Scientists! While waiting for your big discovery, you need to pay the bills, right? Often that means driving a cab after hours or flipping burgers on the weekend. We suggest you set your gaze a little higher: start an offshore hedge fund!
It’s not as loony as it sounds. You should have a fundamental understanding of trading and markets, but the process of starting up an offshore hedge fund can be facilitated by web resource that can quickly teach smart people like you.
Offshore hedge funds offer tax advantages to investors, and fund managers often establish U.S. and offshore entities within the same fund. As you probably know, U.S. hedge funds are frequently Delaware LLPs and LLCs that have to pay U.S. income tax. However, if you attract non-U.S. investors, you can shield them from U.S. taxation by positioning them in an offshore business unit incorporated under a tax-free jurisdiction. Domiciles like the Cayman Islands are very popular for this purpose.
If you are handling investments for onshore and offshore investors, you certainly want to avoid keeping up two equivalent portfolios. It’s not easy to do and involves extra effort. It’s much easier to launch a master-feeder structure. In this type of scheme, three separate entities are established such that there are two feeder funds, one U.S. and one offshore, which shunt their investments into a master fund where all the trading action occurs. Foreign investors sign up for the offshore feeder fund and thereby sidestep U.S. taxes.
The master fund controls all of the investment activity and consolidates all trades for the benefit of the feeder funds. The offshore feeder can delay fees, an added incentive. The offshore fund is structured to bypass taxable unrelated business income, so it also attracts tax-exempt U.S. investors. There is nothing wrong or underhanded about offshore feeder funds – they faithfully obey all IRS regulations and in no way avoid paying lawful taxes. You simply are taking advantage of the reality that you do not live in the U.S., so why pay extra taxes?
The offshore feeder fund can help investors successfully evade the 30 percent withholding tax on royalties, dividends, rents and interest that would be collected from foreign investors in a U.S. hedge fund. You can even launch your own non-U.S. bank and exploit it to market and manage your feeder funds.
Scientific discovery is difficult and requires talent and a little luck. Running a hedge fund is also difficult and requires skill and a little outside help. Maybe you are the sort of person who would excel at both endeavors.