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Hedge fund regulation in the best offshore centers, such as the Cayman Islands or BVI, guarantee a high level of confidentiality and independence of the fund manager.
The Hedge funds are strictly regulated by a range of methods worldwide. While rules vary by jurisdiction, the most common method of oversight is the direct regulation of advisers to the funds.
According to a report by the International Organization of Securities Commissions the most common form of regulation pertains to restrictions on financial advisers and hedge fund managers in an effort to minimize client fraud.
On the other hand, U.S. hedge funds are exempt from many of the standard registration and reporting requirements because they only accept accredited investors.
In 2010, regulations were enacted in the US and European Union, which introduced additional hedge fund reporting requirements.
These included the U.S.'s Dodd-Frank Wall Street Reform Act and European Alternative Investment Fund Managers Directive.
The most hedge funds are established in best offshore centers such as the Cayman Islands, Singapore, Dublin, Luxembourg, the British Virgin Islands, and Bermuda which have different regulations concerning non-accredited investors, client confidentiality and fund manager independence.
Hedge Fund Regulation in Singapore
Singapore has become one of the Asia-Pacific's most important hedge fund centers, and is in close competition with Hong Kong.
There have been several factors that have contributed to the healthy growth of Singapore's hedge funds: tax incentives available to fund managers, good access to the growing pool of Asian high-net-worth investors and licensing exemptions for some fund managers.
Add Singapore's talented workforce, relatively stable economy, forward-thinking business environment, the reasonableness of the central bank's industry regulations plus excellent development and infrastructure… you can begin to understand why Singapore's doing well when it comes to being a hedge fund center.
If you're running a small or boutique hedge fund, one that has less than 30 qualified investors, you're exempted from holding a license.
All other fund managers (unless specifically exempted) need hold only one license, either a Capital Markets Services License or a Financial Advisers License, in order to conduct one or more of the regulated financial services activities as: Dealing in securities, Trading in Futures contracts, Securities financing, Providing custodial services for securities, Fund Management, Leveraged Foreign Exchange trading, Advising on corporate finance matters and Real Estate Investment Trust Management.
If you're an offshore fund manager who wishes to market offshore funds to domestic investors in the island-state of Singapore, you'll have to be licensed or regulated under the offshore jurisdiction, and you must meet the requirement of being 'fit and proper'.
If you're a corporation or person whose business will be in any of the regulated activities mentioned above, you'll need a CMS/FA License or a CMS/FA Representative License, unless, as mentioned above, if you're a fund manager who has less than 30 qualified investors or you are specifically exempt from holding a license under other conditions.
If you work as a hedge fund manager, and you're operating your hedge fund under one of the exemptions, you can market the fund you manage, but, without a license, you will not be able to market any third-party funds.
Another thing to note about operating under an exemption is that you'll have no capital requirements.
But, exempt entities have to ensure compliance with the same requirements on market practices and conducts as do licensed entities.
Hedge Fund Regulation in Cayman Islands
The Cayman Islands is the principal offshore jurisdiction for hedge funds. The Cayman Islands continue to be the preeminent offshore jurisdiction for hedge funds.
Around 85% of the world's hedge funds are domiciled in the Cayman Islands, enabling the jurisdiction to outrank competing offshore centres (BVI, Bermuda and Jersey among them) as the top spot for hedge funds.
It is attractive as a domicile for funds because it is supported by a fully-developed business law, an English-based legal system and a regulatory and professional infrastructure capable of implementing large and complex international business transactions.
In 2013, 977 Cayman Islands open ended funds were registered with the Cayman Islands Monetary Authority.
We acted for 341 of these through our worldwide offices, with the managers spread broadly across the globe, with particular concentrations in North America (53%), Europe (23%) and Asia (15%).
The funds launched covered a wide range of strategies with Equity Long-Short (33%) and Multi-Strategy (22%) predominating.
Members of our Cayman Islands Hedge Funds Group are based in our Cayman Islands, Dubai, Hong Kong and London and Singapore offices.
In Cayman Islands there are no prohibitive licensing and regulatory provisions or stringent measures calling for local custodians, managers or directors.
Rather, the legislation recognises that most of those engaged in the industry are already strictly regulated or controlled within or outside the Cayman Islands.
Thus, reliance to a large extent on self regulation within the industry is seen as reasonable.
There are also no restrictions placed on investment objectives, risks, rates of return, leveraging or other commercial matters given the institutional and sophisticated nature of the investors in hedge funds.
The law requires that the offering memorandum describes comprehensively the equity interests and contains sufficient information (on objectives, risks, service providers, conflicts of interest etc.) to enable the investor to make an informed decision.
A regulated investment fund must qualify under the law before starting business.
To do so it may either obtain its own licence, appoint a licensed mutual fund administrator in the Cayman Islands to provide its principal office, or be automatically registered if it is for a sophisticated investor, i.e. the minimum investment per investor is US$ 100.000.
Hedge Funds established before 14th November 2006 are permitted to retain the previous minimum investment requirement of US$ 50,000.
Hedge Fund Regulation in BVI
The British Virgin Islands ("BVI") has a regulatory regime which makes it significantly easier for small to mid-size hedge fund groups to establish investment managers and advisors in the BVI.
For investment managers and advisors that qualify, this "approved manager" regime substantially reduces the time and cost of establishing new fund structures and entails significantly less ongoing regulation than is typically the case.
The British Virgin Islands (BVI) has introduced a 'regulation light' fund manager regime tailored to meet the requirements of private equity, venture capital and a multitude of other fund managers seeking to commence business quickly and in a cost-effective way.
The 'approved manager' regime came into effect on 10 December 2012, with the enactment of the Investment Business (Approved Managers) Regulations, 2012 (Regulations) and Approved Investment Managers Guidelines (Guidelines).
This regulatory alternative complements the more regulated investment business licensing regime under Part I of the Securities and Investment Business Act 2010 (SIBA).
It comes as a result of months of discussion and co-operation between the local service providers in the jurisdiction and the Financial Services Commission of the BVI (Commission) to ensure that the funds industry has an appropriate suite of products to offer the wide variety of requests received.
A key feature of the new regime is that the approved manager is subject to a limit on the size of the funds which it manages or advises.
Open-ended funds cannot exceed an aggregate of US$ 400 million in assets under management and closed-ended funds cannot exceed US$ 1 billion of capital commitments.
The thinking around these limits is that once they are exceeded, it is logical that a manager should be more appropriately regulated under the licensing regime of SIBA given the level of assets under management.
There are also limits on the type of funds approved managers may manage.
Generally, a manager may carry on business as an investment manager or investment adviser to:
One or more private or professional funds recognised under SIBA (the funds may be domiciled in the BVI or elsewhere, provided they are recognised under SIBA); or
One or more closed-ended funds which are domiciled in the BVI and have certain characteristics of a private or professional fund.
However, there are some limited additions to this list as well.
In BVI the hedge funds only have restrictions on the number of investors and no restrictions on the sophistication or net worth of the investors, whereas a Cayman Islands exempt manager may, broadly speaking, only act for funds which fall within the definitions of "sophisticated investor" or "high-net-worth person" under SIBL.
This makes the BVI regime ideal for managers of funds with less than fifty investors, especially start-ups and family funds, for example.
The approved manager regime has therefore provided an exceptionally helpful extra string to the bow of the BVI funds industry and one that should allow practitioners in the jurisdiction to provide a full and well-rounded service to clients.
Hedge Fund Regulation in Delaware (USA)
In Delaware (USA) the hedge funds are subject to the same trading reporting and record-keeping requirements as other investors in publicly traded securities.
They are also subject to a number of additional restrictions and regulations, including a limit on the number and type of investors that each fund may have.
Many hedge funds operating in the U.S. are also regulated by the Commodity Futures Trading Commission (CFTC), including advisers registered as Commodity Pool Operators (CPO) and Commodity Trading Advisors (CTA).
Hedge funds investing in markets governed by the CFTC would also be regulated by the body and subject to the requirements set forth in the Commodity Exchange Act.
The regulatory landscape in the U.S. evolved recently with the passage of the Dodd-Frank Act, which set forth new registration and other requirements for hedge fund managers.
Hedge funds with regulatory assets under management in excess of US$100 million are required to register with the U.S. Securities and Exchange Commission.
Advisors who have regulatory capital under management between US$100 million and US$150 million and qualify for the private fund advisor exemption do not have to register with the SEC.
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