Investment Vehicles made for Non-US Investors
What is an Offshore Fund
Offshore funds are investment funds that are set up in tax-neutral locations that allow non-US persons and non-taxable US entities to invest in US assets without having to pay certain US taxes. Domestic, US-based hedge and private equity funds are typically set up as a partnership, whereas offshore funds are typically set up as a company. A company differs from a partnership in that it issues shares to its investors, has a board of directors, holds annual meetings, and delegates certain duties and authority to affiliates, such as an investment management company. Offshore funds are subject to the laws and rules of the jurisdiction in which it is formed and must remain in compliance to avoid penalties, fees, and other possible actions. Common places to set up an offshore fund include Cayman Islands, British Virgin Islands, Bermuda, Cyprus, Luxembourg, Anguilla, Belize, Panama, and more.
Offshore Fund Structure
Offshore fund structures are created to maximize tax advantages and efficiencies that will allow the fund manager to employ specific strategies that will benefit the fund and its investors. Offshore funds are typically set up as a master-feeder structure, mini-master structure, or side-by-side structure.
The master-feeder structure generally has two separate feeder funds that are designed to accept capital contributions from investors and feed them directly to the master fund, where all trading, purchasing and selling of assets and securities will take place. One feeder is designed as a US-based fund (specifically for US taxable persons), while the other will be an offshore feeder (specifically for non-US persons and non-taxable US persons). The master fund is typically set up in the offshore jurisdiction according to that country's laws. Depending on the jurisdiction of the offshore fund, the laws may be more advantageous to set the fund up as a corporation or as a partnership. Most Cayman Islands and British Virgin Islands funds are set up as corporations that will require specific compliance issues to be met prior to formation and while in operation of the fund.
A mini-master fund structure is slightly less complex but is generally only used in limited circumstances. This fund structure is similar to the master-feeder, but has no domestic feeder fund in place. Some tax advantages may be available in certain situations under the mini-master fund structure and it would be best to contact legal and tax professionals to find out if this structure would be right for you.
A side-by-side structure is designed to keep US investors and non-US investors separate from each other entirely. The US investors would invest in a domestic fund and the non-US investors would invest in a separate offshore fund. Some advantages may be that the domestic fund can have its own strategies, fiscal year, withdraw and distribution dates, fees, lock-ups, and other terms that the offshore fund doesn't share. Some disadvantages are that each fund will need its own administration, accounting, auditing and other services. Some managers find the work of a side-by-side fund structure to be overwhelming or too burdensome at times and instead, opt for a master-feeder structure to accommodate their non-US and non-taxable investors.