Offshore hedge funds differ very little from the standard hedge fund. The advantage of the offshore hedge fund is that it does not operate under United States law and is free of any taxes that would otherwise be due on profits. Most offshore hedge funds operate out of such exotic locales as the Cayman Islands or British Virgin Islands where there are regulations in place to assure the investor that the fund operator is indeed legitimate. Other popular places for offshore hedge funds to operate from include Dubai, Bermuda, and Bahamas. It could also be said that these types of investments also cater to the wealthier investor who might be found vacationing in these locations.
The offshore hedge fund investment vehicle is free from the limits of how many non-U.S. investors can come along for the ride. However, the fund’s securities transactions are still managed by a U.S. manager and take place on U.S. exchanges. But because its administration is conducted offshore, non-U.S. investors and such U.S. investors as pension funds aren’t subject to U.S. taxes.
In general the offshore hedge fund investor is willing to take a higher risk for a higher return on his money. Hedge funds are usually set up as private partnerships that are only open to a set number of investors. Usually they require a large minimum initial investment with the stipulation of no withdrawals from the fund for a set time, generally a period of one year. The manager generally receives a small percentage of the initial investment plus 20% of the returns. It is because of these stipulations that offshore hedge funds are seen as an investment only for the already wealthy.
Another characteristic of the offshore hedge fund because of their generally well-versed investors is that they are unregulated, in contrast to mutual funds. U.S. law requires that the most hedge fund investors be accredited, earning a minimum amount of money and having a net worth exceeding $1 million. Of course, the offshore hedge fund is open to more investors because of its exemption from those U.S. laws.
Historically hedge funds got their start in 1949 when Alfred Winslow Jones, a journalist studying investment, took and invested $40,000 of his own money along with that of other investors totaling approximately $100,000. His method of investing got the name, hedge fund, because they generally tried to hedge against the bear market’s downside risk. Presently it would not be accurate to say that offshore hedge funds hedge against risk as their manager’s use many different investment strategies. In fact, these investments generally carry more risk than other investments but also offer a greater reward in a shorter amount of time.