November 25, 2002
NEW YORK - As mutual funds continue their struggles to retain assets, investors are looking for more beneficial ways to invest their money and have turned a gleaming eye towards hedge funds and offshore accounts. After all, these are two of the few areas left that have not already been saturated.
But there are many issues investors need to know before deciding whether to send their dollars across the sea, according to a recent conference hosted by The National Investment Company Service Association (NICSA).
As the bear market has weathered on, mutual funds have come under increased pressure. Competition has spread beyond the walls of mutual funds, spilling over into other investment vehicle areas. Investors who normally have gravitated to mutual funds have begun looking for alternative forms of investing, including offshore hedge funds, all in search of better returns than the abysmal mutual fund market has provided these past three years.
Hedge funds, favored by wealthy individuals and institutions, are allowed to use aggressive strategies generally not available to mutual funds, such as short selling (although recently some mutual funds have filed for permission to short; see MFMN 9/23/02), leverage, program trading, derivatives, arbitrage and swaps.
Financial professionals and investors looking into learning more about these options gathered here at The New York Athletic Club for NICSA's "Alternative Investments Conference" to discuss offshore hedge funds and other alternative investments.
There are many reasons why investors would choose to structure a hedge fund offshore, according to the panel, including the tax of the entity and its government and regulations. There are also commercial considerations, most notably marketing.
The offshore fund administration environment is changing rapidly, according to NICSA, and the panel was arranged to discuss regulatory issues in Bermuda, Cayman, Dublin and other foreign locations.
From an investor's standpoint, investing in one of these funds is not as simple as choosing a familiar hedge fund here in the States. For a fund complex, there are a large number of factors to be taken into account when deciding whether or not to settle on an offshore fund. The panel said potential investors should ask the domicile whether the fund will be regulated and whether or not there are any exemptions. It is also important to find out whether the fund will go through a discretionary application procedure and whether or not approval is needed before the entity is formed.
Being that the fund is in a different country, there may be different laws that are applicable to the fund. An investor should find out whether they have to go back to regulators for approval when they want to make changes to the structure of the fund. They should also learn what the ongoing reporting requirements of the fund are and whether or not there are mandatory rules concerning the content of offering documents.
What are the investment restrictions. if any, and what are the fixed costs? The panelists also said that it is important to understand whether there are mandatory rules concerning service providers and whether or not the funds will be required to use local service providers. If so, how expensive and experienced are these service providers?
Other important factors include whether or not the fund has to use local directors or has any taxes or exchange controls. Does the fund have to return money to the investor if the fund has an unsuccessful launch? What is a realistic lead-in time? What types of entities are available, and can they accommodate the specific structural requirements? Where can the managers market the fund and must it be domiciled in that jurisdiction?
There are many popular hotspots for offshore hedge fund investing including Bermuda, the British Virgin Islands, the Channel Islands, but by far the most popular is the Cayman Islands, according to members of the panel.
Adrian Pope, a panel member and a partner at Maples & Calder, Cayman Islands, said that some estimates put offshore hedge funds located in the Cayman Islands at 90%.
Other panel members included moderator Jude Scott, a partner at Ernst & Young, Cayman Islands; Gene Mannella, president of International Fund Services of New York, and Jeffrey Blumberg of Gardner, Carton & Douglas of Chicago.