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 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 the 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 months 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 BVI “functionaries” – directors, investment managers, administrators, custodians or auditors.
- BVI funds are priced to be ultra-competitive, especially for smaller and startup funds.
The BVI splits funds into 2 categories, Registered and Recognized Funds, based primarily on the total capital controlled (assets 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 & Approved Funds
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. (see guidelines below)
- 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 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.
Establishing a New BVI Incubator or Approved Fund
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.
Investor & Assets Under Management Guidelines
As discussed above, the BVI Incubator & Approved funds are the best options for new or startup hedge funds. Assets under management limits are $20M (Incubator) and $100M (Approved). The maximum number of investors for both fund types is 20, but those are “designated” investors.
Fortunately, there is a workaround, which is written into the BVI fund regulations, which creates some flexibility for the amount of capital and number of investors a fund may take on. The BVI Corporation established as the main corporate structure through which the fund will operate comes with two types, or classes, of shares. Class A, voting shares for the principals/directors, and Class B, non-voting shares. Once the 20 “designated” investor limit has been reached, the fund may sell Class B shares to additional investors. Accordingly, these Class B shareholders are just that: non-voting, passive shareholders of the BVI company. But, under the BVI legislation, these Class B shareholders ARE NOT counted as “designated” investors. As such, once the maximum the 20 designated investors has been reached, the fund may take on more investors by simply selling them Class B shares.
In reality, the 20 designated investors and the Class B shareholders of the BVI company are investors in the fund. But the procedure of selling Class B shares is allowed under BVI regulations so that funds may go above the limits, within reason, as needed. The intent is that if a fund reaches its investor or capital limit but receives an additional offer (or two or three) for additional investment, that the fund can take on the additional capital/investors without having to re-apply for the next level license (which could take months). Again, the intent is to create flexibility for beneficial circumstances. But it is not intended to allow a fund to operate with double or triple the stated assets under management or investors into perpetuity.
In summary: The designated capital and investor limits should be viewed as guidelines, not commandments, and that is how the BVI legislation is written.
Set Up and Annual Renewal Costs
The price to establish an Incubator or Approved fund is USD $12,500. That covers the setup of the legal entity (the BVI corporation), all standard government and registered agent fees for the company, assistance with the license application, government application and issuance fees for the fund license, and 2 accounts for the fund. In short, everything necessary to establish the fund and begin taking on capital and making investments.
The total annual fee to renew the fund (either Incubator or Approved) is $8000. This fee includes the renewal of the BVI Corporation, renewal of the issued license, Registered Agent fees for the BVI Corporation and the fund itself, assistance with filing any required forms, as well as anything and everything else necessary to renew the BVI corporation and licensed fund.
Note: the annual renewal fees are not due on the anniversary date of the company formation as is the case for most offshore companies and trusts. The annual fees are due the next calendar year on March 31. For example, if a fund license is approved on February 15, 2024, the annual fees aren’t due until March 31, 2025. Likewise, if a fund license is approved on April 10, 2024, the annual fees aren’t due until March 31, 2025. However, if a fund license is approved on November 10, 2024, (or anytime up to December 31, 2024), the annual fees are due on March 31, 2025. And then they are due March 31 each year thereafter. The annual fee due dates are set by the BVI government directly.
Time: It usually takes 3-4 months for the entire set up. 1-2 weeks for setting up the BVI company, 4-8 weeks to finalize the license application and receive license approval, 4-6 weeks for account set up.
| BVI complete Fund package - Incubator & Approved Funds |
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BVI complete Fund package - Incubator & Approved Funds
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.
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$12,500 |
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BVI complete Fund package - Incubator & Approved Funds fund license is approved on April 10, 2024, the annual fees aren’t due until March 31, 2025. November 10, 2024, (or anytime up to December 31, 2024), the annual fees are due on March 31, 2025.
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.
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$8,000 |