Establish An Offshore Hedge Fund

Incubator Fund: The Incubator fund is the ideal vehicle for starting a new hedge fund with minimal assets and/or a small number of investors, to establish a track record or to test a new investment strategy. An Incubator fund may operate for a specific period of time (2-3 years) to allow the manager to establish a track record and/or accept additional investments and then upgrade to a permanent fund type. The specific requirements and restrictions of an Incubator fund are as follows:

• Maximum of 20 investors. (see guidelines below)
• Each investor must invest at least $20,000.
• Total capital under management cannot exceed $20M.(see guidelines below)
• Investors must be presented with a written description of the investment strategy including an outline of the risks.
• The fund can be set up in a matter of months and does not require an offering memorandum or licensed functionaries (licensed fund managers, investment managers, administrators, auditors, etc.).
• Minimal set up and annual renewal costs.
• The Fund must designate a Legal Advisor. The Legal Advisor is an attorney or law firm who can give legal advice to the principals of the Fund. This is NOT an attorney or law firm in the British Virgin Islands. The intent of the legal advisor requirement is that the principals of the fund – the clients have who have established and are operating the fund - have local counsel in their home country (for example if the clients are located in the USA they would need an American attorney, if the clients are located in Brazil they would need a Brazilian attorney) who can advise them on local legal issues that may apply to them. These legal issues could include regulations or restrictions for taking on local investors, general regulatory issues, securities laws, etc.
• The fund must have 2 directors. The first director is usually the client and the second is a business partner (the second director cannot be a spouse or relative).
• The fund is licensed to operate for 2 years (with a possible 1-year extension).
• The fund may be upgraded to any of the fund types listed below (more detailed information about these fund types follows) prior to the end of the 2-year period if the fund manager wants to increase funds under management or take on additional investors.
• Once the 2-year mark is reached the fund may receive an additional 1-year extension or be upgraded to one of the following fund types that may operate into perpetuity:

• Approved fund – A maximum of 20 investors, no minimum investment requirement and maximum capital of $100M. (See additional info on Approved funds below)
• Professional fund - Only for sophisticated investors who are either employees of the fund or who have a net worth of $1M and invest at least $100,000. No maximum capital.
• Private fund – A maximum of 50 investors, no maximum capital.

Approved Fund: The Approved fund is the ideal offshore investment vehicle for a family office or a small group of investors such as an investment club. It is similar to an Incubator fund but allows for significantly more capital. The specific requirements and restrictions of an Approved fund are as follows:

• Maximum of 20 investors. (see guidelines below)
• Total capital under management cannot exceed $100M. (see guidelines below)
• No minimum investment amount for investors.
• The fund can be set up in a matter of months and does not require an offering memorandum or licensed functionaries (licensed investment managers, auditors, etc.).
• Minimal set up and annual renewal costs.
• The Fund must designate a Legal Advisor. The Legal Advisor is an attorney or law firm who can give legal advice to the principals of the Fund. This is NOT an attorney or law firm in the British Virgin Islands. The intent of the legal advisor requirement is that the principals of the fund – the clients have who have established and are operating the fund - have local counsel in their home country (for example if the clients are located in the USA they would need an American attorney, if the clients are located in Brazil they would need a Brazilian attorney) who can advise them on local legal issues that may apply to them. These legal issues could include regulations or restrictions for taking on local investors, general regulatory issues, securities laws, etc.
• The fund must have 2 directors. The first director is usually the client and the second is a business partner (the second director cannot be a spouse or relative).
• Must have a "Fund Administrator". The Fund Administrator is essentially an accountant for the fund. The Fund Administrator’s role is to verify the finances of the fund. Specifically, he calculates the fund’s Net Asset Value (NAV), the value of the fund’s operating capital, the value of client investments (individual and collective), makes sure that investment purchases and sales are properly accounted for, that the fund's operating cash is separate from investor’s cash, etc. etc. The Fund Administrator is there to provide financial accountability and to make sure that if something were to happen to the principals of the fund that investors can get their money back.

• There is no licensing requirement for the Fund Administrator, but the Fund Administrator is usually an accountant or consulting firm with investment and/or private fund accounting expertise.
• The Fund Administrator must be a separate individual or company from the 2 directors of the fund.
• The Fund Administrator does not have to be licensed or located in the BVI.
• HFS can refer clients to independent Fund Administrators or clients may use a CPA or attorney or consulting firm of their choice that is familiar with accounting for funds

• An Approved fund may be upgraded to any of the "Recognized" funds listed below if the manager wants to increase funds under management or take on additional investors.

• Professional Fund: This fund is designed for sophisticated investors. Investors must either be "professional" investors with a net worth of $1 million and must invest a minimum of $100,000. Or an investor must be an "Exempt" investor, meaning a fund employee, manager, administrator, promoter or underwriter. For "Exempt" investors, who are assumed to be knowledgeable and sophisticated concerning investments, there is no net worth or minimum investment requirement.
• Private Fund: This fund is designed for a small to medium size number of private investors. There is no limit on the total capital the fund can manage, which is true of all "Recognized" funds. But the fund is limited to either a total of 50 investors or to bringing on new investors only through private means (i.e. no public advertising).
• Public Fund: This fund is designed primarily for established fund managers who wish to create an offshore fund through which they may publically solicit an unlimited number of investors and capital. A Public fund may advertise publicly and has no capital or investor restrictions or minimums.

To establish a new offshore hedge fund, we, the client and HFS, work through a series of steps. Those steps begin with a simple order form and end with a fully formed and capitalized fund.

Step 1: Download, complete and return the Fund Order Form. Please include two choices for the name of the fund as well as the names and contact details of at least two principals.

Step 2: After we receive the order form, we will check the fund names in the BVI and advise on which is available. Next, we will request a complete due diligence set from each principal of the fund and any major partners (there must be at least two individuals/partners for an Incubator or Approved Fund). The due diligence documents consist of a copy of a passport, proof of address such as a utility bill and a CV/resume.

Due Diligence Requirements and Considerations

The primary due diligence issues that the BVI licensors will look at is not the passport or utility bills, those are just formalities. The primary area of concern is that the client has a clean financial history with no securities violations and no censures or prohibitions from a regulatory body like the SEC. The BVI regulators want to be assured that the client has, at the very least, some experience and sophistication (or an educational background) in the type of investments that the fund will be making and no past financial "issues". As long as those conditions are met, the fund license will be approved.

Accordingly, the resume/CV that a client submits must be thorough and without any unexplained gaps in employment. The regulators will want a full list of the client’s educational credentials as well as the last 10 years of employment experience.

Step 3: Once we have received the due diligence items from each principal/partner, we will officially incorporate the BVI corporation which will be the primary vehicle through which the fund operates. The BVI company will be the equivalent of a C-Corp with directors, shareholders and officers (the BVI does not form LLC’s.).

Step 4: After the BVI company has been formed, we will begin working on the application for the fund license. The process of applying for the license takes more time than any other step in the set up process and accounts for the majority of the overall timeframe in setting up the fund.

The BVI’s fund license application is straightforward but detailed. The BVI government wants to know who the principals of the fund are, their experience in the type of investing the fund will undertake, and requires a plain-English explanation of the proposed fund’s strategy. We work with the client to go through several rounds of revisions, or "polishing" as we refer to it, to make the fund application thorough and understandable to the BVI licensing agency. Our goal is to submit the application and to receive as few questions from the BVI licensing agency as possible. The BVI government always comes back with questions and clarifications. But the better and more "polished" the application is, the fewer and simpler the follow up questions will be.

Analogy: The process of applying for a fund license is similar to the process of revising and updating, or "polishing" a resume. For example, an applicant may put together a first draft of a resume and have a hiring manager review it and make suggestions. After making the first round of changes, the applicant will re-submit the resume. The manager will review the 2nd draft and propose more updates. This process of "polishing" will go on for as many rounds as necessary until the resume is optimized and ready to impress.)

Step 5: Submit the license application to the BVI government and wait. After the license application is submitted, the BVI government will assign it to an agent who will ask follow up questions and clarify anything he or she doesn’t understand. Once all questions have been answered, the BVI will issue the license and the fund will be officially authorized to begin operations – to take on investors and start investing.

Step 6: Once the license is approved, we will begin the process of applying for bank and/or brokerage accounts for the fund. The accounts will vary depending on the amount of assets under management and the type of investments (stocks, bonds, forex, futures, cryptocurrency, real estate, etc.) that the fund will make. Bank and brokerage accounts may be opened anywhere from the Caymans to the Cook Islands, from New York to Hong Kong, Singapore, etc.