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Offshore Investment Funds

Quite similar to the reasons that influenced the expansion of local businesses and trade across borders, local investment funds broadened their scope to include foreign territories. As such, along with increased globalization and constant growth of the financial services industry, offshore investment funds have become one of the many offshore investment methods applied by private individuals, groups and companies to save on taxes, accumulate wealth and ensure its continuity. In addition to offshore bank accounts and offshore companies, therefore, offshore investment funds are being constantly used by investors who wish to diversify their investment strategy, tap into new ways of maximizing their dollars, legally controlling the tax burden and achieving an acceptable degree of privacy when handling their affairs.

Individuals who are inconversant or inexperienced with offshore investment funds or are tied to a job or profession may usually hire someone to manage their offshore investment affairs. These people may also find it difficult to access sufficient investment opportunities on their own and therefore may form a group to pool their resources or assets in order to create an offshore investment fund or collective investment scheme. This makes it possible to distribute the costs associated with investments, making the venture much more affordable than if expenses were to be borne by a single person.

Mutual funds, exchange-traded funds and unit investment trusts are the main forms that an offshore investment fund may take. As offshore investment funds, mutual funds can be structured differently and designed to correspond with the investment objectives and methodologies of its participants. Consequently, offshore mutual funds can be organised as stock funds (e.g., global equity funds, growth and income funds, precious metal or gold funs and income equity funds to name a few), bond and income funds (e.g., income-mixed funds, GNMA funds, balanced funds, government income funds, corporate bond funds, high-yield funds, to name a few) and money market funds (e.g., tax-exempt state, taxable or tax-exempt national market funds). The option usually exists to establish this type of offshore investment fund as a managed or indexed fund but all funds are required to comply with the regulations established in whichever jurisdiction they operate.

Offshore mutual funds are very popular especially in territories like the Cayman Islands where the Mutual Funds Law was enacted in1993 and then revised in 2003. In the Cayman Islands offshore investment funds that qualify as mutual funds are required to be registered if the investment of each investor sums up to about USD49,000 at least, and if the fund does not hold a license an authorised mutual fund manager must be appointed; giving rise to three main categories of offshore mutual funds, namely licensed mutual funds, administered mutual funds and registered mutual funds.

Depending on the type of structure that the participants wish to have for their offshore investment fund, a mutual fund can be setup as a part of a side by side or master feeder entity with a single or several funds that are based in the participants’ country of domicile. Or, tax exempt companies and limited partnerships that purchase or redeem their own shares are able to flexibly function as open or close-ended corporate funds.

The offshore exchange-traded fund or exchange-traded product is another type of offshore investment fund. Stocks and bonds are the assets placed in this investment fund and are traded on the stock exchange at a price that is almost equivalent to the net value of the actual assets. Stocks and bonds held in an offshore exchange-traded fund are usually traded in kind with groups of securities presented as single units by large organisations that pool significant amounts of funds for investment. The valuation features of either a mutual fund or a unit investment fund can be integrated into this type offshore investment fund.

The third type of offshore investment fund, the offshore unit investment trusts, has become very popular offshore investment funds. Like the mutual fund and exchange traded fund, an offshore investor should first know what he wants and if uncertain or unfamiliar with these types of investment funds should seek professional advice. Offshore unit investment trusts are arranged by sponsors and traded through brokers.

The securities held in this type of offshore investment fund are unmanaged, meaning that they belong to a portfolio that is fixed despite being composed of various securities. Though different types of offshore unit investment trusts can be setup as offshore investment funds, stock and bond trusts are the most commonly used. This offshore investment fund differs from the mutual fund in that the former operates under more restrictions and may therefore be less flexible. For instance, offshore unit invest trusts usually have a limited life since they are established for a fixed duration and there are defined conditions under which securities can be traded.

To conclude, offshore investment funds operate using the same principle as local funds. Investors pool their assets and with the guidance of a fund manager or administrator pursue investment interests. Once an investment fund has been duly registered and established in an offshore jurisdiction, such fund automatically becomes an offshore investment fund, and is able to produce the tax and profitable benefits promised if managed skilfully. Although offshore investment funds are tax exempt, the investors may be subject to tax depending on their country of domicile, such as in the US or EU where taxes are levied on international income, including dividends and interests earned on personal offshore bank accounts and investments.

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