Offshore Hedge Fund

US hedge fund investors that are subject to US taxation often operate under a US based Limited Partnership or Limited Liability Company. In many cases these are organized in Delaware. Hedge Fund management is comprised of LLC’s (or other entities) that serve as the general partner of the Limited Partnership. The investors are limited partners. Limited partners do not participate in the day-to-day management of the partnership and have little or no control; however they do participate in the entity’s gains, losses, expenses and income based on their capital account balances.

Offshore Hedge Fund Strategy

In order to manage money for both US and Non-US investors, hedge fund managers will often create separate entities in separate jurisdictions; a US-based limited partnership and an offshore fund for foreign investors. This helps to ensure preferable tax treatment for both groups.

There is a way to simplify the arrangement, since the above setup leaves the hedge fund manager balancing two separate portfolios where performance and trade allocation equality is expected for these separate entities. The solution to this complexity is implementing what is commonly referred to as a "master-feeder". This involves setting up 3 separate entities in a format where there are 2 “feeder funds” that forward money to the master fund. Feeder funds are comprised of a US based entity and an offshore based entity, one for domestic investors and the other for foreign investors.

With this format, the entire investment is managed in the master fund. The master fund is where the investments are consolidated. An added benefit to the offshore feeder is the ability to defer fees, through the US based hedge fund manager.

In some cases the hedge fund can leverage activities in order to avoid taxable unrelated business income (UBI). This is why US tax-exempt investors – such as retirement plans - often prefer offshore hedge funds. Investors that seek out offshore solutions are typically seeking to legally avoid tax liability on their investment earnings while lawfully obeying IRS reporting requirements. Dividends, rents, royalties, interest and other fixed annual or periodical income require foreign investors in U.S-based funds to withhold approximately 30% tax on the gross amount of positive economic activity. With the above arrangements, one may legally avoid the withholding requirement. Check with a knowlegable, licensed tax advisor.

Offshore Hedge Fund Start Up

You can start your own offshore hedge fund through a number of formats and quite possibly will consist of US-based entities, offshore-based entities and bank accounts in foreign jurisdiction. Another solution is to open your own bank. Yes you read that correctly, you can own your own bank that offers investment services in the form of hedge funds, or in this case, an offshore hedge fund.

To speak with an Offshore Hedge Fund or Bank Formation specialist, call 800-959-8819 or 661-253-3303 anytime between 8AM and 5PM Mon-Fri Pacific Time