Establish An Offshore Hedge Fund
Interested in forming an offshore hedge fund or mutual fund? We can help. At HFS we have streamlined the process and handle all of the steps from choosing the appropriate jurisdiction, establishing the legal entity, obtaining the appropriate license and opening international bank and investment accounts for the fund.
HFS was founded with the intent of making the process of “going offshore” simple, affordable and understandable. Our aim has always been to provide a complete, start-to-finish service so that our clients can establish offshore structures and accounts without so much as leaving their desks. We have applied this same approach to establishing offshore licensed hedge funds and mutual funds. From choosing a jurisdiction for the fund to setting up a trading account and everything in between, we make the process of establishing an offshore fund straightforward, understandable and affordable. What’s more, we inform our clients of exactly what the set up and annual renewal costs will be. There are no surprises, hidden fees or unexpected expenses. The complete, start-to-finish service of establishing an offshore licensed fund is what we provide.
The Premier Jurisdiction for Offshore Funds: The British Virgin Islands.
Currently there are about a dozen countries around the planet that license offshore investment funds. These countries range from the Isle of Man and Cyprus in Europe to St. Vincent & The Grenadines and The Bahamas in the Caribbean. While these jurisdictions might have some niche benefit for specific purposes (for example establishing a fund will only invest in real estate in The Bahamas) the vast majority of the world’s new, offshore, licensed investment funds are established in one offshore financial center: The British Virgin Islands.
The British Virgin Islands
The BVI is the most popular jurisdiction for establishing new offshore funds, accounting for more than a quarter of the world’s total offshore hedge funds and mutual funds. The BVI is a popular for the following reasons:
- There are no restrictions on investment strategies or the type of investments or geographic location of investments.
- There are no restrictions on use of leverage or margin.
- Neither BVI funds nor their investors pay any taxes in the BVI.
- The BVI is a stable political and economic jurisdiction with an excellent global reputation.
- The BVI offers fund types that are suitable for the whole spectrum of fund categories - from startup funds that can be set up in a matter of days with minimal regulatory requirements to private hedge funds and retail mutual funds for existing managers with billions in assets.
- BVI funds are not required to have local “functionaries” – directors, investment managers, administrators, custodians or auditors.
- BVI funds are priced to be ultra-competitive, especially for smaller and startup fund
The BVI splits funds into 2 categories based primarily on the total capital controlled (under management) by the fund.
1. “Registered” funds are designed as “starter” funds for managers who want to set up a new fund, test a new investment strategy or for small investment groups (family offices, a tight-knit group of investors, etc.). As such, Registered funds are much faster and easier to establish and operate under a greatly simplified regulatory regime. But Registered funds are limited in terms of how many investors may participate and the total amount of capital/assets that can be managed. However, if these limits are exceeded the fund can be upgraded to the appropriate type of fund as needed. There are two types of Registered funds, Incubator funds and Approved funds.
Incubator Fund: The Incubator fund is the ideal vehicle for starting a new hedge fund with minimal assets, 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.
- Each investor must invest at least $20,000.
- Total capital under management cannot exceed $20M.
- 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 days and does not require an offering memorandum or licensed functionaries (licensed fund managers, administrators, auditors, etc.).
- Minimal set up and annual renewal costs.
- The fund must have an attorney or law firm who can give legal counsel and guidance.
- 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 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.
- 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. Here are the particulars of the Approved fund:
- Maximum of 20 investors.
- No minimum investment amount for investors.
- Total capital under management cannot exceed $100M.
- The fund can be set up in a matter of days and does not require an offering memorandum or licensed functionaries (licensed fund managers, auditors, etc.).
- Minimal set up and annual renewal costs.
- The fund must have an attorney or law firm who can give legal counsel and guidance.
- 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. But the Fund Administrator does not have to be licensed or located in the BVI. The Fund Administrator is essentially the accounting department for the fund. The Fund Administrator typically calculates the fund’s Net Asset Value (NAV), verifies balances for the Fund and individual investors, applies new investments to investor accounts and facilitates redemptions, etc. There is no licensing requirement for the Fund Administrator, but the Fund Administrator is usually a firm or individual 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.
- 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.
2. “Recognized” funds have no restrictions on the total capital the fund can manage and therefore are subject to greater regulatory scrutiny. There are three types of Recognized funds.
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 begin the process of setting up a BVI Fund please Contact Us. We would be happy to discuss the options, make a recommendation and then for a Recognized fund (Professional, Private or Public) provide a customized quote including setting up the BVI entity, applying for the fund license and assistance with establishing bank and investment accounts for the fund. To establish a Registered fund (Incubator or Approved), we offer a complete package that is a start-to-finish service including establishment of the fund as well as bank and investment accounts.