Offshore fund – definition and meaning

An offshore fund is any fund, such as a mutual fund, that exists in an offshore financial center. Places that offer little or no government interference, such as Hong Kong, Jersey, and Antigua have offshore financial centers. A mutual fund in British English is a unit trust.

An offshore fund, if you are American, for example, exists outside the United States. We commonly use the term, perhaps incorrectly, to describe funds that exist in tax havens or low-tax nations.

Technically, offshore funds are simply funds that exist and operate abroad. However, if you do not specify, most people will think it is a fund in a tax haven.

A ‘tax haven‘ is a country or territory that offers amazingly favorable tax rates and other conditions. Antigua, the Cayman Islands, Jersey, the Isle of Wight, and Gibraltar are tax havens.

In its widest sense, we use the term to include any cross-border collective investment scheme.

While most people think of a mutual fund, an offshore fund refers to any collective investment scheme. Specifically, a collective investment scheme that operates abroad.

Offshore fund - twenty most popular locations
There are many reasons why people opt for an offshore fund. However, by far the most popular motivation is the lower tax benefit. (Image: adapted from Wolters Kluwer)

Definition of ‘offshore’

The term ‘offshore’ in business and finance means any country other than your own. In other words, foreign or overseas.

If you have an offshore bank account, it means a bank account abroad. An offshore company is registered in one country but is active in another.

Offshore manufacturing means relocating a production plant abroad, and importing the finished product. In other words, making it abroad and selling it in the home market.

If I create a trust abroad, it is an offshore trust. They are usually outside the jurisdiction of the country of residence of the trustor (trust’s creator).

The term ‘offshoring’ means relocating some of a company’s operations abroad.

Offshore fund global market

We measure market share in offshore funds either by AUM or the number of funds. AUM stands for Assets Under Management.

However, Wikipedia informs that different sources may vary. The variations depend on which jurisdictions we deem as ‘offshore’ and which types of investment schemes we include.

For example, the dominant player in hedge funds is the Cayman Islands. However, Delaware dominates in offshore private equity funds.

The first image below shows us the market share for offshore hedge funds. The second image focuses on offshore private equity funds.

Offshore fund - global share hedge funds
Cayman Islands is by far the dominant player in offshore hedge funds globally. (Data Source: Marsh & McLennan Companies)

Assets Under Management (AUM) measures the total market value of all the financial assets of a fund. The term may refer to a venture capital firm, mutual fund, or brokerage house. Funds Under Management (FUM) means the same as AUM.

Offshore fund - global share private equity funds
Private equity funds are in most cases limited partnerships with a set term of ten years. (Data Source: Marsh & McLennan Companies)

Video – David Cameron’s father’s offshore fund

Channel 4 News interviews former British Prime Minister David Cameron regarding his father’s offshore fund. When his father died, Mr. Cameron benefited from that fund. He says he paid all the taxes that were due on those funds.

There is growing scrutiny in the advanced economies regarding offshore funds. Do rich people and powerful politicians use them to avoid taxes? It is a question that we will probably continue to ask for many years to come.