Setting up an offshore hedge fund can be a complex process but if you are starting out and looking to test the water, the BVI could be the perfect jurisdiction.
What is an offshore hedge fund?
The term ‘offshore’ basically means that the entity, be it a company or a hedge fund is not located in your home company and it does not refer to any particular jurisdiction. The reason hedge funds are set up in offshore jurisdiction can be because they often have certain fiscal and regulatory benefits.
A hedge fund manager may consider setting up an offshore hedge fund if they are anticipating having investors from other countries, or in the case where the laws in the country of the investors are not geared towards the hedge fund industry.
British Virgin Islands
The British Virgin Islands (BVI) has been a popular jurisdiction for the incorporation of various investment funds and it is the world’s second-largest jurisdiction. This is due, in part to the stability of the BVI legal system, the tax benefits available to those that operate there, and the flexibility of its judicial and regulatory frameworks. Its legal system is based on the English common law system and funds in BVI are regulated by the Financial Services Commission.
Fund Structuring in BVI
Most funds operating in the BVI are incorporated as companies under the BVI Business Companies Act. This allows for a flexible structure and there is no requirement for authorised capital or share capital. Furthermore, if the memorandum and articles of association of the company stipulate it, shares can be issued with no par value. In addition to this, funds can be incorporated as an international limited partnership where the entity doesn’t have a separate legal personality from the partners. This means that the general partner is responsible for any debts and obligations of the partnership but a limited partner is not.
BVI Incubator Fund
When we incubate something, we keep it safe and in a suitable environment for a period of time which allows it to grow. When we apply this term to hedge funds, it means we create a fund with structured conditions that allow the development of investment strategies over time. Therefore an incubator fund is geared towards emerging managers and start-ups who don’t have a lot of capital but want to attract more as time goes on. Incubator funds are a great way to start a verifiable track record and to demonstrate a fund managers capabilities going forward. It also serves as a good way to attract meaningful capital sums in the future. If structured properly, an incubator fund can provide a wealth of opportunities for hedge fund managers.
The BVIs incubator fund is regulated as per the BVI Securities and Investment Business Act 2015. These are some of its notable features:
- A BVI Incubator Fund can be set up and commence activities within two business days, once the application has been lodged with the BVI Financial Services Commission.
- It has a maximum of 20 investors and a minimum initial investment of $20,000 per investor with a cap of $20 million of the total investments in the fund.
- It has limited functionary requirements, especially when compared to other jurisdiction. This means it doesn’t have to have a manager, administrator, custodian or auditor and it does not need to provide an operating memorandum. Instead, a description of the investment strategy and appropriate warnings to investors are all that is required.
- It is cost-effective and geared towards emerging managers and small investor groups.
- The incubator can operate for a maximum of two years with the possibility of extending for one more year. After this time it must either convert to an approved fund, a private fund, or a professional fund. In order to do this, an audit to demonstrate its current financial position, as well as compliance with BVI regulations, must be submitted to the Commission.
- If conversion is not an option, the fund must wind up all operations at the end of a two, or three year period.
- An authorised representative is required in BVI and the fund must have two directors, one of which must be an individual, at all times.
- The fund must also prepare and submit annual financial statements and semi-annual returns to the Commission regarding its eligibility to retain its fund class.
If you are looking to set up an offshore hedge fund and are interested in finding out more about BVI Incubator Funds, or any other kind of fun, contact us today. We can take care of all corporate, legal, fiscal and regulatory matters for you including making all the relevant applications to the local authorities. We have been working in this sector for over two decades- who better than Fast Offshore to help you realise your investment goals?