strad has the expertise to guide you through the process of establishing your offshore fund. we have extablished strong relationships with several different law firms in different jurisdiction to offer you the best service at an affordable price.
Hedge funds are set up as offshore or onshore funds to allow for different groups of investors. U.S. based hedge fund managers who have significant potential investors outside the United States and/or U.S. tax-exempt investors typically create offshore funds. Many hedge fund managers use offshore hedge funds to provide privacy to investors. In those cases where complete investor confidentiality and privacy are necessary, an offshore fund should not accept U.S. investors and the fund manager should not be based in the United States.
Confusing to some is the use of onshore and offshore funds in a master/feeder structure. The master/feeder structure allows a hedge fund manager to manage money for a broad spectrum of investors. The master fund, structured as an offshore corporation (but treated as a partnership for U.S. tax purposes via a “check-the-box” election), engages in all trading activity. A hedge fund manager will pool money and “feed” it in to a master fund and allocate trading gains and losses back to the onshore and offshore feeder funds based on the percentage assets under management in each feeder fund. A master/feeder structure typically includes (in addition to the master fund company) a U.S. limited partnership or limited liability company as the feeder fund for U.S. taxable investors and a foreign corporation as the offshore feeder for foreign investors and U.S. tax-exempt investors.
If U.S. taxable investors invest in or effectively control an offshore hedge fund, some complex U.S. tax rules applicable to controlled foreign corporations, foreign personal holding companies, or passive foreign investment companies (PFIC) need to be addressed. However, these rules are manageable when knowledgeable tax advisors are on board.
An offshore fund is set up outside of the United States in offshore financial centers (“OFC”) and is usually managed from a low or zero tax jurisdiction. OFC’s are countries that cater to the establishment and administration of mutual and hedge funds. Offshore funds generally attract the investment of U.S. tax-exempt entities, such as pension funds, charitable trusts, foundations, retirement plans and accounts, and endowments, as well as non-U.S. residents.
U.S. tax-exempt investors favor investments in offshore hedge funds because they may have exposure to U.S. taxation if they invest in U.S. based hedge funds. Under U.S. tax laws, a tax-exempt investor (such as an IRA, an ERISA-type retirement plan, a foundation, or an endowment) is liable for income tax on “unrelated business taxable income” (“UBTI”), notwithstanding its tax-exempt status. UBTI exposure exists when a U.S. tax-exempt investor invests in a hedge fund that uses leverage (e.g., trades on margin). The UBTI tax is avoided by investing in an offshore hedge fund. A U.S. based hedge fund manager should consider setting up an offshore fund if he or she manages money for foreign and/or U.S. tax-exempt investors.
For a new hedge fund manager who is a small operator and for whom the extra costs are a major burden, the best location to launch an offshore hedge fund or a master feeder fund is the British Virgin Islands (“BVI”). The BVI allows new hedge funds to start out as professional or private fund and then later upgrading to registered public fund status if necessary. Hedge fund attorneys in the BVI are familiar with hedge fund start-ups and will work with a new hedge fund manager. Related service providers (accountants, administrators, etc.) in the BVI are very reputable.
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