Two things have changed for emerging managers. Institutional-grade operational due diligence is now applied to funds a quarter of the size it used to be. And the annual cost of running a compliant, audited, administered vehicle has risen faster than management fees on small AUM.
The result is a widening gap between the fund a manager wants and the fund the economics support.
Does the strategy need a fund at all?
Ask this first. Alternatives that are frequently better below $25m:
- Managed accounts. The investor holds their own account; you have a management agreement and trading authority. No fund, no administrator, no audit. Scales poorly past a handful of investors but is enormously cheaper.
- A single deal-by-deal SPV per investment. Common in real estate and venture. Investors choose each deal; there is no blind-pool commitment and no continuous offering.
- A club or co-investment structure documented by contract rather than as a collective investment scheme.
A fund earns its cost when you need a blind pool, multiple investors, portfolio-level economics and a track record that carries to fund two.
Vehicle and domicile
Cayman. Still the default for hedge, crypto and global venture strategies with US and Asian investors. Exempted company or ELP, registered with CIMA, with the master-feeder pattern where US taxable and tax-exempt/non-US money are both present. Predictable, well-understood by prime brokers and administrators, and accepted by most institutional allocators. Costs: registration and annual CIMA fees, audit by a CIMA-approved auditor, administration, and directors.
Luxembourg. The route to European institutional capital. RAIF is the workhorse for speed — no direct product authorisation, but a mandatory authorised AIFM. SCSp as the partnership form. More expensive to run than Cayman, and materially more so once AIFM, depositary and audit are stacked, but it is what European pension and insurance money expects.
ADGM and DIFC. Increasingly credible for Gulf capital, with a shorter distance between manager and investor for GCC-focused strategies and a workable fund manager licensing path. Growing administrator and audit presence, though still thinner than Cayman or Luxembourg.
Ireland. ICAV for regulated strategies and UCITS where retail distribution is the goal.
BVI. The lower-cost approved fund and incubator fund regimes remain genuinely useful for the first, small, friends-and-family vehicle with limits on investor numbers and AUM.
The cost curve
Run the arithmetic before choosing. A rough annual picture for a straightforward vehicle:
- Cayman standalone with administrator, audit, two independent directors and CIMA fees: broadly $60k–$120k a year.
- Cayman master-feeder: add roughly half again.
- Luxembourg RAIF with third-party AIFM, depositary, administrator and audit: substantially higher, commonly a multiple of the Cayman figure.
- BVI incubator/approved fund: a fraction of either, with corresponding limits.
On a 2% management fee, $60k of running cost consumes the entire fee on $3m of AUM and half of it on $6m. Below roughly $20–25m, most first-time funds are subsidised by the manager. Know that going in.
What operational due diligence now asks
Even from small managers, allocators expect:
- Independent administration and NAV calculation — self-administration is close to disqualifying.
- At least one genuinely independent director with time capacity.
- A named auditor of recognised standing.
- Segregation of duties in cash movement, with documented authorisation.
- Written valuation policy, especially for illiquid or level-three assets.
- Cybersecurity, business continuity and key-person provisions.
- Clear, consistent fee and expense allocation between the fund and the manager.
Where managers get hurt
- Substance in the wrong place. The fund is Cayman; the manager is somewhere with no licence and no substance. Both the tax analysis and the regulatory analysis depend on where decisions are actually taken.
- Marketing before permissions. Approaching EU investors without either an AIFMD marketing permission or a properly evidenced reverse-solicitation position.
- Expense creep into the fund. Charging manager costs to the fund without clear LPA authority is the fastest way to lose an allocator relationship.
- Underestimating the second-year cost, when audit and administration are billed in full for the first time.
FAQs
Cayman or Luxembourg?
Follow the investors. US, Asian and crypto-native capital defaults to Cayman; European institutional capital generally needs Luxembourg.
Can I run a fund with no employees?
The fund itself, effectively yes — the service providers do the work. The manager needs real people wherever it claims to be managed from.
How long does a launch take?
Eight to sixteen weeks for a Cayman vehicle with organised documentation; longer in Luxembourg, chiefly because of AIFM and depositary onboarding.
What size is too small?
Below about $10m committed, look hard at managed accounts or deal-by-deal SPVs first.