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Billy Xiong News: A Cayman Islands Hedge Fund Review | Part 2: Launch /

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A review of Cayman Islands hedge fund corporate governance and
best practice, including in times of distress

It may be business as usual for hedge funds as they seek to
weather the market storm caused by Covid-19. However, the true
economic effects are perhaps yet to be seen.

This five-part series considers some of the guiding principles
that apply to corporate governance in a Cayman Islands hedge fund
context and some of the best practices that boards of directors
should be implementing as a matter of course, which may need to be
re-visited and adapted in times of distress.

To access part 1, please click
here
.

Part 2: Launch / Business as Usual

While there is no ‘one size fits all’ solution as to how
boards of directors should regulate their business and conduct
their meetings, directors must pay regard to applicable law, the
fund’s memorandum and articles of association and the
principles set out in Cayman Islands Monetary Authority’s
(“CIMA“) Statement of Guidance for
Regulated Mutual Funds – Corporate Governance and, of course, act
at all times in accordance with their duties as directors,
including fiduciary duties1. How these principles/duties
translate as a matter of practice will be a question for the board
of directors, in consultation with the fund’s professional
advisors, including legal counsel.

In practice and in a ‘business as usual’ environment for
a hedge fund, say, pursuing a long/short equity strategy with
monthly liquidity, it would be typical for a board of directors to
meet quarterly (bearing in mind that CIMA’s minimum expectation
is at least two meetings a year). However, the size, nature and
complexity of a fund may require more regular meetings to enable
effective oversight, including with respect to risk. In the early
stages of operation and when assets under management quickly
increase (or decrease), more regular meetings may be appropriate
until operations regularise.

In advance of each board meeting, an agenda should be circulated
with a board pack containing any reports to be discussed at the
meeting that have been prepared by the fund’s service
providers, e.g. legal counsel, the investment manager, the
administrator and compliance officer and, after the financial year
end, the auditor. The directors should familiarise themselves with
such documents and identify any issues that ought to be discussed
and addressed at the meeting. It is important to recall that
directors have, both collectively and individually, a continuing
duty to acquire and maintain sufficient knowledge and understanding
of a fund’s business to enable them to properly discharge their
duties as directors.

At the meeting itself, there is no substitute for active
engagement by the directors: the directors should be proactive and
prepared to ask questions of and, if required, challenge the
fund’s service providers. The board of directors must be
satisfied that the fund is conducting its affairs in line with all
applicable laws, regulations and other rules (including, but not
limited to, CIMA’s Rules on Segregation of Assets and
Calculation of Net Asset Values), and consistently with all
representations to investors, while satisfying itself that its
service providers are doing the same with respect to all delegated
functions. Accordingly, appropriate legal advice should be taken
and then information should be requested from service providers
and/or professional advisors, so that the board of directors can
satisfy itself that such compliance is being achieved.

In addition, the directors should:

  • regularly assess the suitability and capability of the
    fund’s service providers, e.g. do the systems and processes of
    the administrator address the obligations of the fund as regards
    delegated Cayman Islands regulatory obligations2?

  • regularly monitor whether the investment manager is performing
    in accordance with the defined investment criteria, investment
    strategy and restrictions; and

  • as necessary and at all material times, inform themselves of
    the investment activities of the fund, as well as performance and
    the financial position, including material risks (which should be
    discussed and addressed, where necessary).

If required, the directors should make further enquiries, obtain
advice from legal counsel, and give directions to rectify
non-compliance, with all relevant action points being actively
followed-up in an appropriate and timely manner until resolved to
the satisfaction of the board of directors.

Accurate minutes of the meeting, including the matters
considered and decisions made, and the information requested from,
and provided by, service providers and advisors, should then be
prepared for the review and sign-off by the
directors3.

Part 3 will consider corporate governance in a period of market
turbulence and in times of potential distress.

Footnotes

1 For further reading on the duties of a director, please
see the Walkers Client Memo:
Cayman Islands – Duties and Liabilities of
Directors
.

2 Regulation in the Cayman Islands is focused on the
management of systemic risk, the prevention of money-laundering and
the promotion of regulatory and financial transparency. In the
context of a Cayman Islands investment fund, regulatory obligations
include, but are not limited to: anti-money laundering, sanctions
and the combating of terrorist financing; automatic exchange of
investor information in connection with international tax
cooperation arrangements (namely, FATCA and the Common Reporting
Standard); and data protection. Walkers was the first offshore law
firm to establish a dedicated Regulatory and Risk Advisory Team.
For further information on or advice relating to a Cayman Islands
investment fund’s regulatory obligations, please contact Cayman
Islands partner Lucy Frew.

3 It is worth noting that while the SOG does provide that
full, accurate and clear records should be kept of all meetings, in
the event of any doubt, or if there are matters discussed with
legal counsel that could give rise to legal advice privilege
considerations, specific Cayman Islands legal advice should be
taken.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

Jonathan Cartu

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