Structure of Offshore Mutual Funds

A mutual fund is a pool of money contributed by a small or large number of subscribers, unit-holders or shareholders, which is invested and administered on their behalf. They share the proceeds (or losses) in proportion to their subscriptions after deduction of costs. An offshore mutual fund is based in an offshore jurisdiction.

The structure of an Offshore Mutual Fund is governed by four elements:

• The nature of the underlying investments in which the mutual fund intends to specialize 
• The way in which the fund intends to market its shares
• The way in which investors earn their returns and realize their investments
• The way in which the fund's manager and other professionals earn their fees

Most funds permit themselves the full range of investments and they generally specialize in a particular area such as equities, bonds, currencies, or particular geographical areas or market sectors. Some funds may be hedge funds that rely to a greater or lesser extent upon the use of derivative instruments, i.e., options, futures and swaps based upon the underlying principal investment. In addition, some funds may rely heavily on the use of leverage or trade upon margin in order to boost returns. The latter are obviously the highest risk funds, in particular where these are also based upon derivatives.

Where the intended investments are relatively liquid, the typical fund will be an "open-ended" fund. If the intended asset classes are illiquid investments, such as real estate developments or film finance, then a "closed-end" fund may be more appropriate. With this type of fund, subscriptions are limited by reference to the number of shares or a specified offer period. Investors only receive a return of capital after a specified period or when management so decides, in both cases after the fund has liquidated its investment.

The Mutual fund structure is also affected by where and to whom the funds are offered.  In addition, is the fund marketing purely directed to the sponsor/manager's existing client base or discretionary managed accounts, or is it also directly or indirectly going out to other investors? Each of these will affect the various regulatory implications that need to be considered.

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