Questions
For our readers, can you please give a brief introduction about offshore funds?
Technically an offshore fund is a fund located in a jurisdiction that is not the same as the investment management firm that controls neither it, nor its investors. Funds located in these “offshore” centers usually benefit from lower or zero tax regimes, lighter touch regulation and lower fund costs for services. These regimes usually have significant double taxation treaties with a high number of countries in which fund investors may well be located. In Europe, it is typically also used to describe the primary European fund centers of Luxembourg, Malta and Ireland. These centers have few active managers, but significant fund industries benefiting from favorable tax regimes and interpretations of European regulations.
What do you think are the emerging key trends in the global offshore funds industry? Is it growing? What are the key challenges?
The offshore funds sector continues to grow, but it is also going through a sea change as onshore regulators seek to extend their control over offshore funds. New legislation such as FATCA reporting from the US and AIFMD in Europe, seeks to impose onshore type costs and regulations on the managers of offshore funds. This presents both an opportunity and a challenge for offshore fund managers. It undoubtedly increases the regulatory burden on both the managers and costs on the funds by forcing them to adopt higher levels of disclosures, risk management and safe keeping. However, by raising the standards of offshore funds and their managers, they may actually make offshore funds more investible to investors than before.
What are the benefits a GCC based entity/fund can derive by opting for an offshore jurisdiction?
A GCC based entity reaps the same benefits as all offshore fund managers, ultimately lower fund costs (so improved fund performance), attractive tax regimes and ease of marketing cross-border in the region. It also gives GCC managers the potential ability to market to investors outside of the GCC to investors more familiar with a Cayman or Hong Kong structure than an onshore structure in the GCC.
For a GCC based entity, what are the key regulatory requirements to establish offshore funds?
For a typical Cayman structure, very little is required and the creation of a fund structure can be done quickly and easily by an experienced local or offshore lawyer. However, to make the fund investible, the fund should appoint a globally recognized set of service providers and place independent fund directors on the board. Investors will make judgments based on the service providers chosen for a fund. They will gain comfort from seeing a Tier One fund administrator such as Apex, a global custodian or prime broker, a recognized offshore lawyer plus an audit from one of the big four. What is important is that the fund management is regulated or complies with the regulation of whatever jurisdiction in which they are based. They must ensure they have the appropriate fund management permissions to match their activities and comply with any restrictions on marketing the fund.
Could you please tell us what are the preferred offshore jurisdictions for a GCC based entity and what differentiates them from others?
It really depends on what type of fund they are looking to set up and what type of investors they are seeking to attract. A closed ended real estate fund or private equity fund may well be best suited to Guernsey or Jersey, a liquid and listed hedge fund with low leverage looking to have distribution through GCC banks may well opt for a UCITS in Luxembourg, Ireland or Malta. A classic hedge fund seeking institutional funds only and additional investors with offshore Asian and US money may well chose Cayman. We encourage fund managers to be guided by their likely investors. If an investor is invested in 12 Private Equity funds and they are all in the Channel Islands, he may well expect your PE fund to also be based there. Perhaps the bigger question is not were the fund is based, but can the offshore fund be serviced locally to the GCC manager regardless of the funds jurisdiction.
We understand that governance and reporting requirements may differ for various jurisdictions but if you were to consider majority, what are the governance and reporting requirements for establishing an offshore entity/fund?
You are absolutely right they vary enormously as do the jurisdictions of the managers themselves. Good operational infrastructure, clear risk reporting and oversight, tier one service providers and independent directors, all decrease the chances of falling foul of the regulator either on or offshore.
Does process for establishing an offshore mutual fund and a corporate entity differ? If yes, how does it differ?
Yes, most offshore fund jurisdictions have specific fund legislation which is specifically created for funds. They often have different tax, reporting requirements, share holder (investor protection) requirements, and may allow different activities permitted by one and not the other.
What are the mechanisms in place at these offshore jurisdiction for security of investments?
A clear PPM or offer document filed with the regulator stipulating the activities of the fund and procedures around investment decisions, counterparties, NAV and performance calculations, independent directors and a tier one fund administrator. For a classic trading fund for instance, the fund administrator is actually appointed by, and works for the fund and its investors. It will typically control the fund bank account and will ensure that any monies coming into the fund can only be wired to the funds trading account. Likewise, any monies from the trading accounts can only be sent to the fund bank account and any payments to investors have the correct performance deductions before monies are released. This protects both investors and managers.
With the arrival of the U.S. FATCA, there is evidence that other countries are interested in setting up similar mechanisms as a means of combatting tax evasion among its citizens. For instance, in October 2013, the governments of Jersey and Guernsey signed the British version of the FATCA-like agreement. In the long term horizon, what impact do you foresee on the offshore funds industry due to potential overwhelming tax evasion measures from various governments, given the fact that a key attraction of offshore funds is the lower tax rates for investors?
Offshore funds are typically not used to avoid tax but allow different investors from different regimes to invest in the same fund vehicle without disadvantaging them. The tax regime and rates vary from country to country so, if a fund tried to comply with US tax (ie taken as earned), then they would disadvantage say, UK investors that typically pay tax when the income is received. Investors have responsibility to ensure they comply with their local tax authorities which the bulk of investors already do. Hopefully, disclosure initiatives such as FATCA will explode the myth that offshore funds are about tax avoidance rather than tax management. It is worth noting that some investors such as large US pension plans don’t pay tax and therefore have to invest offshore to maximize the benefit to their investors. Likewise with large GCC sovereign wealth funds.
With the U.S. Foreign Account Tax Compliance Act (FATCA) gathering pace of implementation, what effects do you see impinging on the GCC offshore funds market if implementation is deployed in the region, as well?
The GCC typically has low levels of personal tax and therefore FATCA is likely to have a limited effect within the GCC. Though say this, fund managers will have to take responsibility for proving this to the IRS rather than, as now, relying on them to prove otherwise. This process is relatively simple and not as onerous as many believe. Your fund administrator should be well placed to provide you with a solution.
How can the offshore funds industry tackle the growing challenges of money laundering and the problem of serving as potential conduits for illegal funding activities (e.g., organized crime)?
Anti-Money Laundering (AML) and Know Your Client (KYC) legislation have transformed the offshore funds industry. Respectable recognized offshore jurisdictions and the tier one service providers such as Apex that operate in them, have robust legislation and policies that protect both the managers and other investors from “dirty” money. If the veracity of investments cannot be proved, then they will not be accepted into the fund. If anything, some large US institutions and service have gone too far and discriminate against investors based purely on geographic location regardless of the individual standing and that there are no financial sanctions in place. This is why it makes sense to work with providers that have presence in multiple markets.
Can you talk a little bit about your company and the range of services that you offer?
Apex Fund Services was established in 2003, and is now one of the world’s largest independent fund administration companies with 34 offices and $28bn AUA. The Apex Global Network is at the heart of the Company’s strategy. Apex is located alongside its clients providing the highest levels of personalized services based on four core pillars of Fund Administration, Fund Launch Solutions, Financial Outsourcing and Technologies to provide a full suite of services for our clients. It is also the second largest privately owned fund administrator in the world with a core competency in new fund start-ups: 400 funds are due to be launched across the group during the current financial year.
Apex Fund Services has a series of offerings such as our offshore platform which allows funds to set up (including legal), fund administration, audit and director fees for as little as $40k in the first year for some funds. We also cater for large scale institutional fund launches in the $100m to $500m range requiring daily, weekly or monthly NAVs.
Apex can support multiple fund types and jurisdictions including but not limited to: hedge funds, real estate, private equity, classic long only funds, Shari’a, family office structures, UCITS, PIFs, SIFs, QIAIFs, UK Onshore regulated, PCCs plus offshore funds in all of the key jurisdictions.
The key differentiator is that Apex can support the fund from the manager’s location with no part of the fund administration process off-shored to low cost/low service level centers. In addition to this Apex clients benefit from much lower minimums for start-up funds than they would receive from comparable competitors. Our interests to see our client AUMs is therefore closely aligned.
In addition to fund administration we also offer middle office technology, middle office outsourcing, order management solutions, cloud hosting, broker introduction and cap intro for our clients. Apex is unique in its ability to reach globally, service locally and provide cross-jurisdictional solutions and best practice enabling a straight through process with complete integration.
Apex has offices in all the major fund domiciles or jurisdictions including Australia, Bahamas, United Kingdom, Brazil, Canada, Cayman Islands, China, Cyprus, Guernsey, Hong Kong, India, Ireland, Isle of Man, Japan, Jersey, Luxembourg, Malta, Mauritius, Russia, Seychelles, Singapore, Switzerland, UAE, Uruguay, and the United States.
What is your advice to our readers who may be considering offshore funds as a means of increasing their personal financial security?
If correctly structured and in appropriate jurisdiction, offshore funds can provide investors with many benefits. Investors should pay careful attention to the offer document and check to see that the service providers are adequately equipped to protect their interests. Ultimately however, the success or failure of the fund is going to be reliant on the ability of their fund manager to not only deliver the returns they expect, but also have the infrastructure, correct controls and processes in place to ensure that their non- investment risk is covered.
