The standards of good governance that are described in Famous Frauds & Financial Failures and that are now common in the hedge fund industry, especially the wide-scale adoption of independent directors on hedge fund boards, are substantially improving the world of alternative investing.
This fact is perfectly illustrated by the example of the Cayman Islands. Around 75–80% of all offshore hedge funds are domiciled in the Caymans, with over 30,000 investment funds registered with the Cayman Islands Monetary Authority (CIMA) and a total assets under management on the Islands of approximately US$8.3 trillion. Cayman has also evolved from a top-tier offshore financial center into arguably the single most important foreign player in the U.S. Treasury market. In late 2025, Federal Reserve (“Fed”) researchers, including Daniel Barth and Daniel Beltran, reported that Cayman-based funds’ holdings of U.S. Treasuries had jumped by US$1 trillion since 2022, reaching US$1.85 trillion by the end of 2024. By contrast, the U.S. Treasury’s official figures reported only US$423 billion in holdings. The gap suggests the Caymans have overtaken China, Japan, and the United Kingdom as the largest foreign holder of U.S. government securities.
Despite being one of the world’s most popular jurisdictions for hedge fund incorporations, there is a common misconception that Cayman is an unregulated domicile that specializes in money laundering. Cayman is saddled with this outdated and erroneous trope based on the movie adaptation of John Grisham’s novel The Firm, in which the Cayman Islands are portrayed as a tax-free paradise used by criminals. Ever since, every action drama has the bad guys asking for the ransom money to be paid into a Cayman bank account (instantaneously by online app, of course). See AppleTV's Slow Horses, Season 5, Episode 6, for just the latest example.
This characterization was never true and is absolutely not true today. Cayman is so well regulated that it can take several weeks to open a bank account, due to all the background checks and anti-money laundering controls in place, and criminals are not able to move illicitly gained dollars through a Cayman account. Additionally, Cayman has a world-leading standard of corporate governance for hedge funds (see Appendix 2 of Famous Frauds & Financial Failures). In reality, therefore, Cayman is now an extremely well-regulated jurisdiction and a strategic hub in the Western Hemisphere where over two-thirds of the world’s offshore hedge funds are set up and governed.
The success of the Cayman Islands as the world’s leading domicile for offshore hedge funds is attributed to several key pillars.
1. Tax Neutrality and Efficiency
- Avoidance of Double Taxation: Cayman is not a “tax haven” designed to hide assets, but a tax-neutral platform. It doesn’t impose corporate, income, capital gains, or withholding taxes. This allows a hedge fund to act as a “flow-through” entity, ensuring investors are only taxed once in their home jurisdictions rather than being subject to an additional layer of tax at the fund level.
- Tax Undertakings: The Government offers “Tax Exemption Certificates,” which provide a 20- to 50-year guarantee that if the islands were to introduce taxes in the future, the fund would remain exempt, providing long-term fiscal certainty.
- Highly Efficient: Hedge fund managers typically use Cayman for the offshore feeder (and often the master fund) in a master‑feeder structure, allowing US taxable investors and non‑US/US tax‑exempt investors to invest efficiently in the same strategy while consolidating trading at the master level.
2. Legal and Regulatory Sophistication
- English Common Law Foundation: The legal system is based on English common law, providing a predictable and stable framework familiar to international investors and managers. The ultimate court of appeal is the Privy Council in London.
- Pragmatic Regulation: CIMA is frequently praised by the Alternative Investment Management Association and Cayman Finance for its “proportionate” and “balanced” regulation. It provides oversight that meets institutional standards (appealing to sovereign wealth funds, pension funds, and endowments) without the prescriptive, “retail-focused” constraints found in onshore jurisdictions such as the United States or the European Union.
- Specialized Judiciary: The Cayman Islands has a dedicated Financial Services Division of the Grand Court, staffed by judges with deep expertise in complex commercial and insolvency matters.
3. Operational Flexibility and Speed to Market
- Versatile Structures: Managers can choose from various entity types, including Exempted Companies (which may be either regulated mutual funds or general partners of private funds), Exempted Limited Partnerships, and Segregated Portfolio Companies (SPCs). The SPC structure is particularly attractive for allowing a single legal entity to “ring-fence” assets and liabilities between different investment strategies in segregated portfolios.
- Speed of Setup: Entities can often be formed on a same-day basis. There are typically no pre-launch approval requirements for registered mutual funds, allowing managers to capitalize on market opportunities quickly.
4. Global Compliance and Reputation
- International Standards: The Government highlights Cayman’s commitment to transparency. The jurisdiction is on the Organisation for Economic Co-operation and Development’s “White List” and has been recognized for its compliance with Financial Action Task Force recommendations. It actively participates in global reporting standards such as the Foreign Account Tax Compliance Act and theCommon Reporting Standard.
- Institutional Trust: Because the world’s largest banks, prime brokers, and institutional investors are deeply familiar with Cayman structures, using the jurisdiction provides “instant credibility.”
5. World-Class Ecosystem of Service Providers
- Specialized Talent: Cayman’s success is bolstered by a high concentration of “Big Four” accounting firms, top-tier international law firms, and specialist fund administrators. This “ecosystem” ensures that funds have access to local professionals who understand the nuances of hedge fund operations and global compliance.
- Standardization: The world’s top fund lawyers are all very familiar with setting up and using Cayman vehicles. This means that the regularly used documents (viz: Memorandum & Articles of Association, Offering Memorandum, Subscription Documents, etc.) are all easily produced as there are established templates and hundreds of prior examples available.
Conclusion
Cayman offers tax neutrality, legal certainty rooted in English common law, and creditor‑friendly courts (with ultimate recourse to the UK Privy Council), pragmatic regulation by CIMA, and a deep bench of service providers. Formations are fast, and Cayman entities have many characteristics that are familiar to US investors and their advisors. When structuring an offshore hedge fund, Cayman offers a wide range of vehicles that closely mirror onshore vehicles (such as the Delaware LP and LLC).
Source:
No author listed (2025), “Basis Trades Obscure Hedge Fund Holdings of $1.4tn in US Treasuries,” Hedgeweek, October 17: https://www.hedgeweek.com/basis-trades-obscure-hedge-fund-holdings-of-1…