Offshore Alternative Investment Market
The offshore alternative investment market describes a wide array of investment products that are not registered with the Securities & Exchange Commission in the United States. While the securities themselves are legally registered overseas, investment firms in the United States often manage them. The offshore market is only available to certain U.S. investors, and can provide diversification to an investment portfolio.
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Investment Types
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There are several types of offshore investments, the most common of which are hedge funds. Offshore hedge funds typically issue shares or units, are priced monthly, and have minimum investment amounts greater than $100,000, although minimum investments of $1 million and greater are the norm. Private equity funds, trusts, insurance securities and limited partnerships are other commonly seen offshore investments.
Eligibility
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Offshore investments are U.S. tax-exempt, and as such they are available only to non-U.S. and non-taxable U.S. investors. U.S. investors that are eligible include pension funds, IRA accounts, charities and some trusts. Offshore funds may hold a maximum of 25 percent U.S. retirement plan money. If a fund exceeds this amount it is required to register with the SEC as a benefit plan administrator.
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Location
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The offshore market is dominated by securities registered in the Cayman Islands. As of August 2008, more than 10,000 securities were registered in Cayman. Other popular offshore jurisdictions include Bermuda, British Virgin Islands, and Isle of Man. While the legal address may be in any of these locations, the principal place of business for most offshore funds is typically in a major financial center such as New York, London or Hong Kong.
Risks
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The exemption for offshore investments to register with the SEC allows fund managers to utilize investment strategies that are more sophisticated and speculative than their counterparts. This also exposes investors to certain risks. In addition to the potential for fraud in an unregulated environment, strategies that permissible can be more prone to fail. These trading strategies include extreme leveraging, short selling and purchasing unlisted securities.
Growth
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In 2006, President George W. Bush signed into law the Pension Protection Act. This legislation narrowed the definition of what was considered "retirement money" and as a result offshore funds were able to accept greater amounts of money from pension funds. This has led analysts to predict that the industry will grow in size as much as three times between the inception of the Pension Protection Act and 2011.
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References
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