Many people don’t understand what an offshore hedge fund is or the purpose of the offshore hedge fund. An offshore hedge fund is simply a structure used by hedge fund managers as a way to attract offshore investors (non-U.S. citizens) or U.S. tax-exempt investors (explained later in this article). The offshore hedge fund will generally be established in various jurisdictions through a variety of structures (that is, as a single entity structure, a side by side structure or a master-feeder structure).
I provided the information in the article below to inform you about the various jurisdictions in which offshore hedge funds will be established. Please note that the driving considerations for establishing an offshore hedge fund will be tax efficiency (both the structure and jurisdiction should be discussed with your attorney), preference and perception of manager and prospective investors and the cost of establishing the fund in the various jurisdictions. Your attorney should discuss these items with you when you consider in which jurisdiction to establish your hedge fund.
Offshore Hedge Fund Jurisdictions
The offshore hedge fund can be established in a variety of different jurisdictions and the driving force for the jurisdiction of choice will be tax considerations. A vast majority of the hedge funds are established in low or zero tax jurisdictions. This means that there is no corporate level tax for the offshore hedge fund – this does not, however, necessarily mean that there are no taxes for the investors in the fund. Instead the investors in the fund will generally be taxed in their country of residence on the income from the fund. Another consideration will be the regulatory laws in place in the jurisdiction.
The two most prevalent offshore jurisdictions are the Cayman Islands and the British Virgin Islands (BVI). In both the Caymans and the BVI there are strong regulatory structures in place in order to assure investors that the managers of the offshore funds are legitimate. Other offshore hedge fund jurisdictions include: Bahamas, Bermuda, Nevis, Guernsey, Jersey, Dubai, among many others.
There are three main offshore hedge fund structures: single, side by side and master-feeder. The structure will be dictated in large part by the intent of the sponsor of the offshore fund.
Single fund structure – this is a structure which is geared primarily towards non-U.S. investors, and also potentially to U.S. based non-taxable investors (such as pensions and endowments). The sponsor and management company can be either U.S. based or offshore based, but most offshore stand alone fund structures are managed by offshore individuals.
Side by Side structure – in this structure a U.S. based (typical) investment manager will run two completely separate funds in the exact same manner. This means that the manager will form both a domestic and offshore hedge fund. This structure is often good for certain strategies such as a fund of funds strategy. It is not as good for other, trading intensive strategies simply because trade tickets are typically split between the domestic and offshore fund which creates administrative hassles.
Master-feeder structure – this is a very common structure which will have a domestic hedge fund “feeder,” an offshore hedge fund “feeder” and an offshore hedge fund “master.” In many cases the master-feeder structure is the preferable structure from an ease of administration point of view. However, please be aware that there are some accounting considerations which you should be aware of when establishing a master-feeder structure. In many instances this structure can be used to minimize tax impact on the investment manager – our firm has substantial experience with this structure and would be happy to help you think through the issues involved. Other law firms should also be able to help you use this structure to minimize tax impact to the manger.
Cayman Island hedge funds
Cayman is probably the most popular offshore jurisdiction and is viewed to be the pre-eminent offshore hedge fund jurisdiction. The Cayman Islands regulatory body is named the Cayman Islands Monetary Authority or CIMA. There are two types of offshore funds which can be structured in the Caymans: a registered or non-registered fund.
A Cayman hedge fund is required to register with CIMA if:
- The fund is open-ended and has more than 15 investors, OR
- The fund has 15 or less investors and those investors do not have the right to appoint or remove a director.
A fund would not need to be registered with CIMA if neither of the above items were applicable. Generally this will be the case for private equity funds and for offshore incubator hedge funds.
If the Cayman offshore fund is registered with CIMA, it will need to comply with the following requirements:
- payment of an up front and recurring annual fee of US$3048 to CIMA
- at least 2 directors who must be individuals (the directors do not need to be resident in the Caymans)
- an auditor who is situated in Cayman
- a minimum initial investment of US$100,000 or higher
If the fund is not CIMA registered, the fund will only need to have 2 directors.
It was recently released that Cayman Islands has over 10,000 offshore hedge funds registered with CIMA.
BVI hedge funds
[Information on the BVI will be coming soon!]
[Information on tax considerations will be coming soon!]