“Directors should be asked
if they are willing to show
independent thought and
that they fully understand
64 CAYMAN FUNDS | 2019
Victor Murray is a director of MG
Management. He can be contacted
Fund documents will have to be reviewed and updated for the
Cayman Islands’ new data protection rules.
Anti-money laundering officers
There have been significant enhancements to the existing Anti-
Money Laundering (AML) Cayman Islands Guidance Notes.
Fund directors are responsible for ensuring: (1) the suitability
of the AML officers and making appointments; (2) that the fund
complies with the updates to AML laws and regulations; (3) that an
AML compliance programme is established; and (4) that the AML
officers and all service providers are adhering to the regulatory
AML officers are responsible for periodically reporting to the funds
directors on the implementation of the fund’s AML procedures and
report the results of any testing.
Therefore, it is perhaps not advisable that fund directors
themselves fulfil the AML officer role as they would essentially
be reporting to themselves. The Guidance Notes envisage that the
directors will have oversight and receive reporting from the AML
officers of their fund.
Master feeder redemption terms
A master fund ordinarily would be established with identical articles
of association to the feeder fund and this is especially important for
It was assumed in the Cayman Islands that there was an automatic
back-to-back redemption process as between feeder and master
funds. However, the recent Cayman Islands case of Arden Maroon
decided that there was no such automatic redemption process
allowing the administrator to process the redemption from the
master fund as there was a failure of the feeder fund to provide an
actual redemption notice.
The impact of this decision is that existing funds should enter
into a written agreement between the feeder fund and master fund
outlining the mechanism used to process redemption from the
For newly established funds, they should incorporate in their
constitutional documents as to how the redemptions will be made
from the master fund so that there is a written process in place.
This is one of the key areas that directors should assess for existing
and new funds.
Operation of the fund
One of the most-asked questions is about how often board meetings
should be held and if any should be held in person.
In forming an opinion on frequency and format for the meetings
there are a number of considerations, including how active the
fund is, whether there are special issues needing oversight and the
requirements of investors and other stakeholders. Board meetings will
be held to approve audited financial statements and for most hedge
funds quarterly or even more frequent meetings may be appropriate.
Any professional hedge fund director who is properly experienced,
and has sufficient time to devote to his or her appointment, will
make sure that board meetings are comprehensive and substantive
and not merely “going through the motions”.
Hedge fund directors need to be able to weigh up legal advice,
and the commercial aspects of a transaction and situation, and
balance this with their duties to the hedge fund and investors. This
may mean challenging advice or recommendations they do not
Directors should also request to see copies of any investor letters or
complaints. As was shown in the Weavering case, the directors allegedly
received the reports but failed to duly consider or question them.
The majority of hedge funds will be asked to enter into a side
letter. The side letter can be used to facilitate a large investment
or to attract a strategic investor. Entering into a side letter will raise
various fiduciary and other concerns that must be addressed by
A director should not be afraid to raise questions when a side
letter term is clearly incompatible with the fund’s articles or the
rights of the investors.
Since the global financial crisis most hedge funds investors are
conducting due diligence on the manager and its principals. The
independence and quality of the directors should also be carefully
evaluated as part of that process.
In particular investors will want to ensure that the director is
sufficiently competent and experienced so that if they have to
make difficult decisions they will do so independently in the best
interests of all the investors, and not favour one group of investors
A decision to liquidate the fund may be taken at some point.
The directors are required to execute the declaration of solvency
to commence the process in the most common winding-up: a
voluntary liquidation (a solvent liquidation).
The directors will need to be satisfied as at that date that the fund
is solvent for a certain period (usually 12 months). The directors
will take personal liability in the event such declarations prove to
be untrue so they should undertake to receive proper information
from the administrator, manager and, in some cases, the auditor.