Offshore investors will prefer to invest into an offshore corporation. Most nonresident aliens (NRAs) are eligible investors. These are individuals who are both non-U.S. citizens and non-U.S. residents and who are generally present in the United States fewer than 180 days a year. Offshore funds are also attractive to tax-exempt investors, such as certain not-for-profit institutions and retirement funds.

  U.S. taxpayers generally prefer to be in a domestically organized vehicle that is a flow-through entity for tax purposes, such as a limited partnership or a limited liability corporation where the profits "flow through" to the investors, who are responsible for paying any taxes due. U.S. investors have been discouraged by their tax advisers’ form investing in offshore funds because of certain tax rules which are designed to minimize the benefits of tax deferral.

  Many investment fund managers want to know when the time is right to set up a hedge fund operation outside of the United States. Our response is usually a series of questions: Where are the client's investors coming from, where do they reside and what matters to them? What special needs might the trading strategy of the manager present? What needs might the investment fund manager have to establish an offshore fund?

  If, after careful analysis, it is determined that there is an investor base from non-U.S. sources and/or a potential investor group that is U.S.-based but of a tax-exempt nature, then forming an offshore hedge fund could be a good idea. Because of the complexity of the U.S. tax and securities laws, and in view of the many information-sharing treaties between the U.S. and other nations, it is fairly common to conclude that non-U.S. investors will not invest in hedge funds that are based in the United States. Such investors much prefer non-U.S. locales.

  Many investment fund managers do, in fact, maintain both U.S. and non-U.S. operations. Many U.S. based traders will set up an offshore fund to function as a counterpart with an identical investment strategy to its U.S. counterpart. In terms of day to day trading, the offshore fund trades in pari passu with domestic funds or accounts managed by the same trader. Some traders use a master feeder fund structure to simplify allocation and other trading issues. Given the global nature of the investment financial community, investment fund managers want to have both types of investment vehicles so that they attract all kinds of investment dollars

  Most offshore funds require a board of director, a fund manager, an administrator, and custodian. Directors can be the fund manager. Most OFCs allow for the directors to be anyone. Typically, an offshore fund enters into a contract with the fund manager, who may be based abroad or in the United States. If the fund is required to have a foreign based fund manager, the fund manager usually enters into a subcontract with a U.S. based trader to manage the fund. An offshore administrator usually handles the fund's day to day activities of operating the fund's bank account, issuing payment instructions, providing the net asset calculations, calculating management and performance fees, receiving and processing subscriptions, maintaining the shareholder register, preparing accounts, arranging payment of redemption proceeds, coordinating communications with shareholders, and overseeing anti money laundering compliance. Although all of these activities can be performed in the United States without triggering U.S. tax issues, many of these functions are still performed outside the United States.

British Virgin Islands www.bvi.gov.vg/

  More than 2,000 mutual funds worth an estimated $55bn are currently incorporated in the BVI, while several hedge funds are here. In all, 11 banks operate on the BVI, catering mainly for high net-worth wealth and trust management. The government launched new laws to placate the international community’s concerns over financial regulation.

Cayman Islands www.cayman.gov.ky

  The Cayman Islands is one of the world’s lowest tax domiciles with no personal or corporate taxes. Registering in the Cayman Islands does not involve much due diligence by the Cayman Islands Monetary Authority during the incorporation process, but is not necessarily cheaper or faster overall. Cayman does not require monthly reports or prior consent to change service providers, but before a fund can commence trading, it has to be registered with CIMA under the Mutual Funds Law (subject to some exceptions). This means identifying all service providers to the fund and providing certain information about the fund and the offering of its securities, and CIMA has to be notified of any subsequent changes. However, currently the Cayman Islands do not require a fund to file regular reports with CIMA.

Gibraltar www.fsc.gi/fsc/home.htm

  Gibraltar caters mainly to the banking, fiduciary and wealth management needs of southern Spain and Portugal. Gibraltar is a small jurisdiction (bank deposits total $3.5bn) and has no real fund management industry.

Guernsey www.gfsc.guernseyci.com