An offshore mutual fund is an investment vehicle-based in an offshore location outside the jurisdiction of the United States, often used as a tax haven.
- Offshore mutual funds may provide investment exposure to international markets, as well as tax benefits from being domiciled in overseas jurisdictions.
- However, offshore funds may follow different rules and regulations than standard investments, which could present some higher risks of capital loss.
- Investors should exercise caution. Sponsors located outside of established offshore financial centers can be prone to fraudulent activity due to relaxed regulations.
An Introduction To Mutual Funds
Understanding Offshore Mutual Funds
Offshore mutual funds are domiciled internationally. They may provide investment exposure to international markets. They are known to offer some cost benefits such as lower taxes, as well.
Internationally domiciled funds are obligated to follow the laws and regulations of the country where they are incorporated. Funds may choose their domicile to target a specific investor. Many offshore funds are incorporated in the Bahamas or Cayman Islands, which offer tax efficiencies. Taxation, 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.
Offshore funds can be structured much like an open-end investment fund. They can also be formed as an offshore company, partnership, or unit trust. Most offshore funds are 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.
Risks and Advantages
Offshore funds can 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 may follow different rules and regulations than standard investments, which could 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.
Investors should always add extra due diligence when investing money in offshore accounts with sponsors that are not well known 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 risks. The Third Point Investors Limited is a London-listed, closed-end fund managed by Dan Loeb. Its TPOU share class is denominated in U.S. dollars.