Unlike mutual funds, which are narrowly defined in their investing strategies, hedge funds can seek large gains through a broad array of investments — everything from buying stocks and bonds to dealing in commodities, currencies and emerging-market debt. They are bound by far fewer disclosure rules than mutual funds and enjoy much looser constraints when it comes to trading techniques such as short selling (a method of profiting from a declining stock) and borrowing money to seek higher returns.
Because they are much less regulated and carry more risk, they are open only to accredited investors — pension and endowment funds, and individuals with more than $1 million in assets or incomes of more than $200,000.
Hedge funds that incorporate themselves offshore — as Fortress did in the Caymans — are attractive tax havens for wealthy investors. Certain U.S.-based pensions and endowments, as well as all foreigners who invest in such funds, are exempt from having to pay U.S. taxes on their capital gains. Offshore hedge funds allow such investors to take advantage of U.S. investments and expertise without having to pay taxes, and the firms get huge infusions of foreign capital that otherwise wouldn’t be invested in U.S. markets because of the tax consequences.
