Offshore and master-feeder hedge funds

3,080 of the 11,596 hedge funds on HedgeMountain, about 27%, are organized outside the United States. Most of them, 2,362, are in the Cayman Islands, followed by Bermuda (104), Hong Kong (100), Ireland (79), United Kingdom (70), Virgin Islands, British (68). Many are run by U.S. managers. Here is why.

Who invests offshore

• Non-U.S. investors generally prefer a non-U.S. fund, which keeps them out of the U.S. tax system and its filing requirements.
• U.S. tax-exempt investors such as endowments, foundations and pension plans can owe tax on "unrelated business taxable income" when a partnership uses leverage. Investing through an offshore corporation usually blocks that income.
• U.S. taxable investors generally invest through a domestic partnership instead, so the offshore fund is not for them.

How a master-feeder structure works

To serve all three groups with one portfolio, managers often set up:

• a domestic feeder (usually a Delaware limited partnership) for U.S. taxable investors;
• an offshore feeder (usually a Cayman company) for non-U.S. and U.S. tax-exempt investors;
• a master fund that both feeders invest in, which holds the portfolio and does the trading.

Each entity that sells interests to U.S. investors files its own Form D, which is why one strategy can appear on HedgeMountain as several funds. Across all funds on the site, 1,206 have "Offshore" in their name, 380 "Feeder" and 266 "Master".

What offshore does not mean

An offshore fund is not unregulated or secret. Cayman funds generally register with the Cayman Islands Monetary Authority, file audited financial statements, and are run by advisers who are themselves registered or reporting in the U.S. or elsewhere. The structure is about tax and investor mix, not about avoiding oversight.

Reading the filings

A Form D from an offshore feeder shows the fund's jurisdiction and the related persons, often the same people as the domestic fund. On HedgeMountain, "Other funds with the same team" on each fund page links the feeders and master funds of a single manager. Browse all offshore jurisdictions at the bottom of the location list.

Education, not advice. This guide explains general rules and market practice. It is not legal, tax or investment advice, not an offer or solicitation, and not a recommendation of any fund. Rules change; confirm details with the SEC and a qualified professional. Disclosures