The following table shows the similarities and differences between the BVI, Cayman and Luxembourg Investment Funds across 27 different areas.

Please reach out to the authors to find out more.

Emerging fund managers in the Middle East—particularly those targeting sub-US$50 million in assets under management —face critical decisions when launching their first fund. While the region's domestic markets are maturing, and offer a compelling alternative in certain circumstances, for first time managers selecting an offshore jurisdiction may be the better choice. The Cayman Islands and the British Virgin Islands offer cost-effective, internationally respected platforms that simplify fund formation, enhance credibility with global investors, and provide a neutral, well-understood legal framework. This article outlines the key advantages of these two jurisdictions and explains how their structures can align with the strategic needs of new managers in the region.

Why emerging managers look offshore

While distinct in their offerings, the Cayman Islands and British Virgin Islands share several foundational features that make them attractive to first-time fund managers. These jurisdictions provide a stable, tax-neutral environment, which is crucial for pooling capital from diverse international sources without adding layers of tax complexity. This, combined with their regulatory efficiency, creates a powerful value proposition:

Global recognition and investor confidence – Both are leading international finance centres recognised by institutional investors, regulators, and counterparties worldwide. This global standing enhances a new fund's credibility and significantly simplifies the investor onboarding and due diligence process.

Strong legal foundations – Based on English common law, both jurisdictions offer clear, predictable, and commercially-minded legal frameworks. This provides certainty on matters such as shareholder rights, director duties, and creditor protections, which is highly valued by sophisticated investors.

Political and economic stability – As British Overseas Territories, they benefit from long-term constitutional stability and a reliable court system, with an ultimate right of appeal to the Privy Council in London. This insulates fund structures from local political and economic volatility.

Cost efficiency – For emerging managers, budget is paramount. Startup fees, annual government fees, and professional service costs in these jurisdictions are often substantially lower than in major onshore financial centres, making them ideal for lean, entrepreneurial teams.

Speed to market – Both jurisdictions feature streamlined and efficient regulatory registration or approval processes. This allows managers to launch their funds quickly and predictably, enabling them to capitalise on fundraising opportunities without being delayed by bureaucratic hurdles.

Cayman Islands: Global standard-setter

The Cayman Islands is the world's leading offshore fund domicile, with tens of thousands of funds registered with the Cayman Islands Monetary Authority. This depth of experience has created a sophisticated ecosystem of world-class service providers. The jurisdiction offers two primary fund structures relevant to emerging managers:

Mutual Funds – Ideal for open-ended strategies with liquid assets (eg hedge funds) where investors can subscribe and redeem on an ongoing basis. These funds are regulated by the Cayman Islands Monetary Authority and must appoint a Cayman-based auditor and a licensed fund administrator, ensuring robust governance and independent oversight.

Private Funds – Designed for closed-ended strategies with illiquid assets (eg private equity, venture capital, real estate) where investors commit capital for the life of the fund. While still required to register with the Cayman Islands Monetary Authority and appoint appropriate service providers for cash monitoring, valuation, and safekeeping of assets, the overall regime is more flexible than for mutual funds.

Cayman remains the default choice for many institutional investors due to its regulatory maturity and deep investor familiarity. However, the mandatory app...

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I regularly act for residential and commercial property investors and those who lend to them and I also have a (probably) slightly unhealthy interest in Rightmove's sold property prices. What better credentials do I need?

With a real estate property magnate in the White House and the increase in property investment generally, the real estate sector is ripe for international private equity fund managers to tap into.

According to The Lawyer's Global 200: Real Estate 2017 Report and data provided by Private Equity Real Estate magazine, the world's top 50 private equity real estate funds raised a combined US$271 billion between 2011 and 2016. Fundraising for global funds declined in 2016 after 5 years of year-on-year growth. PERE reports that this was due in part to a lack of funds closing - 25 per cent fewer funds closed in 2016 than in 2015.

Those who attended MIPIM in early March will have been aware of the positive view of the property sector. Investment in the London commercial property market continues to be popular for High Net Worth Individuals and Family offices, as well as for larger global private equity funds. Asian and Middle Eastern investors still look to London for their property investment and particularly in some of the more distinctive buildings which now pepper London's skyline - from the City to Canary Wharf (the Cheese Grater, the Shard et al). All good signs for onshore and offshore lawyers servicing this market.

Pan European real estate funds are becoming increasingly popular, with London and Germany proving preferred markets for commercial property investment. According to The Lawyer's Real Estate Report, portfolio deals involving particular asset classes (logistics, student accommodation, build to rent and private rented and hotels) are standing out further than single asset investments. In our experience of acting for investors in these sectors, offshore fund vehicles are just the ticket for investment in real estate portfolios - and for good reason.

Whether the investor is looking for a simple offshore company to hold the property assets in his own name or that of a nominee, or a more complex structure involving holding companies and an onshore, midshore or offshore funds vehicle, the legislative regimes in both the British Virgin Islands and in the Cayman Islands provide solid, predicable yet flexible frameworks for private equity investors.

In both jurisdictions, depending on the proposed exit strategy, the investment vehicle may be established as a regulated entity or as a more straightforward unregulated, closed ended funds vehicle or in conjunction with an onshore or midshore fund. Exit strategies will and do vary, depending on the appetite in the market. Private sales of whole property funds or some of their assets, redemptions of holdings or IPOs are all options, although the first two are probably more common of late. Other drivers such as tax and the domicile of the key investing parties will also be relevant.

If you act for investors or lenders who like to finance commercial property investments, and an offshore structure is under consideration, do let us know, we would be delighted to talk through the options.

Sales pitch over, I leave you with a couple of quotes about property investment which I quite like.

"Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world." -- Franklin D. Roosevelt, US President

"Buy land, they're not making it anymore." -- Mark Twain, writer and humorist

Primarily, it means that BVI and Cayman companies are not subject to corporate taxation on income, capital gains or share transfers. Instead, the BVI and Cayman governments raise revenue through other means such as income taxes on resident individuals (in the BVI), real estate taxes, sales and import duties and, in relation to corporate vehicles, through incorporation and licence fees. In Cayman the government goes one step further and will issue a tax exemption certificate to a typical Cayman fund (in return for a fee) confirming that for a period of 20 years (where the fund is a company) the fund will not be subject to certain Cayman taxes irrespective of any change in law.

The fact that BVI and Cayman companies have no corporate taxes can make them particularly useful in fund structures, as one or more corporate vehicles can be used to pool investor funds without adding additional layers of taxation. Investors are still taxed in the jurisdictions in which they are tax resident on any income and gains generated from investment into the fund, but there is no corporate taxation at the fund level. This is subject to certain exceptions where the BVI or Cayman fund may be subject to taxation in another jurisdiction as a consequence of the location of its investments and/or its investors (for example, under US FATCA).

The attraction of tax neutral jurisdictions is not quite as simple as it may sound and it is not always favourable from a tax perspective for all investors for funds to be domiciled in tax neutral jurisdictions. As I set out in more detail in my previous post on fund structures, while some groups of investors would prefer to invest in an offshore, tax-neutral, fund, for others it is advantageous to invest in a domestic onshore fund. For example, U.S taxable investors prefer to invest into domestic U.S. funds structured as partnerships which are "pass through" entities for U.S. tax purposes.

And, it's not all about tax. There are numerous reasons to use BVI and Cayman funds apart from being tax-neutral. Phil has touched on this before in his previous post but, as a recap, both jurisdictions have a modern corporate law, which is supported by hundreds of years of English common law, and a sophisticated court system with ultimate recourse to the Privy Counsel of the United Kingdom. They both offer a range of fund products, suited to different uses and with appropriate regulation and competent and experienced regulators (the British Virgin Islands Financial Services Commission and the Cayman Islands Monetary Authority). In addition, both jurisdictions are home to world-class service providers and Cayman is the fifth-largest banking center worldwide. This makes the BVI and Cayman extremely attractive jurisdictions in which to establish a fund.

If you think that you would benefit from using a BVI or Cayman fund and you would like to discuss the options in more detail, please get in touch.

The original author of this post is no longer with Harneys. For more information on this topic, please reach out to the contact listed above.

But will the OFC and proposed tax changes really entice Hong Kong based hedge fund managers to set up funds in Hong Kong?

Much of the talk of the "advantage" for a Hong Kong manager in setting up an OFC over a Cayman domiciled fund relates solely to a requirement for dealing only with the Securities and Futures Commission (SFC) and not also the Cayman Islands Monetary Authority (CIMA).

This seems to me a little simplistic.

As a starting point, with a Hong Kong manager directly managing a Hong Kong fund, and without any offshore manager, there will be no opportunity for any management or performance fees to be earned at the Cayman level and tax-deferred.

Moreover, hedge funds are cross-border by their very nature. Most hedge funds have investors from a lot of different countries and have investments in a lot of different countries. Accordingly, managers will already need to be considering the securities laws of various countries.

All the investors in a hedge fund will have their own local tax obligations, so as a very base condition a manager is seeking to domicile their fund somewhere with no additional taxes. However, this is not enough.

A manager also needs to domicile their fund somewhere that provides investors from a lot of different countries the relevant level of comfort to place their investments in such a vehicle. There are some very important factors that are considered by the type of sophisticated investors that invest into hedge funds in determining this comfort level. Such factors that a jurisdiction must exhibit include the absolute rule of law, respect for property rights and access to a sophisticated judiciary free from political interference.

The Cayman Islands is a jurisdiction that fulfils these requirements and has reliably proven itself to do so over decades. As a result, over 85 per cent of the world's hedge funds are domiciled in the Cayman Islands.

Hong Kong is a jurisdiction that some might consider is rapidly being subsumed into the People's Republic of China.

Even when you drill down into more of the minutiae of the OFC regime it appears that the Cayman Islands remains a clear leader. The level of prescription and oversight which is contemplated by the OFC regime, whilst it may be familiar to operators of Hong Kong retail funds, is far more than would be familiar to hedge fund managers, or than applies to private Cayman funds.

The OFC's governing document is required to contain certain prescribed provisions, including the kinds of property in which the OFC can invest. Any change to this governing document will require the SFC's approval. There are no restrictions imposed by the Cayman regime on investment strategies of Cayman funds or their use of leverage. A Cayman fund does not have prescribed provisions in, and CIMA's approval is not required for any changes to, its memorandum and articles of association.

The appointments of the directors of an OFC are subject to the SFC's approval, and the SFC will require the directors to be appropriately qualified and experienced. By contrast, CIMA requires directors to register via a web portal but does not impose an approval process nor any requirements as to qualifications, experience or independence.

An OFC must appoint a custodian approved by the SFC which meets the eligibility requirements set out. In practice, many hedge funds appoint one or more prime brokers, and many prime brokers may not, and may not wish to, meet these eligibility requirements. A Cayman fund sold in Hong Kong by private placement is not required to appoint a custodian.

The OFC regime requires that the valuation and pricing of the OFC's property is the investment manager's responsibility. This is inconsistent with the typical hedge fund model, where valuation and pricing is typically delegated to the fund's administrator.

Any change of name of an OFC is subject to the SFC's approval. No approval is required to a change of name of a Cayman fund.

Transfers of OFC shares will be subj...

One of the most common scenarios we encounter is a US-based manager who initially establishes a domestic fund to attract US taxable investors. With the performance going in the right direction, the manager begins to think about US tax-exempt investors, such as charities, pension funds and university endowments, as well as investors based outside of the US, who like the track record and want to invest.

They have probably then been made aware that they will need an offshore vehicle and now have the task of working out why, where, and how much they need to spend.

Why do I need one of these?

US tax-exempt and non-US investors will want to avoid potential US tax exposure that could result from direct investment into your US vehicle and so they will want to come into an offshore "blocker" vehicle. To ensure you can take in their capital, you will need to add at least one offshore structure to form either the traditional "master-feeder" or the "mini-master".

What is a master-feeder?

Here, we will create two new offshore vehicles. Your existing US fund will then contribute its assets into the offshore master fund upon the launch of the new structure. The offshore feeder vehicle will then be available to take in US non-taxable investors and the non-US investors and "feed" into the offshore master fund as well, allowing for a co-mingling of all of the invested capital in the most tax efficient manner.

Sounds good, so what about the minimaster?

In a mini-master structure, a single offshore fund is established which is taxed as a corporation to benefit US tax-exempt investors and block UBTI for non-US investors.

Adding a single offshore vehicle saves cost and therefore has proven popular with startup and emerging managers. The offshore fund invests directly into the existing US fund, which will then act as the master fund (whilst remaining the fund into which the US taxable investors will continue to invest).

This provides an additional benefit of not requiring the ownership of the assets of the domestic fund to be transferred. This reduces the administration around the restructuring and subsequently the cost as well. While there are some tax consequences to be discussed (and some investors may not want to invest even indirectly into a US vehicle), it has proved to be appealing to those looking to keep it as simple as possible to begin with.

Okay, so I need one of these structures. Where do I choose to set it up?

The British Virgin Islands and the Cayman Islands are both highly suitable and well-regarded offshore fund jurisdictions that have been used for many decades and always strive to meet the requisite international standards. We have long-standing clients who elected to use one or the other for different and highly sensible reasons at the time of their first launch. But there are differences, and a number of our clients have fund vehicles in both jurisdictions to maximise the advantages that they each offer.

Understood. But how do I choose the best one for my fund?

Cayman is the world's most popular offshore funds jurisdiction. We estimate that Cayman has over 70 per cent of the world's offshore funds and so is the well-trodden path. Although the BVI has around 15 per cent, managers who opt to establish their funds in the BVI sometimes encounter the additional question from institutional investors of "Why BVI?". Whilst there are very reasonable and logical answers, the selection of Cayman removes this additional query in the DDQ.

But I am also looking to minimise cost…

In terms of corporate and regulatory costs, Cayman is a significantly more expensive jurisdiction than the BVI, both upon formation and for the annual maintenance of the vehicle(s). This is then compounded by the greater regulatory requirements in Cayman, which result in the cost differential for the jurisdictions being substantial.

For this reason, many fund managers who are operating with a relatively low level of AUM prefer to establish their offshore fund in th...

Here is a way to start an article like no other; what a fantastic year 2020 has been. The obituary of the hedge fund industry has been written many times, but for some, it was written in indelible ink in 2008 following the financial crisis. Commentators blamed the industry for its part in the global collapse, notwithstanding the fact that a huge majority of fund vehicles during that time were actually victims themselves. Ignoring the huge layer of red tape that subsequently encased the industry, this wasn't actually the largest cause for concern.

The bigger problem was that once the S&P settled down, its solid and consistent performance led to a benchmark that the industry simply couldn't match. Many funds struggled to provide the exceptional returns they were once capable of and with new products like exchange-traded funds combining performance with a lower risk profile and lower fees, the glitz and glamour of AW Jones' product had truly been eroded. However, the inflow of investment remained, and while the lack of true performance caused general resentment, a shock to the global financial system might cause the passive investment models to fail and suddenly the two and 20 would look like money well spent. So the script for 2020 couldn't have been better written by Hollywood, although probably would have had a little more Dwayne Johnson. The flash crash in March could have lead to the industry flourishing from that point forward.

Dog funds

Sadly, a record 150 funds were classed as poor performers in the "Spot the Dog" list compiled by wealth manager Tilney Bestinvest, which names and shames the worst-performing investment funds and reported a 65 per cent increase in the number of "dog" funds, up from 91 in February. Interestingly, this is consistent with the tough time value investors have generally had over the last decade. Buying shares in companies which appear cheap given their fundamentals became a true art form, but the markets simply haven't played to the same rule book and one obvious explanation for this is the rise of tech firms, which are simply impossible to analyse using standard valuation tools. Brand strength and user adoption models seemingly become far more important than the profit line, for example. With a pandemic forcing the entire planet to go online simultaneously, the arguably overvalued tech stocks somehow continued to grow exponentially.

Those companies that remained well placed to increase in value consistently if the world had continued on its "normal" course, suddenly found that the very solid foundations they were sensibly built on were destroyed from under them. Hugely dependable industries were decimated in a matter of months which even the very best minds in the hedge fund industry couldn't readjust to quickly enough. Where you have such a fundamental and novel shock to the system, the largest funds will always have the biggest problem with turning their tanker around. Just looking at the Top 20 Dogs, all but one of them is over a billion and you can see some truly institutional names. On a wider basis, the ten largest hedge funds reporting to eVestment remain some 4.61 per cent in the red year-to-date, despite posting a 1.31 per cent gain in July. In contrast, hedge funds overall are now flat for the year, having registered a 3.43 per cent rise in July to successfully claw back losses suffered in H1.

Market neutrality achieved? Being nimble and able to pivot in this type of market was always going to be advantageous.

Digital rise

From our own anecdotal evidence, given we have the pleasure of working with a large number of emerging managers, we certainly have clients who are putting some very significant numbers up on the board this year. It has been especially noticeable in the digital asset slice of this market. Whether you believe in the digital gold theory of bitcoin or not, there is no doubt that with so much uncertainty out there, investors are looking for interesting alternatives to ...

One of the most common scenarios we encounter is a US-based manager who initially establishes a domestic fund to attract US taxable investors. With the performance going in the right direction, the manager begins to think about US tax-exempt investors, such as charities, pension funds and university endowments, as well as investors based outside of the US, who like the track record and want to invest.

They have probably then been made aware that they will need an offshore vehicle and now have the task of working out why, where, and how much they need to spend.

Why do I need one of these?

US tax-exempt and non-US investors will want to avoid potential US tax exposure that could result from direct investment into your US vehicle and so they will want to come into an offshore "blocker" vehicle. To ensure you can take in their capital, you will need to add at least one offshore structure to form either the traditional "master-feeder" or the "mini-master".

What is a master-feeder?

Here, we will create two new offshore vehicles. Your existing US fund will then contribute its assets into the offshore master fund upon the launch of the new structure. The offshore feeder vehicle will then be available to take in US non-taxable investors and the non-US investors and "feed" into the offshore master fund as well, allowing for a co-mingling of all of the invested capital in the most tax efficient manner.

Sounds good, so what about the minimaster?

In a mini-master structure, a single offshore fund is established which is taxed as a corporation to benefit US tax-exempt investors and block UBTI for non-US investors.

Adding a single offshore vehicle saves cost and therefore has proven popular with startup and emerging managers. The offshore fund invests directly into the existing US fund, which will then act as the master fund (whilst remaining the fund into which the US taxable investors will continue to invest).

This provides an additional benefit of not requiring the ownership of the assets of the domestic fund to be transferred. This reduces the administration around the restructuring and subsequently the cost as well. While there are some tax consequences to be discussed (and some investors may not want to invest even indirectly into a US vehicle), it has proved to be appealing to those looking to keep it as simple as possible to begin with.

Okay, so I need one of these structures. Where do I choose to set it up?

The British Virgin Islands and the Cayman Islands are both highly suitable and well-regarded offshore fund jurisdictions that have been used for many decades and always strive to meet the requisite international standards. We have long-standing clients who elected to use one or the other for different and highly sensible reasons at the time of their first launch. But there are differences, and a number of our clients have fund vehicles in both jurisdictions to maximise the advantages that they each offer.

Understood. But how do I choose the best one for my fund?

Cayman is the world's most popular offshore funds jurisdiction. We estimate that Cayman has over 70 per cent of the world's offshore funds and so is the well-trodden path. Although the BVI has around 15 per cent, managers who opt to establish their funds in the BVI sometimes encounter the additional question from institutional investors of "Why BVI?". Whilst there are very reasonable and logical answers, the selection of Cayman removes this additional query in the DDQ.

But I am also looking to minimise cost…

In terms of corporate and regulatory costs, Cayman is a significantly more expensive jurisdiction than the BVI, both upon formation and for the annual maintenance of the vehicle(s). This is then compounded by the greater regulatory requirements in Cayman, which result in the cost differential for the jurisdictions being substantial.

For this reason, many fund managers who are operating with a relatively low level of AUM prefer to establish their offshore fund in th...

The market for US dollar (USD)-denominated funds in Greater China has undergone rapid transformation. Professional services providers have been grappling with the impact of a flurry of new laws and regulations, while fund managers have suddenly found themselves overwhelmed by choice. This has led some to question whether market convergence has finally led to the creation of a level playing field for all jurisdictions, or whether in fact this is the beginning of widespread divergence in the fund market industry.

This article explains how and why the market has blossomed in recent years, and considers how it may develop in future.

USD fund market outside mainland China

The USD fund market outside mainland China has flourished due to the emergence of free markets such as Hong Kong, in tandem with the tight capital controls maintained by China. These controls have laid the foundation for China's economic evolution in the past 40 years, which have seen the confluence of international asset allocation, pensions and endowments on the one hand, and the emergence of ultra-high-net-worth individuals, domestic insurance funds and a burgeoning asset management industry on the other.

This dichotomy of two markets - domestic and international - created a real need for offshore vehicles so that USD capital could be pooled and invested, and investment returns distributed in a tax-efficient way. This in turn smoothed the way for the widespread recognition of the Cayman Islands and its investment-holding and fund products, such as exempted limited partnerships for private equity funds, exempted companies as mutual funds and certain non-fund arrangement vehicles.

International standards and rule books

The coordination of international standards and rule books for the fund management market was led by the Organisation for Economic Cooperation and Development (OECD), the Financial Action Task Force (FATF) and, to a certain extent, the UK government. The financial services industry has been beset by "regulatory fatigue" since 2015, as it has got to grips with heightened scrutiny of anti-money laundering and counter-terrorist financing and proliferation measures, and with new requirements governing the exchange of tax information (automatic, spontaneous or on request). At the same time, it has had to deal with new requirements governing economic substance, data collection and transparency in beneficial ownership, as well as measures to safeguard fund assets and heightened oversight of virtual asset issuers and service providers.

The sheer volume of regulatory changes in recent years has certainly felt overwhelming, but it is also necessary to consider how the market has responded to the resurgence of neo-liberalism, and the free flow of capital and free movement of people across borders. The answer may be moot, but governments and regulators have made substantial progress toward establishing a mutual framework for information-gathering and exchange, as well as behavioral standards to which fund managers must adhere.

While this convergence has been taking place, many individual jurisdictions have quietly been re-designing their tax regimes to make them clearer, friendlier and more flexible. As just a few examples:

Hong Kong has established the Unified Fund Exemption Regime and introduced a much-anticipated tax concession for carried interest.

Singapore's new variable capital companies and Hong Kong's partnership funds have garnered considerable interest.

Investors have begun to revisit and "rediscover" alternative structures, notably those offered by the British Virgin Islands, which are more versatile for small to medium-sized funds and for those renminbi fund managers just dipping their toes in the water of the USD fund market for the first time.

Amid all the hype, fund managers have tended to focus on how comparable, or otherwise, these new products are to conventional offshore products, rather than exploring the nuances in terms of what they a...