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Offshore Funds Swim Into Mainstream


Say "offshore account" and many people conjure up images of shady characters hauling duffle bags of cash off to the bank to be laundered.

Hollywood stereotypes notwithstanding, the number of offshore funds and the assets held in those funds has risen sharply in recent years and offshore investing is becoming more popular with investors seeking tax shelter, asset protection and access to international investments, according to a recent report issued by Cerulli Associates.

Offshore centers hold approximately 20% of cross-border funds, amounting to $1.7 trillion in assets, according to the report. Moreover, technology has made investing offshore as easy as logging on to a Web site or making a phone call, which may explain why the number of offshore centers has increased in recent years.

There are now 40 offshore centers holding a total of 7,076 funds as of June, a significant increase from recent years, according to the report.

Changing Stereo Types

Since 1998, a task force has been working to reduce the occurrence of money laundering. The task force, which was organized by the G7 and the European Commission, publishes a list of those countries that are considered non-cooperative in those efforts. Additionally, the G7 Financial Stability Forum is encouraging offshore fund centers to improve their adoption of relevant international standards.

And the negative stereotypes may be changing. Offshore investments have come under greater scrutiny by the Financial Task Force on Money Laundering and the Paris-based Organisation for Economic Co-operation and Development, according to the report.

By encouraging greater disclosure of client information, offshore regulatory agencies will encourage offshore centers to conduct greater due diligence into their clients, increasing the industry's overall credibility, the report says.

Those efforts are opening new markets to investors who may have been hesitant to invest in offshore funds. They may now feel more comfortable placing their money in offshore funds, the report says.

The growing popularity of offshore investing prompted Enterprise Capital Mgt. to launch eight offshore funds last month. (See MFMN 7/17/01) The firm has domiciled eight clones of its U.S. funds in Dublin and will begin offering them throughout Europe, said Enterprise CEO Victor Ugolyn. Ultimately, the firm will offer the funds in Latin America and Asia, he said.

Another incentive for U.S. fund companies to offer offshore funds is the attraction the highly prized high-net-worth market both here and abroad has for such products. U.S. investors are allowed to establish accounts in any country. While it is a false assumption, many investors feel that they don't have to pay U.S. taxes on such accounts.

But certain offshore accounts, called asset-protection trusts, are perfectly legal in the U.S. and protect high-net-worth investors' assets from creditors and lawsuits.

Factors that will serve to drive more foreign investors to offshore products include economic and political instability, globalization and deregulation. Increased taxes will also prompt investors in some countries to seek shelter in an offshore fund, the report says.

As offshore assets increase, the number of offshore funds offered to investors are likely to increase, according to the study. The growth of funds will also be spurred on by the development of the economic and monetary union in Europe.