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A hedge fund is typically open-ended, that is investors can make periodic redemptions. Accordingly there must always be enough cash or liquid assets in the fund to meet such redemption demands.
Fund managers should also consider whether to impose a lock-in period on their open-ended funds, during which investors cannot sell shares. A lock-in period allows the fund manager to invest all of the subscriptions during the early life of the fund without having to meet redemption requests. It is important, however, to ensure the lock-in period is not so long that the fund effectively becomes a closed-ended fund.
While hedge funds are typically structured as Cayman Islands exempted companies, the particular needs or preferences of different types of investor, whether due to market convention, taxation or other considerations, may determine the actual fund vehicle or vehicles used.
Segregated Portfolio Companies (“SPC”) may be considered a suitable option for fund managers. Under Cayman legislation for SPCs, assets and liabilities can be separated into distinct pools amongst its segregated portfolios. This avoids the expense of incorporating individual companies to obtain the same effect. With SPCs, it is possible to create single-investor held portfolios that discreetly meet specific needs of each relevant investor.
Another option is to set up the fund as a limited liability company (“LLC”). An LLC combines many of the features of a company with the flexibility of a partnership. An LLC may be formed by a single member. Each member will receive one LLC interest, representing, for example, its right to capital voting rights and its right to receive dividends. For hedge funds that attract US investors, an LLC may be a good choice as a feeder vehicle within a master-feeder structure.
The fund will usually issue two kinds of shares: voting and non-voting. Voting shares (management shares) are non-redeemable, do not have economic rights but carry significant shareholder voting rights. Non-voting shares (participating shares) are held by the investors and give them the right to participate in the fund’s profits.
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Guide to Establishing Hedge Funds in the Cayman Islands