Open-Ended Funds To Lock-Up Funds – Are Fund Managers Changing Focus?

The Cayman Islands have traditionally been most closely associated with open-ended hedge fund products, wherein managers permit their investors regular liquidity. Such funds employ a variety of different strategies but crucially all issue interests, typically shares in exempted companies, which are redeemable at the option of the investors. This liquidity causes such funds to fall within the ambit of the Mutual Funds Law of the Cayman Islands and consequently be regulated by the Cayman Islands Monetary Authority.

Closed-ended private equity funds have also always had a significant presence in the Cayman Islands. The major private equity houses, a large number of which are advised by Walkers, have historically structured funds, be it standalone funds or feeders into onshore entities, in the Cayman Islands, and that trend is showing no sign of abating. The number of Cayman Islands exempted limited partnerships, the primary Cayman Islands vehicle through which private equity funds and investments are structured, has been rising steadily with the main players raising multi-billion dollar mega funds in 2015 and mid-market funds and even start-up managers having some fundraising success. The key distinction from hedge funds is the highly limited liquidity profiles of these products. Investors are typically locked in for seven to ten years and, whilst the secondaries market has grown over the last few years, interests are generally not regularly traded.

One trend which became particularly noticeable during 2015 to our team here at Walkers is a sharpening focus by managers, who have historically been active in the open-ended space, into lock-up funds. The attraction for managers is obvious: the lack of liquidity gives them the certainty to execute long-term investment plans and successfully access and manage a range of more illiquid asset classes, from real estate to heavy assets such as ships or planes and infrastructure projects, without fear of a run on the fund following a string of redemption requests and the associated fire sale of such illiquid assets. For investors the loss of liquidity is acceptable due to their existing relationships with these managers: they have worked with them on their open-ended products, have bought into their investment philosophy and are consequently willing to commit their money for a set period. Investors will in all likelihood already have closed-ended allocations to fill, which enables these managers to expand their product offerings to leverage existing relationships and gain access to new sectors of their investor’s portfolios.

The new closed-ended offerings are typically complementary to, as opposed to in place of, the open–ended funds being offered by managers. What we are seeing therefore is more a paradigm expansion than a paradigm shift. The investment community is very conscious that hedge funds are well served by the Cayman Islands but more and more managers and their investors are becoming alive to the fact that the jurisdiction has a historically active, stable and growing market for closed-ended funds.

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