A lucrative reason for being offshore is that gains are either untaxed or very lightly taxed in the country where they were originated. While most investors set up offshore funds in the Caribbean and British Virgin Islands, a high number of new hedge funds are springing up all over the globe. This includes places like Hong Kong, Isle of Man, Switzerland, Luxembourg and many other places. Offshore financial centers are attractive to U.S. investors since they adhere to the privacy of their clients, and anonymous transactions can be made easily. Though the number of U.S. hedge funds far exceed the number of offshore funds, the money tied up in offshore funds is of far greater magnitude. Because voluntary information is scarce, it’s hard to estimate how much money is invested in these hedge funds but some have speculated it being over one trillion dollars!
Due to the nature of the U.S. tax and securities laws, it is easy to see why non-U.S. investors typically will not invest in hedge funds that are based in the United States. Many hedge fund managers do maintain both U.S. and non-U.S. components. The laws and regulations of the United States are directed not just to limiting the behavior of its citizens, but also to preventing money-laundering and other improper uses of offshore investment vehicles. Given the global complexity of the investment community, hedge fund managers want to keep their options open and attract investment money from both sides of the ocean.