1. role of a hedge fund director (intro)
By: Alric Lindsay, Cayman Director, Cayman Counsel
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2. Summary www.cidirector.com
DISCUSSION POINTS
1 Typical (Offshore) Hedge Fund Structure
2 Reasons for Cayman as a Domicile
3 (Offshore) Director’s Role Generally and Delegation of
Responsibilities
4 Failure to Monitor/Supervise Delegates
5 Q&A

3. Typical (Offshore) Hedge Fund Structure
Master-Feeder Structure
This chart illustrates a common
•US Domestic Feeder which •Cayman Offshore feeder
accepts subscriptions from which accepts master-feeder structure.
US taxable investors subscriptions from US tax
•Typically, a Delaware exempt investors (usually,
entity is used for this pension plans) and Non-US As the chart shows, a US entity may
purpose investors
be set up to take in US taxable
investors. A Cayman offshore fund is
Onshore Offshore formed to take in Non-US investors
Feeder Feeder and US Tax Exempt Investors. Both
entities then invest in a Cayman
master fund, which makes the
•Cayman Offshore master
actual investments for the
fund into which both structure.
feeders invest
Offshore
Master
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4. Reasons for Choosing Cayman
(THE WORLD’S #1 DOMICILE)
• No Direct Income or Corporate Tax • Good Legal System Based On
or Tax on Capital Gains or Other English Law
Income • Excellent Infrastructure
• Stable Government and Close Ties
To United Kingdom
• Proximity to North America and
Other Financial Centres
• Available Pool of Professionals
With Hedge Fund and Financial
Services Experience
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5. Reasons for Choosing Cayman
(THE WORLD’S #1 DOMICILE)
Pre-Financial Crisis, Cayman was
said to be the jurisdiction of choice
for a large percentage of hedge
funds
60%
other
other
other
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6. (Offshore) Director’s Role Generally
As a director cannot usually perform all
Director aspects of the hedge fund’s business
alone, for example, the completion of
accounting and fund administration,
• Overall responsibility for fund lies with board of directors
auditing at year-end and daily trading and
• Board may delegate responsibilities to service providers below
decision-making, a director will cause the
• However, Board remains ultimately responsible for monitoring and
supervision of delegates hedge fund to enter into various contracts
with service providers. The terms of such
agreements will specify the responsibilities
Administrator that a director delegates to such service
providers, including administrators and
investment managers. Any person that is
• Board delegates calculation of fund’s NAV to administrator
appointed as director must be intimate
• Administrator processes subscriptions, redemptions and transfers of
shares/units/interests in the fund with the roles of these parties.
• Administrator may maintain the register of shareholders of the fund
Investment Management Entity
•Board delegates daily investment decision-making to the investment manager
•Manager may earn a management and/or performance fee
Other Service Providers
•Other service providers include bankers, custodians, prime brokers
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7. (Offshore) Director’s Role Generally
Delegation (continued): Common Misconceptions
• A Director Can Take a “Hands-Off” Approach: WRONG. THE
BOARD MUST HOLD SUCH MEETINGS AS REQUIRED FOR THE
PARTICULAR FUND AND ENSURE THAT THE ADMINISTRATOR,
INVESTMENT ADVISER AND OTHER SERVICE PROVIDERS
REPORT TO THE BOARD ON A PERIODIC BASIS
• Delegation Removes A Director’s Liability: WRONG.
ULTIMATELY ACCOUNTABILITY AND RESPONSIBILITY LIES
WITH THE BOARD. A DIRECTOR MAY BE FOUND LIABLE FOR
PROVEN BREACHES OF HIS DUTIES
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8. (Offshore) Director’s Role Generally
Delegation (Continued): Proper Understanding of Functions
• In order to minimize the • Misconceptions held by fund
occurrence of problems, a director directors may lead to issues.
must ensure that he understands
the terms of each agreement that a
fund enters into with a service
provider, including the specific
responsibilities that are being
delegated. He must also ensure
that service providers are properly
carrying out their duties by
monitoring and supervision as
discussed above.
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9. Failure To Supervise Delegates
Issues that may arise www.cidirector.com
Example 1:
• Fund’s offering document states that the fund
may not invest more than 5% of the fund’s
assets in real estate.
• Director fails to complete a timely review of
periodic accounts or net asset value reports
issued by the investment manager or
administrator.
• Due to this omission, it goes unnoticed that
50% of the fund’s assets are actually invested
in real estate.
• Value of real estate investment falls to zero.
Fund incurs significant losses of assets.
• A prudent director would have noticed the
breach of investment restrictions, drawn it to
the attention of the investment manager and
ensured that the manager corrected the
position.

10. Failure To Supervise Delegates
Issues that may arise
Example 2:
• Investment manager claims to be investing the
assets of the fund, but over several fiscal
periods, he fails to invest any assets of the
fund. Falsified statements are sent to investors,
supporting the manager’s false claims
• Directors fail to do a periodic check with the
independent custodian of the fund’s assets to
determine if such investments actually exist.
• Fraud goes undetected and manager depletes
the fund’s entire assets
• A prudent director would complete a random
or periodic check with the fund’s custodian
• Waiting for this to be caught by the auditors
during the annual audit of the fund is too late
to discover that the no investments exist and
that the entire structure was a ponzi scheme
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11. Questions & Answers
1
Q: How Should A Director Manage
Strategy “Drift” ? (investors are chasing
increasing returns, manager feels
pressure to produce alpha and goes
outside the fund’s investment objective
and strategy to achieve investor’s
wishes)
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12. Questions & Answers
1
• A: “Strategy Drift” may occur from time to time. Although it
may seem that the manager is outside the investment objective
& strategy (i) the offering document may contain a disclosure
that it is not an exhaustive list of strategies and/or (ii) the
manager may actually be acting within a discretion contained in
the terms of the fund documentation. Therefore, a strategy
drift may not be a drift at all.
• The fund’s director or lawyer must review the fund
documentation to determine if the perceived
departure from the strategy or discretion is an
actual departure. Investors should be given an
opportunity to redeem in cases of actual breach.
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13. Questions & Answers
2
• Q: Are All Hedge Funds Required To
Have Directors?
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14. Questions & Answers
2
• A: Due to various hedge fund scandals and for other reasons, a
need has arisen for independent parties in a hedge fund
structure. Therefore, the need for an independent Cayman
director on the boards of Cayman hedge funds. If there were no
independent parties and board members were all
representatives of the investment manager, then the manager
would be left to do as he pleases (which may not be in line with
the wishes of investors). Independent directors must therefore
be appointed to act as watchdogs for investors. At
least one director is required for a Cayman fund
which is not registered with the regulator. A
registered fund requires two directors.
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15. Questions & Answers
3
• Q: Do Directors Have Their Own
Stake/Investment In The Fund Or Are
They Completely Third Parties And Have
No Ties To The Fund?
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16. Questions & Answers
3
• A: By way of background, from a Cayman point of view, there is no
legal requirement for a director to make any investment in a fund.
However, where a director is also a representative of the
investment manager, that director may decide to invest in the
fund. In return, such director is typically issued shares with special
terms (e.g. no performance fee or management fee is applicable
to such shares)
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17. Questions & Answers
4
• Q: It Is Understood That A Director
Must Supervise All of The Relevant
Parties, But How Much Contact Must A
Director Have With Service Providers In
Order To Monitor And Supervise These
Parties?
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18. Questions & Answers
4
• A: The amount of time that a director spends on any particular
fund depends upon (among other things) how much activity the
fund has (monthly vs. quarterly NAV, frequency of board meetings,
etc) and the particular director’s model. One suggestion is for a
director to link the amount of contact to the frequency of the NAV
calculation. For example, if the fund is subject to a monthly NAV,
then the director should contact the administrator or the
investment manager at that time to discuss the reasons
for any unusual changes in NAV and to confirm
whether such changes are due to a departure
from strategy or performance of the market.
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19. Questions & Answers
5
• Q: What Are The Advantages For A
Start-Up Hedge Fund To Domicile
Somewhere Other Than The Caymans?
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20. Questions & Answers
5
• A: Choice of a hedge fund domicile is usually influenced by the
jurisdiction that a client is coming from. Cayman is preferred due
to better regulation, infrastructure and the good attitude towards
the protection of investors’ interests.
• Cayman also offers products for start-up managers. For example,
start-up platforms are available whereby a new manager would
be responsible for running a portfolio of an existing segregated
portfolio company structure. The manager uses
this portfolio to build a track record and build
capital. At the relevant time, he exits the
platform and, hopefully, starts his own
stand-alone fund.
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21. Questions & Answers
6
Q: Does Jersey, Luxembourg, Or
Mauritius Have A Strategic Advantage
Or A Niche For A Certain Type Of
Manager?
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22. Questions & Answers
6
A: Many of the so-called strategic advantages of using jurisdictions outside Cayman are
simply clever “marketing” and based on misleading “perceptions”.
One misleading perception is that Cayman does not have proper legislation and laws.
However, the fact is that the Cayman Islands has had to implement strict laws and
regulations in response to pressure from international bodies and large countries. As a
result, the Cayman Islands has higher standards than many other countries, especially in
the area of anti-money laundering.
Some parties may select a European domicile because managers who want to market to
European investors feel forced by the EU Directive to domicile in Europe (there is no
particular value added by this choice and a domicile in Europe may not necessarily result in
better protection for investors or better performance)
• As a result of the foregoing, it is important that stakeholders distinguish between
“perceived” advantages and “actual” advantages.
• Obviously, bigger countries market “perceived” advantages in order
to attract new capital following the global financial crisis and as a
tactic to keep existing capital within their jurisdiction.
• Upon researching the facts, investors will see that Cayman is a better
, non-misleading choice.
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23. End of Presentation
By: Alric Lindsay
alric.lindsay@cidirector.com
www.cidirector.com
Twitter: CaymanFundGuy