OFFSHORE HEDGE FUND - WHERE IS IT BETTER TO REGISTER?
How to properly create a hedge fund, where is the best place to register a hedge fund, a hedge fund in Europe or a hedge fund offshore - you will find answers to all these and other questions on this page.
Creating your own investment fund is a very attractive opportunity for business development on an international scale.
For decades in a row, hedge funds have been the best tool for generating high income.
If you decide to open your own investment fund, the first thing we recommend doing is to objectively assess your capabilities.
Despite the fact that the best jurisdictions for registering investment funds (hedge funds) abroad are offshore (Cayman Islands, Bahamas, British Virgin Islands), the activities of funds even in offshore zones are subject to strict government regulation and control.
Market-neutral securities hedging strategy
This hedge fund strategy involves investing equally in long and short portfolios of stocks, usually in similar sectors of the market. Market risk is greatly reduced, but the need to effectively analyze and select the right stocks to obtain acceptable returns increases. Leverage can also be used to improve profitability. Funds typically have little or no correlation with market trends. Such a hedge fund may sometimes use index futures to hedge systematic (market) risk. The Treasury Bill Index is usually used as a relative benchmark. Volatility with this strategy is usually very low.
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Below on this page you will find links to articles that describe the conditions for registering hedge funds in each of these jurisdictions.
Publications you may be interested in:
1. Where to register hedge funds?
2. Hedge funds in Europe. Malta
First, you need to understand what a “hedge fund” is.
A hedge fund is an actively managed investment pool, subject to regulation and managed by a professional manager for absolute return purposes, with a unique asset management fee structure.
The prefix “hedge” translated from the original language means “insurance”.
In the classical sense, “ Hedging ” is one of the main elements of hedge funds and their most important function, which involves protecting against the risks of losing assets using various investment strategies and financial instruments.
Thus, the fund builds its activities through general coverage of financial risks.
All that is needed to establish a fund and generate income is an investment that, thanks to the preferential offshore tax regime, will be quite profitable if properly managed.
Flexible approach
Investment targets and strategy change depending on emerging profit opportunities from events such as IPOs; sudden price changes, often caused by temporary market disappointment; hostile bids and other hedge fund-controlled opportunities. Such a hedge fund can pursue multiple investment styles simultaneously and is not limited to any particular investment approach or asset class. Due to the flexibility of the strategy itself, expected volatility cannot be estimated and can vary significantly from low to very high.
Is it better to create a hedge fund in Europe or offshore?
When creating a hedge fund in Europe, you are immediately faced with high tax rates, strict regulatory requirements, as well as high requirements for authorized capital (1,000,000 euros).
That is why the founders of investment funds often prefer financial centers such as the Cayman Islands, British Virgin Islands or a fund in the Bahamas, where financial losses will be minimal and the conditions for creation are loyal.
Offshore business centers are attractive for foreign investment due to the provision of special tax and other types of benefits, reducing or completely eliminating taxation of income of foreign companies established at the location of the offshore center.
Aggressive growth
Invests in stocks that are expected to experience strong acceleration in earnings per share growth. Typically, fast growth is expected for stocks with high and low price/earnings ratios, or no dividend payments at all; Shares of companies with small or micro capitalization also often rise. Such a fund usually invests in the banking sector, the development of new technologies or biotechnology. This strategy involves hedging by shorting (opening short positions in stocks) in anticipation of a decrease in income, or opening short positions in stock indices. Such a fund usually involves long-term investments and is characterized by high volatility.
In which jurisdictions is it better to create a hedge fund?
As already written above, currently the most comfortable offshore jurisdictions for creating hedge funds are the Cayman Islands, the Bahamas and the British Virgin Islands
Other offshore zones where you can register hedge funds with a minimal or zero tax rate are Jersey , Belize , Bermuda, Uruguay .
Below we give several characteristics of the group's funds: Cayman Islands, Bahamas and British Virgin Islands.
In the British Virgin Islands, funds are divided into private, professional and public, in the Cayman Islands - private and regulated, in Bermuda - standard, institutional and recognized schemes, and in Mauritius there is no division of investment companies into categories.
The BVI offers three types of mutual funds: Private fund, Professional fund and Public fund. Unlike the Cayman Islands, the BVI does not recognize its funds as “exempted”. Up to fifty investors are allowed here.
The British Virgin Islands offers one of the best, most respected financial sectors not only in the Caribbean, but throughout the world. Since the passage of the Business Companies Act in 2004, more than half a million businesses have been registered on the island. The British Virgin Islands has a good reputation in the financial community and a place on the OECD "white list" of countries. The BVI is an excellent alternative for registering a fund.
Different countries have different requirements for the location of the fund at the place of its registration.
For example, the laws of the Virgin Islands and the Cayman Islands allow the transfer of the fund’s activities outside the country. In Mauritius, on the contrary, the fund must carry out the bulk of its work locally: the appointment of local directors, administrators, custodians and auditors and other fund participants is mandatory.
The Cayman Islands offers four types of mutual funds: Exempted fund, Registered fund, Administered fund and Licensed fund. In the Cayman Islands, tax-exempt funds cannot have more than fifteen investors. The Cayman Islands have their own stock exchanges, but the BVI does not have stock exchanges.
Purchase of distressed securities
A hedge fund purchases equity (such as shares), debt, or trade claims (accounts receivable) at a significant discount from companies undergoing bankruptcy or reorganization. The gain arises because the market underestimates the true value of heavily discounted securities and because most institutional investors are unable to purchase/hold securities rated below investment grade. Typically, it is the massive sale of such securities by institutional investors that creates a significant discount. The financial results of such a hedge fund do not depend at all on market trends, and volatility is usually low or moderate.
Hedge fund license
An investment fund is a regulated and licensed structure. In reality, in most offshore zones, it is not the fund itself that is regulated, but its manager (manager). Typically, a fund manager must obtain a license or other authorization to operate in the fund's country of incorporation. At the same time, the manager is responsible to investors for the correct investment of the fund’s funds, and therefore must exercise personal control over its investment activities.
It should be borne in mind that obtaining a license for an investment fund is not a formal procedure; it is a complex and time-consuming process that will require careful preparation of documents. When creating an investment fund, nominee service is unacceptable. The fund manager must have the appropriate education, must have qualifications, experience and have all the documents and recommendations confirming this.
Even in offshore zones, obtaining a license for a person who is not an active fund management professional is almost impossible.
When creating its own management company, the licensing authority imposes similar requirements on the qualifications and reputation of its officials. To obtain a license, it is also necessary to confirm the financial status and origin of funds. Thus, one of the most important issues that must be resolved when creating a fund is the issue of management.
Based on the list of jurisdictions analyzed above, we can conclude that the Caribbean is the most popular and attractive territory for registering hedge funds in offshore zones.
However, customer requirements are always individual. Therefore, only after communicating with the client can we recommend the jurisdiction for creating the fund.
If you are interested in creating a foundation, we offer you our professional services for incorporation of a local company and obtaining a foundation license.
We will offer you a large selection of countries where we have experience: Bahamas, Cayman Islands, British Virgin Islands, Jersey, Malta, Luxembourg.
For more than five years, we have been advising our clients, residents of the CIS, in the field of corporate law, international tax planning, finance, international licensing and comprehensive business support in more than 40 countries.
Multi strategy
The investment approach is based on diversification - using different strategies simultaneously to make a profit in the short and long term. Other strategies may include the use of trading systems such as trend following, and various diversified strategies based on technical analysis. This style of investing allows the manager to vary the weighting of different strategies to extract maximum capitalization from available investment opportunities. The ability to use different strategies does not allow us to predict the future volatility of such a fund.
