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What is an 'Offshore Mutual Fund'

An offshore mutual fund is a mutual fund that is based in an offshore jurisdiction, which is generally considered to be outside the United States.

BREAKING DOWN 'Offshore Mutual Fund'

Offshore mutual funds are domiciled internationally. They may provide investment exposure to international markets. Often they also offer some cost benefits such as lower taxes.

Internationally domiciled funds are obligated to follow the laws and regulations of the country where they are incorporated. Funds may choose their domicile in order to target a specific investor. Many offshore funds are incorporated in the Bahamas or Cayman Islands which offer tax efficiencies. Tax, regulation and investor demand are three main factors influencing the country a fund chooses to incorporate in. The United States addresses specific offshore definitions and legislative obligations in Section 871 of the Internal Revenue Code of 1986.

Offshore funds can be structured similar to an open-end investment fund. They can also be formed as an offshore company, partnership or unit trust. Most offshore funds are also required to have operational functionalities in their domiciled country. This has led to substantial fund administration, management, custodian and prime brokerage services in popular offshore locations as well.

Risks and Advantages

Offshore funds can potentially have higher risks. With domicile in a foreign country, investors may not clearly understand a fund’s terms and conditions which could lead to unprotected loss of capital. Offshore funds also follow different rules and regulations than standard investments which may present some higher risks of capital loss.

Generally, offshore funds seek to provide an advantage through their international incorporation. The lower level of regulation makes it easier to establish and administer the funds. Funds domiciled in most offshore countries allow for tax-free income which enables the fund to reinvest gains. They also include tax-free distributions for investors. Operating costs are significantly reduced and management fees can be lower. (See also: Pros and Cons of Offshore Investing.)

Investors should always add extra due diligence when investing money in offshore accounts that have sponsors that are not well known and/or are located outside of established offshore financial centers. While many funds offer competitive advantages, non-mainstream offerings can be prone to fraudulent activity because of relaxed regulations in some offshore locations.

Offshore Mutual Fund Investments

Many brokerage platforms will offer their investors a selection of offshore funds which can help to reduce some of the investment risk. The Third Point Offshore Investors Ltd USD Fund (TPOU) provides one example. The Fund is managed by Third Point Offshore Investors Limited in the U.K. It allows for U.S. investment by qualified purchasers and accredited investors. The Fund uses fundamental analysis and is primarily managed by Dan Loeb.

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