“As the number of hedge funds continues to break records, fund managers are looking for innovative ways to structure funds, and unit trusts are becoming an increasingly popular option,” said Ingrid Pierce, head of Walkers’ Commercial Trusts Group.

“We are seeing more applications for hedge funds — from use by pension funds to convergence with private equity and mutual funds. The unit trust structure is extremely flexible and can be tailored to suit the client’s demands. The overall increase in the use of unit trusts is indicative of the maturity of the hedge fund market, which now has a much broader investor base as Japanese investors are becoming increasingly active in global markets. Unit trusts are a great vehicle to encourage these investors.”

According to a recent survey by the Daiwa Institute of Research, almost two-thirds of Japanese pension funds are investing in hedge funds. Japan saw an almost 13 percent jump in the number of pension funds using alternative asset managers over the last year. The Daiwa report stated that Japanese pension fund managers liked the diversification that hedge funds allowed in their investment portfolios. Given the appeal of the unit trust for Japanese investors, the use of these trusts in fund structures signals further growth in this area. According to analysts, Japanese investors have about $USD50 billion in hedge fund assets.

“While we continue to see our Japanese clients using unit trusts, we are also seeing more complex structures. We fully expect this trend to continue,” Carol Hall, a partner in Walkers’ Hong Kong office, said.

“Arrangements such as the ‘master feeder’ structure, continue to be popular and are a flexible means of adding on to existing structures to accommodate other investor groups. With these multi-level funds, it’s critical that investors and trustees are working with attorneys who understand the issues and ramifications of these types of structures.”

Compared to the numbers in the Cayman Islands, there are only a small group of administrators in Asia that are prepared to act as trustee in a unit trust structure because of the attendant fiduciary obligations.

In recent years there have been a number of high profile hedge fund collapses which have highlighted the concern for service providers who provide trustee services, said Walkers.

“We predict that we will see more changes being requested to unit trust structures to address the concerns of trustees in particular. It remains to be seen how the courts will interpret the role of the manager who is party to a bilateral trust deed under which it assumes obligations that traditionally were assumed by a trustee.  However, it is clear that the safeguards being sought by trustees and their affiliated administrators are a commercial fact of doing business using a unit trust structure in Asia,” added Ms Hall.