The Different Structures of Offshore Hedge Funds

Offshore investments have attracted millions of investors over the years because the assets can be an effective means to capitalize on their funds. As Scott Tominaga explains, offshore investments are made in foreign countries or locations outside the national boundaries.

Offshore hedge funds are an investment vehicle that has attracted and intrigued many individual and institutional investors. The asset engages in the trading of relatively liquid assets using a pool of money collected from various investors. While most fund managers invest in onshore funds, some look for offshore funds for various reasons, including tax exemptions, an increased level of anonymity, and the potential to work with a master-feeder fund structure.

On the offshore front, there are three primary vehicles or structures of hedge funds.

Offshore Companies

Companies are the most common offshore vehicle for hedge funds. Scott Tominaga points out this rings true for both open-end and closed-end funds. Open-end funds are those that do not have a fixed number of shares. Closed-end funds, meanwhile, have a fixed number of shares wherein current investors can sell shares to incoming investors and acquire new shares from investors exiting the fund.

Offshore Unit Trusts

The second structure is the offshore unit trust, an unincorporated mutual fund formed under a trust deed. Unlike offshore companies, all offshore unit trusts stand as open-ended. Assets typically held by an offshore unit trust are property, securities, mortgages, and cash equivalents. There are several reasons offshore unit trusts have become the choice of hedge funds managers, such as favorable tax treatment, relatively low yearly operating expenses, and cheaper options.

Offshore Limited Partnerships

A limited partnership is a partnership structure that limits the personal liability of some of the partners. Because the functions of ownership and control are divided into at least one general partner and a limited partner, assets can be better protected from seizure by creditors. For this reason, some hedge fund managers prefer to invest in offshore limited partnerships. In addition, equity funds that have a limited number of investors can take advantage of offshore limited partnerships.

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