Why Start an Offshore Hedge Fund? The number of offshore hedge funds continues to increase in numbers. The term "offshore" means not in your home country and the term does not refer to any one country in particular. Hedge funds are set up offshore usually for tax neutrality and/or regulatory reasons. Fund sponsors often seek to organize funds in a jurisdiction that minimizes governmental regulation of the fund. Remember, if you are not based in the United States, the United States is "offshore" to you. The United States offers income tax and regulatory neutrality. Learn More About US Hedge Funds Foreign investors in a U.S. fund are subject to U.S. withholding (not income taxes) taxes on dividend and interest payments but not on trading profits. Hedge fund managers should consider setting up an offshore hedge fund if they expect to have investors from other countries or if their home country's laws are not geared toward the hedge fund industry. Learn More by Reading our Leading Media Articles
US Investors In Offshore Fund Have US investors in your offshore fund? It is perfectly legal for US investors to invest in an offshore fund and the tax issues are not that complex. The US investor has two options upon investing in an offshore fund (which is a PFIC (Passive Foreign Investment Company) for the US investor. One solution is that the US investor recognize income on an annual basis and the second solution is to defer the recognition of the income until the time of distribution from the fund. Each US investor can choose between solutions 1 and 2 but they make this election on their tax return in the initial year of the investment. This election can be changed only with respect to additional new capital contributions to the offshore fund. The first solution is available to the US investor only if your offshore fund provides a PFIC statement with the offshore fund's gain and loss information with respect to the US investor. If your fund does not provide this data, the US investor must rely on the second solution. It is more tax advantageous for US investors if you as the fund manager provide the US investor with a PFIC statement. If no PFIC Statement is provided the US investor is left with the second solution. In that case, the US investor is charged interest at the time of distribution from your fund for any distribution above their investment basis. This is why your offshore fund should issue a PFIC statement for US investors. The PFIC statement resembles a Form 1099 or a Form K-1 and provides the US investor with their pro rata share of fund income by category (i.e., interest, dividends, Long term capital gains, short term capital gains, etc.). The US investor can then recognize its annual income on its tax return just as if your offshore fund were a US fund. We prepare offshore fund PFIC statements and offer full fund administration services. Contact US For Assistance
Offshore Fund Structures If you expect to have only U.S. investors, set up a U.S. fund. However, if you anticipate significant participation by offshore investors and/or U.S. tax-exempt investors (IRAs, pension plans, endowments, etc.) an offshore fund may be more appropriate. In any event, anyone can invest in an offshore fund (i.e., it is a legal form of investment). Hedge funds are set up as offshore and/or onshore funds to allow for different groups of investors. Hedge fund managers who have significant potential investors from different countries create offshore funds to make it easier to blend their customer base. Many hedge fund managers use offshore hedge funds to provide financial privacy to investors. The major consideration for establishing an offshore hedge fund is regulatory efficiency. The majority of offshore hedge funds are established in low or zero tax jurisdictions (i.e., tax neutral countries with no entity level tax applied to hedge fund profits).
Closed-End Funds The purpose of these funds, which are registered as closed-end investment companies is to expose existing clients to a hedged investment product with a much lower minimum investment (often only $25,000 or $50,000) than a typical hedge fund
Fund-of-FundsA fund-of-funds is a private fund that invests some or all of its assets in other private funds. Fund-of-funds have become an important source of potential capital to private funds that do not have well-established distribution networks.
UBTI Blocker Funds Hedge fund managers expecting U.S. tax-exempt investors to invest in the fund (i.e., (such as an IRA, ERISA-type retirement plan, foundation, endowment, etc.) should set up an offshore hedge fund (i.e., a blocker entity) when margin trading is required to execute the hedge fund's trading program. The reason for this is the need for such tax-exempt investors to avoid unrelated business taxable income (UBTI) tax exposure. Under U.S. income tax laws, a tax-exempt organization (such as an ERISA plan, a foundation, or an endowment) engaging in an investment strategy that involves borrowing money is liable for income tax notwithstanding its tax-exempt status. The UBTI tax can be avoided by having the tax-exempt organization invest in non-U.S. corporate structures (i.e., offshore hedge funds). Learn More About U.S. and Offshore Tax Issues While the UBTI tax is a unique concern of U.S. tax law, similar laws in other countries encourage fund organizers to set up offshore funds. Awareness of the need for a UBTI blocker fund is useful to non U.S. fund managers seeking to create an offshore fund structure attractive to U.S. investors. While we are based in the United States we have a truly global focus. Contact Hedge Fund & International Tax Attorney Hannah Terhune for Assistance
Master Feeder Fund Structure A “master-feeder” group of funds involves one or more “feeder” funds that invest in a “master” fund. The master-feeder structure allows an adviser to sponsor multiple feeder funds, each with different sales charges, distribution channels and/or categories of eligible investors, while obtaining the benefits of diversification and economies of scale at the master fund level. Master-feeder structures are common for, among others, offshore funds where advisers seek to “co-brand” a feeder fund with various offshore distributors, especially when the adviser does not have a distribution channel or sufficient contacts to offer funds in certain offshore jurisdictions. The major characteristics of a master-feeder structure are:
The master fund and each feeder fund is organized as a separate legal entity.
Each feeder fund generally invests all of its investable assets in the master fund.
Interests in the master fund are sold privately to one or more feeder funds; the interests in the feeder funds are, in turn, sold privately to investors.
The portfolio management, fund accounting and custody functions of a traditional unregistered fund are performed at the master fund level.
The distribution, shareholder servicing and administration functions of a traditional unregistered fund are performed at the feeder fund level.
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
Offshore Limited Partnerships By dividing the functions of ownership and control, limited partnerships are very effective at protecting assets from seizure by creditors. Private equity funds with a limited number of investors will often make use of offshore limited partnerships. The offshore limited partnership vehicle is very popular among U.S. investors who tend to already be familiar with Delaware limited partnerships which the Cayman limited partnership structure is based on.
Offshore CompaniesThe vast majority of companies are incorporated with limited liability. Some companies may have more than one class of shares, which denote various fee structures and/or denote limitations on the types of investments some shareholders can make. There may also exist multiple series within each class of shares. Companies are the most common offshore vehicle for both open-end and closed-end funds.
Offshore Unit Trusts Formed under a trust deed, a unit trust is an unincorporated mutual fund structure. All unit trusts are open-ended. When investors in a unit trust add funds to their account, they are held by a trustee who has the option of acting as the custodian or selecting another custodian. Profits from these investments in the form of capital gains, interest, and dividends are paid out tax-free to investors rather than being reinvested back into the fund. Many offshore unit trusts act as “umbrella” trusts that encompass several smaller “sub-trusts” (or “series trusts”), each of which represents a single investor’s portfolio. The main “umbrella” unit trust must be carefully structured so that the assets and liabilities of each sub-trust are considered separate from the assets and liabilities of other sub-trusts. As an aside, holding units in a unit trust may be more attractive than holding shares in a company in some jurisdictions. It is possible that local regulations may not consider the units to be securities under their domestic securities laws.
Our Offshore Fund Services Include:
Consulting with and advising you on International legal and business matters (i.e., operative agreements among multiple hedge fund organizers, contractor agreements, algorithm licensing agreements, etc.) that apply to you, your intellectual property, the fund and your investment management company;
Advising on the proper fund structure, entity selection, and jurisdiction of formation.
Consulting, recommending, and linking managers to available third party legal counsel and service providers in the offshore jurisdictions.
Structuring hedge fund performance and management fees (plain vanilla & graduated rate fees) that are lawful;
Answering your fund and management company related questions;
Preparing the Private Placement Memorandum (PPM, Prospectus, etc.) in plain English while accurately and lawfully disclosing the fund’s investment terms, trading approach, and other relevant data from a legal and marketing standpoint;
Preparing the fund's constitutive documents (i.e., M&A and AA);;
Preparing the hedge fund Subscription Agreement;
Preparing the investment management agreement between the fund and the investment management company;
Forming the hedge fund and its management company;
Advising you on fund marketing, branding and operational issues;
Coordinating and arranging for the fund administrator, auditor, prime broker and other service providers; and
Advising you on capital raising issues, database listings, and resources related to finding investors for your hedge fund, and
Numerous other advisory services (i.e., capital introductions).
U.S. SEC Offshore AlertThe U.S. SEC's 134-page report published in 2003--The Implications of the Growth of Hedge Funds--presents the status of the hedge fund industry as viewed in the United States. What is interesting about this SEC Report is that articles and web content authored by our very own hedge fund attorney Hannah Terhune, JD, LLM (Taxation) (when she was the Chief and only Attorney at GreenCompany.com) on offshore hedge funds was cited on page 10 of the U.S. SEC Report as providing information the SEC Staff found to be valuable in its understanding of the hedge fund industry. For a decade, hedge fund attorney Hannah Terhune has been counted on by the U.S. government and hedge fund organizers worldwide as a source of cutting edge and practical information on hedge fund formations.
You will see from this web site that we supply more information about hedge funds than most books do on the subject. It's great to see that Hannah Terhune's expertise is appreciated by the SEC! This is quite a coup for Hannah, and provides one more piece of evidence as to how she can help you. You can reach her today at email@example.com or at +1 (307) 413-2212 or on Skype at: CapitalManagementServicesGroup.
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