When a hedge fund is going to be managed outside of the US, it is usually setup as a corporation that is in a tax haven, like the Virgin Islands, Cayman Islands, Bermuda, or Ireland. The country that is chosen to house the offshore hedge fund typically depends on where the people investing live at and what type of entity they want to setup. Other things that are considered when choosing a location include things like regulations and expenses. The Cayman Islands, for example, have decent regulation system set up strictly for creating and keeping up an investment fund, but it is more expensive to maintain a fund there. The Virgin Islands are cheaper the Cayman Islands, but their regulation system is not as all encompassing though.
When an offshore hedge fund is set up, the hedge fund manager will usually create a corporate company that provides the fund with advice. This corporate entity will also usually serve the purposes of the investment manager of the hedge fund as well. If the actual hedge fund manager is already tasked with overseeing the assets of a domestic partnership via a sole corporate entity, then the partnership's general partner can also be tasked with overseeing the offshore fund operations. If the assets of a partnership are being managed via two corporate entities, the one that is tasked with serving the domestic partnership as its management company will also be tasked with serving as the hedge fund's investment manager.
Companies in the United States that have a tax exempt status usually find offshore funds to be attractive. These companies may use an offshore hedge fund for the purposes of single retirement accounts, profit sharing trusts, and qualified pensions to keep from having to pay taxable income that is not related to the business. When an investor from the US with a tax exemption purchases a stake in a domestic partnership, their debt financed may find itself being faced with income taxes.
With an offshore hedge fund, when a company that is tax exempt buys interest in a limited partnership that then buys company stock and it finances half of that purchase with debt and then sells the stock for a gain, then they have an income that is not business related and is thus taxable. The company's 50 percent gain balances out the 50 percent of the share of its cost in net interest. When a company that has a tax exempt status makes more than $1,000 then it must file a tax return and pay taxes on any money over that amount.
Next: Compensation to a Hedge Fund Manager - What They Make and How They Do It ››
