Key Terms and Definitions for Cayman Hedge Funds

Why Cayman Fund Terminology Matters

The Cayman Islands remains the world’s leading jurisdiction for hedge funds and digital asset funds. Yet for many new managers and investors,the terminology used in Cayman offering documents, service agreements, and CIMA filings can be unfamiliar.

Understanding the key terms and legal definitions is essential for fund formation, compliance, and investor confidence.

Below, CV5 Capital provides a clear overview of the core concepts every fund manager and investor should know.

1. Segregated Portfolio Company (SPC)

A Segregated Portfolio Company (SPC) is a Cayman company that allows the creation of separate “portfolios,” each with ring-fenced assets and liabilities.

This structure enables managers to launch multiple strategies or investor classes under one umbrella entity, avoiding cross-contamination of risk.

Example:

CV5 Capital’s CV5 Digital SPC houses multiple segregated portfolios, each representing a distinct fund with its own investors, strategies, and service providers.

2. Segregated Portfolio (SP)

A Segregated Portfolio (SP) is a legally distinct compartment within anSPC. Each SP issues its own shares, has its own Net Asset Value (NAV), and maintains separate accounts, service providers, and investors.

Investors in one SP have no recourse to the assets of another.

3. Mutual Fund vs. Private Fund

Under Cayman law:

• A Private Fund issues non-redeemable interests (closed-ended structure) and is regulated under the Private Funds Act.
• A Mutual Fund issues redeemable shares and allows investors to enter and exit periodically. It is regulated under the Mutual Funds Act (Revision).

Both require registration with the Cayman Islands Monetary Authority(CIMA) and must appoint approved auditors, administrators, and maintain proper governance.

4. Net Asset Value (NAV)

NAV represents the total value of a fund’s assets minus its liabilities, divided by the number of shares outstanding.

NAV is typically calculated monthly or quarterly by an independent administrator. It determines subscription and redemption prices for investors and serves as the basis for management and performance fee calculations.

5. Subscription and Redemption

• Subscription: The process by which investors purchase shares in the fund. Subscriptions are accepted on specified Subscription Days at the current NAV.
• Redemption: The process of repurchasing shares from investors, typically on a Redemption Day, subject to advance notice periods and any lock-ups or gates.

6. High-Water Mark

A High-Water Mark ensures that a performance fee is only charged on net new profits.

If the fund experiences a loss, the Investment Manager must first recover that loss before earning performance fees again.

This protects investors from paying performance fees twice on the same gains.

7. Management Fee and Performance Fee

• Management Fee: A fixed annual percentage of NAV (e.g., 2%), charged to cover the manager’s operational and research costs.
• Performance Fee: A variable incentive (e.g., 20% of net profits) earned only when the NAV exceeds the High-Water Mark or hurdle rate.

Both are usually accrued monthly and paid monthly, quarterly or annually in arrears.

8. CIMA Registration

The Cayman Islands Monetary Authority (CIMA) is the financial regulator overseeing mutual funds, private funds, and investment managers.

CIMA registration requires filing constitutional documents, an offering memorandum, administrator and auditor details, and annual returns (FAR filings).

Funds must submit audited financial statements within six months of year-end and pay annual renewal fees.

9. Offering Memorandum (OM)

An Offering Memorandum (or Prospectus) is the primary disclosure document of a fund. It outlines the investment strategy, risks, fees, redemption terms, and key parties involved.

Cayman law requires that the OM be updated promptly if material information changes.

10. Administrator, Auditor, and Custodian

• Administrator: Calculates NAV, maintains shareholder registers, and performs investor AML/KYC.
• Auditor: Provides independent financial audits approved by CIMA.
• Custodian: Safekeeps assets, particularly critical for funds trading digital assets or derivatives.

Institutional investors expect independent, CIMA-approved providers in each role.

11. Directors and Operators

Every Cayman fund must have at least two directors or operators who are registered under the Directors Registration and Licensing Act.

Directors are responsible for governance, oversight, and regulatory compliance.

CV5 Capital provides experienced, regulated directors and governance services for institutional assurance.

12. AML, KYC and CFT Compliance

All Cayman funds must comply with Anti-Money Laundering (AML), Know YourCustomer (KYC), and Counter-Terrorist Financing (CFT) laws.

This includes appointing

• An AML Compliance Officer (AMLCO)
• A Money Laundering Reporting Officer (MLRO)
• A Deputy MLRO (DMLRO)

Independent administrators often perform investor onboarding and transaction monitoring in line with Cayman AML regulations.

13. Gate, Lock-Up, and Side Pocket

• Gate: Limits the percentage of fund redemptions per period to protect liquidity.
• Lock-Up: A period during which investors cannot redeem their shares, allowing the manager to execute the strategy without withdrawal pressure.
• Side Pocket: A segregated accounting mechanism for illiquid or hard-to-value assets, isolating them from regular NAV calculations.

14. Feeder and Master Funds

Commonly, hedge funds use a feeder-master structure:

• Feeder Funds (onshore/offshore) collect capital from investors;
• Master Fund executes the investments.

This structure allows tax efficiency and pooling of capital across jurisdictions.

15. Service Provider Ecosystem

Cayman’s success as a fund jurisdiction is driven by its high-quality service provider ecosystem.

CV5 Capital integrates these providers seamlessly into its fund platform.

Conclusion: Speaking the Language of Institutional Funds

Understanding these key terms is vital for any manager or investor navigating Cayman’s regulated fund landscape.

Clear knowledge of structures, roles, and compliance obligations not only builds operational confidence, it enhances investor trust.

CV5 Capital assists emerging and established managers in launching, operating, and scaling Cayman hedge funds and digital asset funds efficiently and compliantly.

Launch Your Cayman Fund with CV5Capital

Whether you’re structuring your first hedge fund or expanding into digital assets, CV5 Capital provides turnkey Cayman fund solutions, independent governance, and institutional infrastructure to accelerate your launch.

Contact us at [email protected]

Visit www.cv5capital.io to learn how CV5 can help you establish your Cayman fund in just 3–4 weeks.

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