There are a number of jurisdictions and structures available for consideration for a fund manager looking to start a hedge fund. Operational considerations and investor location may influence the choice of structure and jurisdiction, while other factors, such as political instability and legal system, may compel hedge fund managers to launch offshore.
Established offshore financial centres such as the Cayman Islands and the British Virgin Islands have regulators that create transparent and compliant regulatory frameworks that oversee the financial services industry based in their jurisdiction, and collaborate with governments, national regulators and international authorities on an ongoing basis.
Hedge fund managers may decide to accept capital from investors based around the world. In this case, one structure that might be tax efficient (due to tax transparency of certain structures) for one type of investor may not be suitable for other investors based elsewhere.
A tax neutral jurisdiction would normally be chosen by the fund manager, to ensure that double taxation will not occur. Double taxation is where the hedge fund itself is taxed in the jurisdiction it is domiciled in, and the investor is taxed again as tax resident of his own jurisdiction when the investor redeems his investment. Tax neutrality will allow the investor only to be taxed once, where the proceeds of the investment is returned and taxed at the individual level, as capital gains or income (depending on the tax legislation & policies where the investor is tax resident). Tax transparency is made possible through information-sharing policies like FATCA and CRS.
An offshore jurisdiction might be chosen due to the various infrastructural and institutions-related advantages that it brings.
A political system that is stable will yield a policy-driven and apolitical regulatory environment for businesses and financial institutions.
Many offshore financial centres are either British Overseas Territories (such as the British Virgin Islands, Cayman Islands and Gibraltar) or Crown dependencies (such as Guernsey, Jersey and the Isle of Man), inheriting the tradition, structure and stability of the English legal system.
There is a concentration of talent and professional expertise in such jurisdictions, with an established financial infrastructure & financial institutions and experienced third-party professional services providers.