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Do you want to know how to save in excess of USD 20,000 when starting your own investment fund?

If you do – you should read this blog post. A large proportion of our clients advise us that they initially direct their fund enquiries to law firms specialising in fund formation services.

However, the clients often explain that they are shocked as to how expensive the formation of a fund structure can be. Plus, they cannot find a service provider that will handle all aspects of a fund set-up.

 

A Recent Case Study

We were contacted recently by a UK trader/manager who wanted to establish his own regulated investment fund to obtain an audited track record of his investment strategy.

He already had in place the initial seed capital for the fund and was seeking a service provider that could offer a suitable fund solution. The client advised that he was considering a Cayman professional fund solution.

However, he had already contacted several UK law firms offering Cayman fund formation services and was knocked back by the costs being quoted. Our client had seed capital of USD 2,500,000, so the fund formation costs, as well as the annual operating costs, had to be competitive. If not, those administration costs would impact too heavily on the fund’s performance.

The client was quoted in excess of USD 35,000 for a Cayman Islands’ registered fund formation. However, this was just for the fund incorporation and legal expenses for drafting the fund offering prospectus. It did not include drafting the service provider agreements (investment management and trader advisors agreements), or establishing the fund bank and broker accounts, or obtaining an ISIN code and Bloomberg ticker for his fund, or finding a suitable audit firm to act for the fund.

In fact, the law firms he contacted could not provide these ‘additional’ services and pointed the client in the direction of an external fund administrator. This is crazy.

 

What Fund Managers Want

All of our clients are traders and managers. All they want to concentrate on is doing what they do best: managing the investments. The fund formation arena is alien territory to these start-up managers and at first sight, appears complex and expensive.

Essentially, what these traders need is a firm that can offer a ‘complete’ service and who can project manage their fund set-up from start to finish.

Clients that contact us tend to need guidance on which is the most suitable jurisdiction for them to locate and register their new investment fund. Most are familiar with the various fund jurisdictions. Cayman and the British Virgin Islands (offshore) and Malta and Luxembourg (onshore) are often favoured. However, many start-up fund managers are unsure of the best jurisdiction for their fund.

The client in question trades FX. His seed investors are all high net worth individuals who are classed as professional and sophisticated investors. Therefore, he required a professional fund structure. As this was his first investment fund and initial seed capital was relatively small, cost was crucial. However, the jurisdiction for the fund had to be a jurisdiction which his investors would be comfortable with.

The jurisdiction had to be suitably regulated, acceptable not only to the investors but also to the fund’s banks, brokers and auditors. There was no point in going for an obscure jurisdiction just because it was less costly and light on regulation.

The client initially suggested that he wanted a Cayman fund structure and following our initial discussions, we advised him that Cayman ticked all the boxes.

 

Two Solutions

We explained to our client that he had a couple of options with regard to the Cayman fund solution.

The first was to set-up his own Cayman registered fund, which was an open-ended professional fund structure registered with the Cayman Islands Monetary Authority (CIMA). However, this was also the most costly fund solution. With minimal assets under management on day one (USD 2.5 million) the fund formation and annual operating costs would severely impact on his performance.

The set-up cost for a registered Cayman fund was USD 32,000 and annual operating costs would be in the region of USD 65,000 (audit, administration, CIMA and government fees, directors).

The second option would be for the client to take a sub-fund in Ifina’s Cayman Fund Platform – Primary Development Fund (Cayman) SPC. – (“PDF). PDF was specifically designed to provide start-up managers with a low-cost fund solution, while at the same time providing them with an acceptable and recognisable registered professional fund, which would provide the audited track record.

The Ifina Cayman Fund Platform is a Segregated Portfolio Company in which each sub-fund/segregated portfolio is legally segregated. PDF is a CIMA registered professional fund structure and as such, each sub-fund operates as a standalone fund, each with its own name, offering prospectus, ISIN and Bloomberg codes, along with bank and broker accounts.

Set-up cost is extremely competitive at just USD 9,750 (all-inclusive), as are the annual operating costs at USD 33,000 (Year 1) and USD 43,000 (Year 2) onwards. This includes administration and valuation, annual audit and directors. Unsurprisingly, the client chose option two, the sub-fund.

Summary

As explained, the issue our client had with the various law firms he contacted was that they could only provide the legal services relating to the fund formation.

They were unable to offer a full package. Ifina is well versed in establishing investment fund structures, having done so for over 20 years. The fund set-up was assigned to our corporate affairs team and they set about the formation of this new FX fund.

The corporate team liaised with our Cayman lawyers to draft the fund offering prospectus, agreements and filing application with CIMA. We obtained the fund ISIN code from the Cayman Islands Stock Exchange, processed the fund’s bank and broker account openings and acquired a Bloomberg ticker for the fund.

The whole process took 5/6 weeks from start to finish. The client was very satisfied.

Do you need help setting up your investment fund? Email sbratchie@ifina.com and we can arrange a call. If you have any questions, please leave them in the comments below.

 

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