ESTABLISHING A HEDGE FUND IN ANGUILLA – AN OVERVIEW

Anguilla enacted a Mutual Funds Act in 2004 (“the Act”) to compliment its suite of legislation. It is a recent player but offers a cost-effective and efficient regulatory regime under the supervision of the Financial Services Commission of Anguilla (“the Commission”).

Scenario

A brokerage firm based in the USA with offices and clients in London, Hong Kong, Shanghai and Tokyo, amongst other major financial centers, wishes to launch an internal product for its clients, who range in net worth from small investors with accounts holding assets of less than US$100,000 to high net-worth individuals worth several million US$.
It decides to launch an offshore fund for non-USA clients. An Anguilla fund is ideally suited for this as will be explained below.

Fund types

The Act provides for three types of funds:

1. Private – a private fund is a fund, the constitutional documents of which, specify that it will have no more than 99 investors and these documents specify that an invitation to subscribe for or purchase shares is not to be made to the public.
An invitation is not made to the public if it is made to specified persons and is not calculated to result in shares becoming available to other persons or by reason of a private or business connection between the person making the invitation and the investor. There is no minimum subscription for investing into a private fund and they are not required to submit audited financial statements annually to the Commission or issue a prospectus, albeit, most usually do as a matter of practice.
The Commission also has the power to designate certain funds as being private funds.

2. Professional – a professional fund is a fund, the shares of which are made available only to professional investors and the initial investment in which, in respect of each of the persons constituting a majority of such investors, is not less than one hundred thousand United States (US$100,000) dollars or its equivalent in any other currency.
This minimum initial investment limit shall not apply in respect of an investment made by the manager, administrator, promoter or underwriter of the professional fund.
Professional funds are not required to submit audited financial statements annually to the Commission or issue a prospectus, albeit, most usually do as a matter of practice.
The Commission also has the power to designate certain funds as being professional funds. A professional investor is defined as a person whose ordinary business involves dealing in investments or who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of one million United States dollars or its equivalent in any other currency and that he consents to being treated as a professional investor.

3. Public – a public fund is a fund, which is not a private, or a professional fund.
Unlike the private and professional fund, a public fund must submit to the Commission audited financial statements annually and must issue a prospectus.

Special purpose and corporate vehicles

An Anguilla fund may be in the form of an Anguilla domestic company, international business company, limited liability company, limited partnership, partnership, unit trust or protected cell company/protected cell accounts (segregated portfolio company/segregated portfolio accounts). However, the Commission, which approves all fund applications, has the power to exclude any body, which is designated by regulations as not being a mutual fund.
To date, the Commission has not excluded any type of entity from being used as a fund.
The corporate entities are extremely useful because they allow for the issuance of series or classes of shares with different rights thus allowing for the creation of umbrella funds and master/feeder structures.
The use of an Anguilla domestic company also allows for the use of companies limited by guarantee, limited by guarantee and shares, as well as private companies whereby the articles restrict the number of shareholders to 11.

Structuring

To the brokerage house, a product or series of products could be created to cater for its wide range of investors. For the small investors who do not generally invest USD100, 000 in one product, a private fund would be ideal.
The brokerage firm could create several private funds of 99 investors each with a low minimum subscription in a “cookie-cutter” fashion. That is each private fund could issue a similar prospectus, use the same functionaries with the same or similar agreements and basically negotiate on legal and other fees.
The costs for establishing and operating each fund of 99 small investors would decrease dramatically, thus avoiding any adverse impact on performance or undue burdens on the fund manager.

Unlike the private fund, which has a maximum number of investors, a professional fund does not have that restriction but instead has a minimum subscription as stated above.
This is ideally suited for the wealthier of the brokerage firm’s clients.
In fact, it could indeed market it to an unlimited number of its clients, but from a practical point, the use of several professional funds in a master-feeder structure would be more efficient in terms of managing and administering the structures and assets under management.

Alternatively, the brokerage firm could create a public fund or indeed several public funds for its clients. This of course would allow all clients to invest without issues of investment size or investor numbers.

The Anguilla public fund would be required to submit a prospectus prior to being registered and present audited annual financial statements as well as a certificate of compliance from the jurisdictions where it is marketing and or operating outside of Anguilla.