The Cayman Islands is widely recognised as the world’s leading jurisdiction for investment funds. Two core pieces of legislation shape this landscape: the Mutual Funds Act (2025 Revision) and the Private Funds Act (2025 Revision).
At first glance, these two regimes may appear quite similar. Both require registration with the Cayman Islands Monetary Authority (CIMA), both impose annual audit obligations, and both expect compliance with sound governance practices. Yet in practice, there are important differences between the two structures, and those differences are usually what determine which framework a fund’s promoter should choose.
Definitions
Under the Mutual Funds Act, a “mutual fund” is a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors to share in the profits or gains from the fund’s investments.
By contrast, the Private Funds Act defines a “private fund” as a company, unit trust or partnership that issues investment interests, the purpose or effect of which is pooling investor funds so that investors can share in the profits or gains of the fund’s investments, where the interests are managed as a whole by or on behalf of the operator. Unlike mutual funds, there is no statutory requirement that private funds be established with the aim of spreading investment risk.
The nature of investor interests
This is the core distinction.
A mutual fund issues redeemable equity interests, meaning shares, units, or partnership interests that entitle investors to participate in profits and can be redeemed or repurchased at the option of the investor. This feature makes mutual funds ideal for hedge funds and other open-ended vehicles investing in liquid, tradeable assets such as listed securities, bonds, derivatives or commodities, where investors expect regular liquidity.
A private fund, on the other hand, issues non-redeemable investment interests. These also entitle investors to profits, but cannot be redeemed or repurchased at the option of the investor. Investors typically exit by transferring their interest, through a secondary sale (often with the consent of the general partner or directors), or by waiting until the end of the fund’s life. This closed-ended structure aligns private funds with private equity, venture capital, real estate and infrastructure strategies, where there is no liquidity and no real secondary market.
Investment aims
The Mutual Funds Act requires that a mutual fund be established with the aim of spreading investment risk, which in practice means diversification across a portfolio of liquid investments.
Private funds are not subject to this requirement. As we discussed in our earlier article on private funds in the Cayman Islands, the Cayman Islands is one of the few jurisdictions where it is expected to registered a closed-ended fund where there is no diversification of porfolio risk, being perfectly acceptable for a private fund to be established for the purpose of investing in a single project or company and remain regulated. This flexibility regulates global industry practice for closed-ended funds, particularly in private equity and real estate, which often target a single investment thesis rather than diversification.
Offering and registration
Here the divergence is quite stark.
Mutual funds must prepare a full offering memorandum (PPM) that complies with the requirements of the Act, including details on the fund, its operators and service providers, subscription and redemption procedures, valuation methodology, and risk disclosures.
Private funds, in contrast, may register with CIMA by filing a term sheet or summary of terms, although CIMA has issued rules on the information that should be included in offering or marketing materials. These include details of the fund and its principals, service providers, subscription procedures, and material risks.
Minimum investment
Licensed and Administered Mutual Funds are not required to have a minimum initial investment, although these are the less common types of the mutual funds in the Cayman Islands, a jurisidction which suits better to profesionals and institutional investors.
Registered mutual funds generally require each investor to make a minimum initial investment of at least US$100,000.
The exception is the so-called “limited investor mutual fund,” which may have 15 or fewer investors and no minimum, but only if the majority of investors have the right to appoint and remove directors.
Private funds impose no statutory initial minimum investment threshold and does not require the promoters of the fund to to give the investor the right to appoint and or remove the directors.
Service providers and operations
The Private Funds Act is more prescriptive about operational oversight. Private funds must ensure appropriate arrangements for cash flow monitoring, safekeeping of assets, segregation of non-fund assets, and valuation. These functions can be outsourced to third-party service providers, or carried out internally where there is no conflict of interest and adequate disclosure is made.
Mutual funds, by comparison, are not subject to these specific statutory requirements. In practice, most appoint an administrator to calculate NAVs and handle subscriptions and redemptions. While the Mutual Funds Act does require certain categories of mutual funds to appoint a licensed administrator, registered mutual funds are allowed to appoint administrators based outside the Cayman Islands, even where those administrators are not regulated in their home jurisdiction.
Governance
Both mutual funds and private funds must comply with the “four eyes” principle, meaning that at least two natural persons must be responsible for directing the fund.
The distinction is that the directors of a mutual fund must be registered under the Directors Registration and Licensing Act (DRLA). Private funds are not caught by the DRLA, although they must still maintain a governance structure appropriate to their activities.
Audit requirements
Both mutual funds and private funds are required to prepare annual audited financial statements and file them with CIMA.
Wrapping up
The Cayman Islands has deliberately drawn a clear line between its two main fund regimes. Mutual funds are designed for open-ended strategies, providing liquidity through redemptions and diversification of risk. Private funds are tailored for closed-ended strategies, typically illiquid, long-term, and often focused on a single project or asset.
This distinction gives fund managers and investors the flexibility to choose the structure that best suits their strategy and investor base.
If you are considering launching a fund and are not sure which regime applies to your structure, the team at Vale would be happy to help guide you through the options.
