Leaving a Fund Platform: Moving a Segregated Portfolio to a Standalone Fund

Leaving a fund platform means forming a new standalone fund, moving the segregated portfolio's assets into it and moving the investors across, and then closing the segregated portfolio. A segregated portfolio is not a separate legal entity, so it cannot be lifted out of the platform company as it stands; what moves is its portfolio, its investors and the investment management relationship. The common routes are an in-kind transfer of the portfolio to the new fund against the issue of shares, which are then distributed to investors, or individual redemption and resubscription. Whether either route is available, what it costs and how long it takes are fixed largely by the platform documents a manager signs before launch, which is why the exit deserves the same scrutiny as the launch.

Managers ask about leaving before they have launched, and they are right to. A platform should be the right home for a strategy at a particular stage, not a place the strategy cannot leave. The practical answer is not a promise from the platform. It is a set of documents that say who holds the management agreement, what notice applies, whether the portfolio can be transferred in kind and what it costs. If those points are clear in writing before launch, the exit becomes a planned transaction rather than a negotiation.

David Lloyd, Chief Executive Officer at CV5 Capital

Executive Summary

The lock-in concern about fund platforms is legitimate, but it is a question about documents rather than about structure. The Cayman segregated portfolio company makes a clean exit possible; the platform's articles, supplement and agreements decide whether it is practical.

• Under the Companies Act a segregated portfolio is not a legal entity separate from its company, so leaving means moving assets and investors to a new vehicle, not re-registering the portfolio.
• A segregated portfolio company cannot be a constituent company in a Cayman statutory merger, which rules out merging the portfolio into the new fund.
• The efficient route is an in-kind transfer of the portfolio into the new fund against shares, followed by an in-kind distribution of those shares to investors, provided the portfolio's documents permit it.
• Fee crystallisation, high-water marks and the presentation of the track record must be settled before the transfer date, not reconciled afterwards.
• Notice periods, the party to the investment management agreement, access to investor relationships, transfer costs and timing should all be confirmed in writing before a manager joins any platform.

Why Lock-In Is a Documents Question

The worry is easy to state. A manager launches on a platform to save time and fixed cost, the strategy grows, and the vehicle, the investor register and the performance history all turn out to sit with someone else.

That outcome is possible, but it is not a feature of the segregated portfolio structure. It is a feature of particular platform terms. Two managers on structurally identical segregated portfolios can face very different exits: one holds the investment management agreement directly with the portfolio, has an in-kind transfer power in the supplement and a short notice period; the other is a sub-adviser to a platform affiliate, with no in-kind power and a long notice period. The legal structure is the same. The exit is not.

This article covers the exit, not the initial choice, which is examined in our full cost, timeline and risk comparison of platform and standalone launches.

When a Standalone Fund Becomes Justified

A move is justified when the standalone fund solves a problem the platform cannot solve at an acceptable cost, after counting the cost of the move itself. Four triggers recur.

Cost is the trigger that is easiest to misjudge. The relevant comparison is not platform fee against administrator fee. A standalone fund carries its own directors, audit, regulatory fees, compliance officers and service provider oversight, and the manager's operations team absorbs work the platform previously carried. Our analysis of the true cost of running a Cayman fund standalone or on a platform sets out the fixed cost base on each side. The move itself adds formation costs for the new fund, a final audit of the portfolio, account onboarding and transaction costs on any positions that cannot be transferred.

Governance and investor triggers are often more decisive than cost. A large allocator that will only invest through a dedicated vehicle with a board it has approved is a concrete reason to move. A general sense that a standalone fund looks more established is not, on its own, a reason to move.

What the Segregated Portfolio Structure Allows

The Companies Act sets the boundaries. Section 216(2) provides that a segregated portfolio company is a single legal entity and that a segregated portfolio does not constitute a legal entity separate from the company. The portfolio cannot be continued, re-domiciled or registered elsewhere on its own. Our complete guide to the Cayman segregated portfolio company explains how statutory segregation works in practice.

Three further provisions shape the exit. Section 217(4) requires distributions on segregated portfolio shares to be paid only out of the assets and liabilities of the portfolio in respect of which those shares were issued, so the departing portfolio's investors are paid from that portfolio alone. Section 239A provides that no constituent company in a merger or consolidation under the Act may be a segregated portfolio company, so a statutory merger of the portfolio into the new fund is not available. Section 40 requires every company to keep a register of its members, which means the investor register of the portfolio is the platform company's register, not the manager's.

Once the portfolio has no assets and no liabilities attributable to it, section 228A allows the company to terminate it by resolution of its directors, or by such other authority as its articles provide. The company then reports terminated portfolios to the Registrar with its annual notice under section 213(6).

The Three Exit Routes

For an open-ended portfolio with third-party investors, the move is made through one of three routes, or a combination of them.

The first route keeps the portfolio invested throughout and treats every investor alike. It depends on the portfolio having the powers it needs. Section 37(3)(c) of the Companies Act allows redemption to be effected in such manner and on such terms as the articles authorise, so an in-kind redemption must be found in the articles and the portfolio's supplement rather than assumed. Our article on in-kind redemptions and in-specie transfers covers the authority and fairness tests. Where the powers are missing, the board of the platform company would need investor consent or an amendment, and the timetable lengthens.

The second route suits investors who prefer cash or who are not eligible for the new fund. In practice the two are often combined: the in-kind route for investors who move, cash redemptions for those who do not. Every investor should in any case receive notice and an opportunity to redeem before the transfer date.

Moving the Positions

The new fund is a new client to every broker, custodian, bank and trading venue. Its accounts must be opened in its own name and fully onboarded before the transfer date, and that onboarding is commonly the longest step in the plan.

• Listed securities and cash can often move free of payment from the portfolio's accounts to the new fund's accounts once both are open.
• Listed futures and options can move between clearing accounts only where the clearing broker and exchange rules allow; otherwise they are closed and reopened, with margin posted afresh.
• OTC derivatives need counterparty consent to novate to the new fund under new trading documentation. A counterparty is not obliged to consent, so the plan should assume close and reopen for any position where consent is uncertain.
• For digital asset strategies, exchange sub-accounts and wallets are held by the platform company for the account of the portfolio. Assets are withdrawn to wallets and venue accounts controlled by the new fund, which makes venue onboarding and wallet governance the critical path.

The portfolio's final NAV should be struck at a single valuation point on the platform's valuation policy, and the same figure should be the new fund's opening NAV after agreed transaction costs. The outgoing and incoming administrators then reconcile the transferred positions to that number before the new fund deals.

Fees, High-Water Marks and the Track Record

Investors judge the move on whether their economics change. Three points need deciding in advance.

The first is crystallisation. Offering documents commonly crystallise accrued performance fees on redemption. If investors are redeemed from the portfolio as part of the transfer, a performance fee may become payable on that date. The manager can instead waive crystallisation and carry the accrual into the new fund, but that choice moves value between investors above and below their high-water marks and must be disclosed.

The second is high-water mark carry-over. An investor below a high-water mark in the portfolio expects to remain below it in the new fund rather than be reset to the transfer NAV. The new fund's terms must recognise each investor's existing high-water mark, implemented through series accounting or investor-level records, using the design choices set out in our analysis of equalisation and series accounting for performance fees.

The third is the track record. Where the manager's own advisory entity has managed the portfolio throughout, the strategy's history remains the manager's history, and the administrator can produce a continuous return series with the transfer date marked. Where the platform or an affiliate held the investment management agreement and the manager acted as sub-adviser, the position is more complicated. For an SEC-registered adviser, the Marketing Rule defines predecessor performance as performance of an account or private fund that the advertising adviser did not advise at all times during the period shown, and permits it only where the people primarily responsible for it manage accounts at the advertising adviser, the accounts are sufficiently similar, all substantially similar accounts are included and the advertisement discloses that the results were achieved at another entity. Our article on how managers retain strategy, brand and track record on a platform explains why the documents should address this at inception.

Closing the Segregated Portfolio

A new Cayman open-ended fund needs its own CIMA registration under the Mutual Funds Act before it carries on business, its own board, its own administrator and auditor, and its own AML and CFT arrangements. The departing portfolio, meanwhile, has to be closed in good order.

CIMA's REEFS completion guide for the termination of a segregated portfolio, series trust or sub-fund states that the form is used to de-register segregated portfolios of mutual funds, and that the process requires good standing: all prescribed fees paid, all required audited financial statements submitted and no outstanding queries or filings. The application must attach a certified resolution of the operators or investors stating the date on which the portfolio will cease or has ceased to carry on business. CIMA's cancellation procedure for regulated mutual funds, to which the guide refers, provides that unless an audit waiver applies the final audited accounts run from the last audited year end to the date of final distributions, or to the final NAV date with a subsequent events note confirming that distributions were made.

The portfolio's final audit, fees and filings are therefore part of the cost of leaving, and the resolution fixing the cessation date should be drafted around the transfer date.

What to Check in a Platform's Documents Before Joining

The exit is set at launch. Before joining any platform, a manager should ask the following questions and obtain the answers in writing.

None of these questions implies bad faith. The platform company and its board owe obligations to every portfolio and investor, and those obligations are written down. Reading them for the exit before signing tells a manager the cost and timetable of leaving in advance.

The Exit Sequence

Each step depends on the one before it.

1. Review the platform agreement, investment management agreement, articles and supplement for notice periods, transfer powers, consents and exit charges.
2. Agree the transfer economics: valuation point, fee crystallisation, high-water mark carry-over, track record presentation and allocation of costs.
3. Form the new fund, appoint its board and service providers, and complete its CIMA registration.
4. Open and onboard brokerage, custody, bank, venue and wallet arrangements for the new fund, and agree novation or close and reopen for each derivative position.
5. Serve notice under the platform agreements, issue the investor notice, obtain any consents and allow a redemption window.
6. On the transfer date, strike the portfolio's final NAV, transfer the assets, issue shares in the new fund and distribute them to investors.
7. Reconcile the new fund's opening positions, then close the portfolio: final audit, CIMA de-registration and termination by the platform company.

Common Mistakes

• Signing platform documents without reading the termination, transfer and fee provisions.
• Assuming the manager holds the investment management agreement when it is a sub-adviser to a platform affiliate.
• Fixing a transfer date before the new fund's accounts are open and its registration is complete.
• Letting high-water marks reset at the transfer NAV without investors having agreed.
• Treating the cost of the new fund as the cost of the move, and leaving out the portfolio's final audit and closing costs.

The CV5 Implementation Perspective

CV5 Capital is the Cayman-headquartered institutional fund infrastructure platform for hedge fund and digital asset managers who need to launch quickly, operate properly and satisfy serious investors from day one. It operates CV5 SPC for traditional strategies and CV5 Digital SPC for digital asset strategies, both registered with CIMA under the Mutual Funds Act. Each manager receives a segregated portfolio with an independent board and coordinated fund administration, audit, banking, custody and compliance arrangements. CV5 Capital is not the investment manager of the strategies on its platforms.

The questions in this article apply to every platform, and CV5 Capital is no exception. A manager considering the CV5 Cayman hedge fund platform should put the same questions on notice periods, the investment management agreement, investor relationships, the track record, transfer costs and timing, and confirm the answers in writing before launch. Settled at the outset, they give a manager a clear view of how the strategy would move later.

Key Takeaways

• Read the platform documents for the exit before signing them, and get notice, transfer and cost terms in writing.
• Confirm who is party to the investment management agreement, because that decides whose track record the portfolio's performance is.
• Make sure the portfolio's articles and supplement permit compulsory and in-kind redemption, so the portfolio can move without leaving the market.
• Move to a standalone fund only when cost, governance, investor or multi-strategy needs justify it after the cost of the move.
• Decide fee crystallisation, high-water mark carry-over and track record presentation before the transfer date.
• Budget for the portfolio's final audit and CIMA de-registration as part of leaving.

Frequently Asked Questions

Can a segregated portfolio be moved off a platform as it is?

No. Under the Cayman Companies Act a segregated portfolio is not a legal entity separate from its segregated portfolio company, so it cannot be continued or registered elsewhere on its own. Leaving a platform means forming a new fund, moving the portfolio's assets and investors into it, and then terminating the portfolio once it has no remaining assets or liabilities.

Do investors have to redeem when a manager leaves a platform?

Their shares in the portfolio are redeemed, but they need not receive cash. Under the in-kind route the portfolio transfers its assets to the new fund for shares and distributes those shares to investors pro rata, so they keep the same proportionate interest in the same assets. This depends on the portfolio's articles and supplement permitting compulsory and in-kind redemption.

Can a segregated portfolio merge into a new standalone fund?

Not under the Cayman statutory merger regime. Section 239A of the Companies Act provides that no constituent company in a merger or consolidation under the Act may be a segregated portfolio company. The move is therefore made by an asset transfer and distribution, or by investors redeeming and subscribing into the new fund.

Does the track record move with the manager?

Where the manager's own advisory entity managed the portfolio throughout, the performance remains the manager's history and can be presented as a continuous series with the transfer date shown. Where the platform or an affiliate held the investment management agreement, the presentation rules that apply to the manager, such as the SEC Marketing Rule for registered advisers, may impose conditions.

What happens to performance fees and high-water marks on exit?

If the portfolio's documents crystallise performance fees on redemption, a fee may fall due on the transfer date unless the manager waives it and carries the accrual across. Each investor's high-water mark should carry into the new fund rather than reset at the transfer NAV. Both decisions should be disclosed to investors before the transfer.

What should a manager check before joining any platform?

The notice required to terminate, who is party to the investment management agreement, whether the manager may communicate with investors about a move, whether the performance record can be used after leaving, whether in-kind transfers are permitted, what exit and closing costs apply, and how long a transfer takes. Each answer should be confirmed in writing before launch.