Digital Assets & Virtual Assets
RWA Tokenisation in Hong Kong: Legal Framework and Structuring Guide
Why Cayman Funds for Hong Kong Managers?
The Cayman Islands remains the dominant jurisdiction for offshore investment fund formation globally. For Hong Kong-based fund managers, Cayman structures offer a well-understood legal framework, a deep pool of experienced service providers, absence of direct taxation at the fund level, and acceptance by institutional investors worldwide. The vast majority of hedge funds and many private equity funds managed from Hong Kong are established in the Cayman Islands.
Core Cayman Fund Structures
Exempted Limited Partnership (ELP)
The ELP is the structure of choice for private equity, venture capital, and other closed-end funds. It closely mirrors the Delaware limited partnership structure familiar to US investors. Key features include:
- General partner (GP) manages the fund and bears unlimited liability
- Limited partners (LPs) contribute capital and enjoy limited liability
- The partnership is not subject to Cayman corporate income tax
- Flexible constitutional documents (limited partnership agreement) that can be tailored to investor requirements
Exempted Company
The exempted company is commonly used for open-end hedge funds, structured as a standalone vehicle or as a master fund in a master-feeder structure. It offers:
- Share capital divided into separate classes for different investor types or strategies
- Segregated portfolio companies (SPCs) where assets and liabilities of each portfolio are legally separated
- Standard corporate governance with a board of directors
Unit Trust
Unit trusts are used in certain contexts, particularly where the investor base includes institutions in jurisdictions that prefer trust structures over corporate ones. The trustee holds assets on trust for unitholders, and a separate manager runs the investment strategy.
Cayman Regulatory Framework: CIMA
The Cayman Islands Monetary Authority (CIMA) regulates investment funds under the Mutual Funds Act (for open-end funds) and the Private Funds Act (for closed-end funds). Key requirements include:
Registered Mutual Funds
Open-end funds with a net asset value of at least US$100,000 per investor or with fewer than 15 investors (who may remove the operator) must register with CIMA as a registered mutual fund. Annual filings and audit requirements apply.
Private Funds
Closed-end funds (such as PE and VC funds) must register with CIMA as private funds. Requirements include annual audited financial statements prepared to IFRS or equivalent standards, appointment of an auditor registered with CIMA, valuation policies, and cash management procedures.
Economic Substance and OECD Compliance
Cayman has enacted economic substance legislation consistent with OECD Base Erosion and Profit Shifting (BEPS) standards. Fund vehicles themselves are generally exempt from economic substance requirements (they are treated as investment funds rather than relevant entities for substance purposes), but fund managers and GPs structured in Cayman may have substance obligations.
In practice, most Hong Kong managers use a Hong Kong-incorporated manager entity (which may be SFC-licensed), with the Cayman GP serving a pure GP function and the Hong Kong manager providing investment management services under a delegation or advisory agreement.
Anti-Money Laundering and KYC
Cayman funds must comply with the Anti-Money Laundering Regulations and applicable guidance notes. In practice, this means conducting customer due diligence (CDD) on investors, maintaining records, and having AML policies and procedures in place. Many funds appoint a registered anti-money laundering officer and delegate operational AML functions to their administrator.
Side Letters and MFN Clauses
Institutional investors often negotiate side letter arrangements granting preferential terms — such as reduced management fees, enhanced reporting, or co-investment rights. Most-favoured-nation (MFN) clauses entitle investors to the benefit of more favourable terms granted to other investors. Careful drafting is required to manage conflicts between side letter obligations and the fund's constitutional documents.
Cayman Funds and Hong Kong SFC Licensing
Hong Kong-based managers of Cayman funds must assess their SFC licensing obligations. Managing a Cayman fund constitutes "asset management" (Type 9 regulated activity) in Hong Kong if managed from Hong Kong. An SFC Type 9 licence is therefore required unless an exemption applies (e.g., the manager only manages assets of a related corporation or SFO-type arrangement).
How Alan Wong LLP Can Assist
Alan Wong LLP advises fund managers, GPs, and institutional investors on all aspects of Cayman fund formation and Hong Kong regulatory compliance. We work with leading Cayman counsel to coordinate structuring, documentation, and CIMA registration, while advising on Hong Kong SFC licensing, investor negotiations, and fund governance. Our investment funds team has broad experience across hedge fund, private equity, venture capital, and real assets strategies.
