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Offshore laws have provided protection to hedge fund investors in cases of high profile corruption

Date: 19 Nov 2015

Bumblebee Design

Hayden Isbister, partner at Mourant Ozannes in the Cayman Islands, gives the latest updates on hedge funds in the Caribbean.

 

Everyone is down on hedge funds. Can they bounce back?

Based on what we are seeing in Cayman, hedge funds are actually doing quite well: hedge fund registrations have increased in the past six months at a rate of 76.5 new funds per month and the number of registered hedge funds has grown by 460 in the past two-quarters.

We still see investors going to hedge funds. Part of the reason is that some offshore jurisdictions for fund registration are well-known and well regulated, which provides a degree of certainty around the rights of investors. Even when funds end up being liquidated, investors still have protections. Take for example the Herald Fund SPC and Primeo Fund, which were two feeder funds into Bernard L. Madoff Investment Securities LLC. Despite the massive failure of the Madoff organization, it was possible to secure hundreds of millions of dollars for investors in these funds. A ruling obtained provides much-needed clarity on the rights of redeemed but unpaid investors in an insolvency scenario, and the basis on which a liquidator of a Cayman Islands company may seek to alter the rights of investors to receive distributions.
 

What due diligence should investors do before investing in a hedge fund?

Every investor has his or her own financial goals and risk profile. Investors should speak with a lawyer who is well informed about hedge fund structures and have that attorney review the fund documents to ensure the proper protections are in place in the event the fund is forced into liquidation. It is also important to consider a funds service provider and investment strategy. Everyone enters into an investment hoping for the best, but should things go poorly, it is much better to have had the rights clearly stated at the beginning rather than having to try to scramble in the middle of a liquidation or litigation. It is also wise for the investor to know if different shareholder groups will be treated differently and how protections might vary.