Offshore Investment Funds
Offshore Investment (Hedge) Funds
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 such as pension and endowment funds. The offshore hedge fund will generally be established in different jurisdictions through a variety of structures such as a single entity structure, a side by side structure or a master-feeder structure. If the major considerations for establishing an offshore hedge fund is tax efficiency, both the structure and jurisdiction should be discussed with your attorney.
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 is usually the tax considerations. The 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. Investors in the fund will generally be taxed in their country of residence on the income received from the fund. Another consideration will be the regulatory laws in place in the jurisdiction.
The two most common offshore jurisdictions are the Cayman Islands and the British Virgin Islands (BVI). In both the Cayman 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 to tax-exempt U.S. based investors such as pensions, charities 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, typically a U.S. based investment manager will run two completely separate funds in the exact same manner. 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,” anoffshore 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, there are several accounting considerations which you should be aware of when establishing a master-feeder structure.
Segregated Portfolio Companies
A segregated portfolio company (SPC) is a single entity structure which contains a series of segregated portfolios (sometimes referred to as “cells”), each of which is regarded as a separate legal entity for asset protection purposes. For offshore hedge funds, the segregated portfolio company is the functional equivalent to the domestic hedge fund series LLC.
Like traditional offshore hedge fund structures the offshore SPC will usually be established in a traditional offshore jurisdiction like the Cayman Islands or the British Virgin Islands. Other offshore jurisdictions include: Anguilla, Jersey and the Isle of Man.
Structure of offshore hedge funds in the SPC structure
There are two central structures where offshore hedge funds will use the segregated portfolio company structure: (1) with a single entity offshore hedge fund structure or (2) with a master-feeder offshore hedge fund structure.
Single Entity SPC Structure
The single entity offshore SPC structure is a relatively straightforward structure. This option would be best for an offshore hedge fund sponsor who is looking to have only offshore (non-U.S. investors) or U.S. tax-exempt investors.
Master-Feeder SPC Structure
The master-feeder SPC structure is a more complicated structure and is generally an option for those hedge fund sponsors who wish to market a fund “platform” to both U.S. and non-U.S. investors.
The master-feeder SPC can be structured in a number of different ways. Generally there will be (1) an offshore SPC master fund, (2) an offshore feeder level which may be comprised of individual funds or of another segregated portfolio company, and (3) a domestic feeder level which may be comprised of individual funds (established as limited partnerships or limited liability companies) or a series LLC. There are many considerations when determining the actual structure including costs, compliance and jurisdictional specific issues. Because of the complex legal, accounting and tax issues associated with both the single entity and master-feeder SPC structure, the actual structure will generally be solidified after consultation between the sponsor/manager, lawyer, accountant/administrator and auditor.
Segregated Portfolio Company Offering Documents
Like a traditional offshore hedge fund, the SPC will have the traditional offering documents:
• Offering memorandum or private placement memorandum
• Memorandum and Articles of Association
• Subscription Documents
There are two common ways of drafting an offering document. There are a couple of ways of drafting the offering documents. The first provides an offering memorandum which is shorter and includes a general description of the fund, the risks of the fund and a description segregated portfolios. This offering memorandum would not provide specifics of each program and instead a portfolio supplement will be provided with each offering memorandum. The supplement would provide greater detail of the individual portfolio investment program and the specific risks applicable to the program. The second would include all of the information on the fund as well as information on each investment program and their specific risks.