Actors! While waiting for your big break, you need to pay the bills, right? Often that means waiting on tables or flipping burgers. We suggest you set your sights a little higher: start an offshore hedge fund!
It’s not as crazy as it sounds. You should have a good understanding of trading and markets, but the process of starting up an offshore hedge fund can be facilitated by web sites that exist to help people like you.
Offshore hedge funds offer a lot of tax advantages to investors, and fund managers often set up U.S. entities and offshore business units within the same fund. You see, U.S. hedge funds are often Delaware LLPs and LLCs that are subject to U.S. income tax. However, if you have non-U.S. investors, you can protect them from U.S. taxation by putting them into an offshore business unit incorporated in a jurisdiction free of income tax. Places like the Cayman Islands are very popular in this regard.
If you are managing investments for onshore and offshore investors, you definitely want to avoid maintaining two equivalent portfolios. It’s hard to do and involves extra work. It’s much easier to set up a master-feeder structure. In this type of organization, three separate entities are set up such that there are two funds, one U.S. and one offshore, which feed their investments to a master fund where all the trading activity occurs. Foreign investors enroll in the offshore feeder fund and thereby bypass U.S. taxes.
The master fund makes all of the investment decisions and consolidates all trades on behalf of the feeder funds. The offshore feeder can defer fees, an added bonus. The offshore fund is set up to avoid taxable unrelated business income, so it even attracts tax-exempt U.S. investors. There is nothing illegal or even shady about offshore feeder funds – they carefully obey all IRS regulations and in no way skirt lawful taxes. You simply are taking advantage of the fact that you do not live in the U.S., so why pay taxes there?
The offshore feeder fund can help investors legally avoid the 30 percent withholding tax on dividends, royalties, rents and interest that would be required of foreign investors in a U.S. hedge fund. You can even set up your own foreign bank and use it to offer and administer your feeder funds.
Acting is hard and requires talent and a little luck. Running a hedge fund is hard and requires skill and a little assistance. Maybe you are the type of person who would be good at both.