|
A domestic
hedge fund is one that is organized within the United States. If the
fund is organized in the U.S., all U.S. laws will apply. Domestic
hedge funds are engineered to cater to U.S. investors who are liable
for paying income taxes. They are structured as limited partnerships,
with the general partner being the portfolio manager, and the qualified clients as the limited partners.
Offshore
Hedge Funds
Funds structured under foreign law, or located outside the U.S. are designated
as “offshore
hedge funds”. The advantage of an offshore
hedge fund is that the investors in the fund are not subject to United
States taxation. Hedge
fund managers typically launch offshore
funds in the Caribbean, however a European/Asian offshore fund may
be appropriate if a compelling number of investors are involved. Offshore
Hedge Funds are not registered in the United States or with the SEC,
and therefore provide privacy benefits as well as tax advantages. These
offshore
hedge funds are not subject to U.S. income on distributions received
from the fund or to U.S. estate taxes on fund shares. Generally, offshore
hedge funds are exempt from withholding taxes because the funds are
located outside the United States. A lucrative reason for being offshore
is that gains are either untaxed or very lightly taxed in the country
where they were originated. With respect to the tax implications for the
hedge
fund manager, the manager may want the offshore
fund to allow deferral of management and incentive fees. This will
allow the manager to defer his or her fees for a specified period and
allow them to accrue with the fund on a tax-deferred basis.
Because of the nature of the U.S. tax and securities laws, it is easy
to discern that non-U.S. investors will not invest in hedge
funds that are based in the United States. Many hedge
fund managers do maintain both U.S. and non-U.S. components. Given
the global complexity of the investment community, hedge
fund managers want to have both types of investment vehicles so that
they attract all kinds of investment dollars. The laws and regulations
of the United States are directed not just to limiting the behavior of
its citizens, but also to preventing money-laundering and other improper
uses of offshore
investment vehicles.
Related Reading:
 What
is a Hedge Fund?
Timing
and Your Investment Decisions Revised
Hedge
Fund Performance
Hedge
Fund Managers
|
