International legal structures for funds 21
International legal structures for funds
One of the most important things to understand before you decide to
invest in a fund is its legal structure. The legal structure shows you in
detail how your money is controlled. It takes a bit of work to compre-
hend it all, but my aim is to make it easier for you. We are going to
start by setting out what you should be looking for. If we all apply this
bit of knowledge we will improve the standards of the industry and
save you time and money overall.
Focusing on offshore fund structures that use a company form, as this is
most common, note that the fund has a board of directors. Therefore,
some argue that the fund is independent of the manager; however since
it has delegated asset management activities to the manager, the main
reason for its existence (investing your money) is not within its com-
plete control. The fund does not, in reality – and this is certainly true for
offshore hedge funds – deal with its affairs without the approval or guid-
ance of the manager and sometimes the advisor, depending on the set
Legislators felt that this was fair as the idea of pooling money to invest in the
economy was overall beneficial to society and encourages people to save, a major
issue in western countries. These savings will provide for retirement and pensions.
Governments unfortunately only decided to confer this special status on certain
types of fund.
In Europe the desire to unite these types of funds led to the creation of the
UCITS format, a way to harmonise all the relevant funds that should be tax
exempt and freely distributable within the EU.
When it came to setting up alternative strategies (non-UCITS or equivalent) in the
UK for example, no fund format existed. So, most UK-based managers had to
create structures outside of the UK, including in the Cayman Islands.
Without much of a legal framework, those funds are very much under the control
of the manager with few independent safeguards even today.
Over the past decade most European countries have created new fund laws
to support alternative hedge fund strategies. These fund laws exist for exam-
ple in Luxembourg and Ireland but also in Spain, Germany and France. The UK
has amazingly but willingly stayed out of this space! Despite that, former British
Prime Minister Gordon Brown famously sought to blame the Cayman Islands
for having hedge funds in its jurisdiction and for the Cayman Islands’ presumed
role in the 2008 financial crisis. As you can see from the above, it is hardly the
Cayman Islands’ fault. It just filled a natural vacuum and remains a prime location
for hedge funds today.