Offshore (Investment) Funds

Offshore investment fund is a collective investment scheme domiciled in an offshore financial centre. There are about 9,000 hedge funds in the world, formed in different jurisdictions, including  British Virgin Islands, Cayman Islands, Luxembourg and Bermuda.

Investment funds in offshore jurisdictions offer significant tax benefits compared to many high tax jurisdictions such as the United States. British Virgin Islands has become a popular location for hedge fund managers to register their funds, as this allows non-US investors to avoid paying US taxes on their non-US investments. There are about 2,600 hedge funds registered in the British Virgin Islands, most of them working in the US market.

Besides tax reasons also the privacy is reason for choosing offshore fund. The tradition of offshore centres to protect investors' privacy still persists. Offshore jurisdictions implement measures needed to maintain a reputation for probity, on money-laundering for example, they are co-operative when there is evidence of criminal activity, but they actively resist any attempts to receive information made by onshore tax authorities.

Offshore funds can protect those who are subject to a high risk of litigation - business proprietors, doctors, lawyers, etc. Liability insurance may be insufficient to cover these amounts in full measure.

Many offshore jurisdictions are internationally regarded as investor-friendly and financially secure. The British Virgin Islands offer a zero-tax regime for investment funds which are domiciled there, thus allowing the fund to reinvest that part of its investment portfolio's gains that would otherwises have been lost to tax. The regulatory regime in these offshore jurisdictions is light, with emphasis put on the importance of balancing effective regulation for the benefit of the protection of investors on the one hand, with the establishment of a regime in which the conduct of investment business is fast and simple.

However, a number of offshore jurisdictions have tightened the regulation of offshore funds. The regulatory regime makes a distinction between funds generally offered to public, and requires a high degree of regulation because of the nature of potential investors, and non-public funds on the other. Non-public funds are either categorised as private funds or professional funds.

Usually, investors in non-public funds can be assumed to be sophisticated because of the nature of the offering. The fund may be designed for a small and select group of investors, then the number of investors will be limited by the constitutional documents. Although most offshore jurisdictions permit funds to obtain licences to operate as public funds, onerous regulatory requirements associated with such licences usually mean that only a small minority of offshore funds is available for subscription by the general public.

People also choose offshore funds to get investment returns; offshore funds have the opportunity to further increase their returns through exposure to a wider range of asset classes. Offshore funds are free to access  asset classes such as hedge funds, commodities and derivatives.

In the past, hedge funds were able to pull the 20-90% annual returns, and provided the access to a wider range of instruments or currencies that were lacked  by domestic-only investors.  The general principle is that diversity can better balance an investor's portfolio and reduce its volatility.

By spreading investment around different financial centres, not only diversity is increased, but also explosure to different market conditions and investment styles.

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30/09/2006
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