document, consent letters,
supporting documents and
application fee with CIMA
File Form MF3, offering
document, consent
letters, supporting
documents and
application fee with CIMA
File Form MF2, offering
document, consent letters,
supporting documents and
application fee with CIMA
The Fund must either apply for a
Mutual Fund Licence or appoint a
Cayman administrator to provide
Principal Office
(Form MF2A)
Note: As of 14 November 2006 a Non-
Cayman Fund domiciled in a CIMA
approved country and administered in
the Cayman Islands does not need to
be registered with CIMA
Initial minimum subscription threshold
drops below US$100,000
YES
Pursuant to S.4(10) of the Mutual
Funds Law, the fund has the option
to apply for a
MUTUAL FUND LICENCE
YES
NO
Is the investment fund issuing equity
interests which entitle investors to
participate in the profits or gains of the
company?
YES
NO
Entity is exempt from
regulation pursuant to S.4(4)
of the Mutual Funds Law
Entity does not meet
definition of a mutual fund
under the Mutual Funds Law
YES
Are equity interests redeemable or
repurchasable at the option of the investor
(ie. is fund open ended?)
YES
YES
A CURRENT COPY OF THE OFFERING DOCUMENT MUST BE FILED WITH THE CAYMAN ISLANDS MONETARY AUTHORITY
(“CIMA”) CIMA MUST BE NOTIFIED AS TO ANY CHANGES OF PRESCRIBED PARTICULARS*
FINANCIAL STATEMENTS MUST BE FILED WITHIN 6 MONTHS OF THE FUND’S YEAR-END
ANNUAL FEE REQUIRED TO BE PAID TO CIMA ON OR BEFORE 15 JANUARY IN EACH YEAR

5. Registration
Mutual Funds are, subject to the exemption noted below, required to be registered with the
Monetary Authority.
Unregistered Mutual Funds - Exemption from Registration
Mutual Funds in which the "equity interests" are held by not more than fifteen (15) investors, a
majority of whom are capable of appointing or removing the "operator" of the fund are not
required to be registered with the Monetary Authority.
In the case of an investment fund structured as an exempted company or segregated portfolio
company (SPC), the operator would be the fund's Directors. In the case of an investment fund
structured as an exempted limited partnership, the operator would be the fund's general
partner(s). In the case of an investment fund structured as a unit trust, the operator would be
the fund's trustee(s).
As noted above, private equity funds and other closed-ended funds (e.g. real estate funds)
which do not give investors the right to redeem their shares, units or interests from the fund at
the investor's option do not issue "equity interests" for the purposes of the Funds Law and
therefore would not fall into the registration regime in any event.
Ancillary legislation affecting Cayman Islands Mutual Funds/Hedge Funds include the:
• Companies Law (2016 Revision) ("Companies Law").
• Exempted Limited Partnership Law, 2014 ("ELP Law").
• Partnership Law (2002 Revision) ("Partnership Law").
• Trusts Law (As Revised) ("Trusts Law").
• Banks and Trust Companies Law (As Revised) ("BTC Law").
• Securities Investment Business Law (2015 Revision) ("SIB Law").
• Proceeds of Crime Law 2017 ("PCL").
• Anti-Money Laundering Regulations, 2018 ("ML Regulations"), enacted pursuant to
powers under the PCL.
The PCL, ML Regulations and the guidance notes prepared and issued by the Monetary
Authority on the prevention and detection of money laundering in the Cayman Islands to
provide guidance to service providers in complying with their obligations under the ML
Regulations (Guidance Notes) are together referred to as the AML Laws.
Regulatory bodies - CIMA
The Investment and Securities Division of the Monetary Authority is responsible for the
ongoing supervision of Mutual Funds and fund administrators. The Funds Law is administered
by the Monetary Authority. The Financial Reporting Authority (FRA) is the Cayman Islands'

6. Financial Intelligence Unit with responsibility for receiving, analysing and disseminating
disclosures of financial information concerning the proceeds of criminal conduct, money
laundering and the financing of terrorism pursuant to the provisions of the PCL.
Suspicious activity or transaction reports (that is, reports on financial transactions in which
there are reasonable grounds to suspect the transactions are related to the proceeds of
criminal conduct (as defined in the PCL) must be submitted to the FRA.
What are the main legal vehicles used to set up a hedge fund and what are the key advantages
and disadvantages of using these structures?
Hedge Funds/Mutual Funds - Legal vehicles.
A hedge fund/mutual fund can be established as one of the following:
• Exempt Company (incorporated with limited liability), which offers shares. This may be
further structured in a way depending on the location of investors. For example, a
“master-feeder” structure, “mini-master” structure, “parallel” structure or “stand-alone”.
• Segregated Portfolio Company (SPC) (which gives the mutual fund the benefits of
employing different investment strategies in different segregated portfolios of the SPC
while separating the assets and liabilities of each segregated portfolio (SP) from the
other SPs)
• Exempted Limited Partnership (ELP) (an exempted limited partnership structure can be
used for mutual funds but is not as popular as Exempted companies and SPCs.
However, an ELP is often used as a master fund in a master- feeder structure for
mutual funds).
• Unit trusts (mutual funds can be structured as an exempted unit trust which offers
units of beneficial interest to investors but is not as popular as Exempted companies
and SPCs.
The choice of the structure is often dictated by some or all of the following factors:
• Market practice.
• Tax.
• The regulatory requirements of the investors in the fund.
• The investors' or investment manager's familiarity or preference of one structure over
another.
The two corporate structures that are typically used to establish a hedge fund/mutual fund in
corporate form is the (i) exempted company; and the (ii) SPC, which are both incorporated
under the Companies Law.
The constitution of both an exempted company and an SPC is contained in its:

7. • Memorandum of Association, which sets out the company's powers and objectives.
• Articles of Association, which regulates the administration of the company, including its
shareholders' rights and its directors' powers and duties.
The share capital of an exempted company incorporated with limited liability and an SPC can
be denominated in any one or more currencies and fractional shares can be issued. The share
capital can also be issued:
• In classes, or different series of the same class or classes.
• With different rights.
• To allow participation in the same or a separate portfolio of underlying assets.
Therefore, an exempted company structure and an SPC structure is particularly appropriate
for umbrella funds or multi-class funds.
Shares
Shares are normally issued with a low par or nominal value (typically US$0.01 per share) and at
a high premium (that is, the amount by which the issue price which is typically US$1,000
exceeds the par value), to provide maximum flexibility on redemption of shares.
In almost all cases, the investment manager will hold the controlling shares of the fund (the
“management” or “voting” shares). Non-voting participating shares are then issued to investors.
Dividends
Monies paid in as share premium are available, under the Companies Law, for distribution by
way of dividend or to satisfy any premium on redemption. In addition, subject to satisfying a
solvency requirement, shares may be re-deemed from capital.
An exempted limited partnership is registered under the ELP Law.
There must be at least one:
• General partner who is liable for all debts and obligations of the partnership.
• Limited partner who, subject to certain exceptions, is liable for the debts and
obligations of the partnership only to the extent provided in the partnership
agreement.
In addition, at least one general partner must be one of the following:
• An individual, resident in the Cayman Islands.

8. • A company incorporated under the Companies Law or registered as a foreign company
under the Companies Law.
• An exempted limited partnership.
• A foreign limited partnership registered as a foreign limited partnership under the ELP
Law.
The partners' rights and duties in relation to one another are regulated by the ELP Law and the
partnership agreement, which gives increased flexibility for fund managers and investors (in
particular, seed investors or large institutional investors) to negotiate and tailor the partnership
agreement as they see fit. Limited partnership interests offered to investors represent
undivided interests in the partnership property.
Limited partnership interests may, subject to satisfying a solvency requirement, be redeemed
in accordance with the provisions of the partnership agreement.
The unit trust is established by declaration of trust and a trust deed (together, the Trust Deed),
under which a trustee issues units of beneficial interest.
• The trustee holds legal title to the underlying assets on trust (for the benefit of
unitholders) and each unit represents an un-divided fractional interest in the trust
property.
• The trust is subject to the pro-visions of the Trusts Law and case law.
• The Trust Deed sets out all powers and duties of the trustee and beneficiaries' rights,
including provisions regarding the transfer and redemption of units.
• All dealings with the trust property are effected by the trustee or by its delegate.
Advantages.
Of the structures listed above, only the exempted company and SPC benefit from separate
legal personality distinct from its investors and administrators. Additionally, investors' liabilities
are limited to the amount unpaid on their shares, if any. The unit trust and limited partnership
structures arguably offer more flexibility than the exempted company structure (but see our
separate Briefing Note on SPCs).
Disadvantages.
The exempted company and SPC structure is subject to company law requirements (for
example, capital maintenance restrictions) under the Companies Law. Neither the limited
partnership structure nor the unit trust structure has the benefit of separate corporate
personality.

9. What are the key disclosure or filing requirements (if any) that must be completed by the
hedge fund/mutual fund?
The following procedures apply to hedge fund/mutual fund registration (MFL):
If the minimum aggregate equity interest purchasable by a prospective investor is at least
US$100,000 (or its equivalent in another currency) or the equity interests are listed on a
recognised stock exchange, including the Cayman Islands Stock Exchange, then the
registration application requires filing of the following documents with the Monetary Authority:
• a certified copy of the Certificate of Incorporation or Certificate of Registration (as
applicable and depending on whether the fund is a company, limited partnership or
trust)
• Form MF1 (this form includes certain prescribed details of the fund, such as the identity
of the operators and service providers and the key terms regarding subscriptions and
redemptions);
• a current offering document (for example, a private placement memorandum);
• a consent letter from the fund's administrator and a consent letter from the Cayman
Islands auditor, approved by the Monetary Authority;
• a registration fee, which is currently US$4,269 (approximately);
• an application fee, which is currently US$365.85.
Administered Mutual Funds ("retail funds")
If a licensed investment fund's administrator provides the fund's principal office in the Cayman
Islands (which applies in the case of an investment fund that agrees to accept minimum initial
investments below US$100,000) then the registration is applied for by filing the following
documents with the Monetary Authority:
• Forms MF2 and MF2A, completed by the administrator and the investment fund
(including similar particulars to the Form MF1) (see above);
• the same documents (except the Form MF1) and registration fee as above.
Filing & Registration Requirements.
The Monetary Authority will not perform a substantive review of the filing. Generally, the
mutual fund can accept subscription monies once the filing is made. It is important to note that
a Mutual Fund's offering document (PPM) must (section 4(6) MFL):
• Describe the equity interests in all material respects.
• Contain such other information as is necessary to enable a prospective investor in the
fund to make an informed decision about whether to subscribe for or purchase the
equity interests.

10. • The requirement to outline the risks involved in investing in the mutual fund in the
offering document (PPM) is implicit in section 4(6) of the MFL.
On-Going Requirements
The mutual fund is required under the MFL to file its current offering document with the
Monetary Authority within 21 days of becoming aware of any change that materially affects any
information in the offering document filed with the Monetary Authority or in the prescribed
details of the offering document filed with the Monetary Authority.
Side Letters
Other than the section 4(6) MFL requirement set out above, there are currently no Cayman
Islands specific disclosure or filing requirements for side letters. However, the offering
documents typically disclose that the fund can enter into side letter arrangements with certain
investors.
Directors – Why Independent Governance is Best Practice Governance
A Registered investment fund must have a minimum of two (2) directors and those directors
must be registered with the Monetary Authority under the Director Registration & Licensing
Law, 2014. Most investment funds (whether registered or unregistered, including private equity
funds), will appoint independent directors to the board for the following reasons:
• Investors and regulators expect that those charged with overseeing the operations of
the fund are independent of the manager, legal, the administrator and therefore avoid
conflicts of interest;
• Independent directors are more likely to detect fraud and make decisions that treat
investors fairly;
• Directors are subject to duties and responsibilities under case law and statute that
govern their role and the risk associated with acting as a director;
• Appointing experienced and qualified directors will generally enhance a fund offering
and provide comfort to investors.
• Increased due diligence by investors will focus on those tasked with governance, which
includes the directors. This might be the difference in raising capital or not.
• Directors, particularly professional directors bring experience of acting on other fund
boards which aids fund managers operationally as the board can provide unparalleled
insight on market developments.
• Professional directors should be able to provide updates on operational and regulatory
matters that need to be implemented by the fund from their experience and location.
For example, once legal counsel has assisted with the set-up and launch of the fund,
they are not typically involved going forward unless a legal matter requires their input.

11. The directors should be able to provide updates on matters that may affect the fund
and ensure that the fund is acting in compliance with the regulations.
Key Service Providers to Consider as part of formation and structuring
1. Fund Administrator
2. Legal Counsel
3. Auditor
4. CIMA Registered Professional Directors
5. Company Secretary/Board Support
6. Registered Office/Principal Office
7. AML Compliance Officers – MLRO, Deputy MLRO and AML Compliance Officer
8. Prime Broker
9. Custodian Bank
10. Principle Point of Contact for Common Reporting Standards & FATCA
Bell Rock Group
Bell Rock Group is a leading and regulated provider of Cayman fund and corporate services.
Our professionals have worked in the fields of law, investment banking, asset management and
compliance for well-known names in the industry and each member of our team has over 18
years of senior level industry experience. We work with fund managers throughout the life-
cycle of structuring and forming an investment fund for launch (including the coordination of
all third-party service providers required) and provide support services going forward, with a
focus on building long-term relationships. We provide fund formation and registration, legal
structuring, fiduciary services such as independent directors to funds and investment
companies, registered office, company secretary and compliance services.
Next Steps – Considerations for Launching a Fund
So, you are ready to launch your fund and get started. Some planning is obviously required,
and we would suggest the following initial questions are addressed at an early stage:
1. Planned launch date (it typically takes 6 weeks to launch a fund)
2. Proposed Name of the investment fund?
3. Whether you want to create an exempt investment manager in Cayman (“excluded
person”)
4. Expectation on how much investor capital you expect to raise
5. Expectation on the number of investors
6. Where those investors will be located / Any US investors
7. The minimum initial investment amount per investor
8. How frequently will investors be able to subscribe for shares or redeem (sell) their
shares (e.g. monthly/quarterly/annually)

12. 9. Whether there will be a “lock-up” for investors e.g. minimum investment holding period
10. The investment strategy / assets that will be traded / types of leverage used and
percentage
11. Risk Management – VaR etc
12. Fees - Management fee, Performance/Incentive fee, Distribution fee
13. High-Water-Mark / Hurdle Rate
For further information on setting up a Cayman Islands investment fund or on our professional
services, please contact us: info@bellrockgroup.com

13. Bell Rock Group
10 Market Street
758 Camana Bay
Grand Cayman, KY1-9006
Cayman Islands
T: 1 345 325 3884
E: info@bellrockgroup.com
www.bellrockgroup.com
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