Cayman Islands Unit Trusts And Their Use As An Investment Fund Vehicle

Cayman Islands unit trusts have become an increasingly popular vehicle for structuring hedge funds. These structures have traditionally been most popular among Japanese fund managers and investors given the similarity to the Japanese domestic investment trust and the associated historical tax benefits. However, we are now seeing increasing enquiries from China-based managers. The similarity with the domestic trust vehicle may again be a contributor to this trend, but the perceived benefits associated with having an independent professional trustee responsible for the oversight of the fund is also likely to be a key driver. Investors may take comfort from the fact that an independent fiduciary will hold the legal title to the fund's assets (rather than a newly incorporated company) and be responsible for controlling the governance of the fund (rather than a board of directors whose appointment is usually under the control of the investment manager or one of its affiliates).

Given the generally passive nature of investments in hedge funds, with such investments typically carrying limited or no voting rights, funds structured as a trust can be an attractive option to investors. We consider the benefits in more detail below.

What is a unit trust?

A unit trust is a form of express trust whereby the interest in the underlying assets is unitised under the terms of the trust instrument. The concept of a unit trust is not one set out in Cayman Islands statute. To understand the nature of a unit trust, one has to look back to the mid-nineteenth century and the origins of the English management trust. This was established pursuant to a deed of settlement providing for the assets of a company to be held by a trustee for the benefit of investors.

Units issued to investors in a unit trust confer a proprietary interest in all the underlying investments, which are subject to the trust. However, the trust instrument will usually include a provision to the effect that a unit does not entitle the holder to any particular asset comprised in the trust fund. Therefore, ownership of a unit entitles an investor a right not to a specific investment comprising the trust fund, but simply a right to redeem its share of the pool of assets, represented as a unit, in return for cash based on the underlying value of the trust assets.

A Cayman Islands unit trust will typically be registered as an exempted trust under the Cayman Islands Trusts Law (Revised) on the basis that its beneficiaries are not and will not include any person at any time resident or domiciled in the Cayman...