Legal Structures for Non-US Hedge Funds

The United States has been the centre of hedge fund activity, but about two-thirds of all hedge funds are domiciled outside the USA. Often these “offshore” hedge funds are established in tax-sheltering locales, such as the Cayman Islands, the British Virgin Islands, Bermuda, the Bahamas, Luxembourg, and Ireland, specifically to minimise taxes for non-US investors. US hedge funds often set up a complementary offshore fund to attract additional capital without exceeding SEC limits on US investors.

In the UK, the Financial Services and Markets Act 2000 (FSMA) and the Public Offers of Securities Regulations 1995 (POS Regulations) are statutes that influence the creation of UK-domiciled hedge funds. The FSMA specifies restrictions for the marketing of hedge funds (“collective investment scheme”) that are similar to the US, such as number of shareholders and limits on advertising. The POS Regulations makes restrictions on how a hedge fund is structured to be a private placement.

Outside the US, UK, and tax-haven countries, the situation for hedge funds is wide-ranging. In Switzerland, hedge funds need to be authorised by the Federal Banking Commission, but once authorised, hedge funds have few restrictions. Swiss hedge funds may be advertised and sold to investors without minimum wealth thresholds. In Ireland and Luxembourg, hedge funds and offshore investment funds are even allowed listings on the stock exchange.

On the other extreme, France has greatly restricted the establishment of French hedge funds, and French tax authorities frown upon offshore investing.

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