Why Offshore Funds Are Structured in the Caribbean

Offshore funds didn’t end up in the Caribbean by accident. Over decades, managers and investors have stress-tested jurisdictions, legal frameworks, and operational realities. The result: a handful of Caribbean centers—especially the Cayman Islands, the British Virgin Islands (BVI), and Bermuda—became the default homes for hedge funds, many private funds, and a growing slice of specialty strategies. If you’re weighing where to domicile a fund, understanding why the Caribbean dominates—and when it may not be the right fit—will save time, cost, and headaches.

What “Offshore Fund” Actually Means

An offshore fund is simply a pooled investment vehicle formed in a jurisdiction different from the manager’s home base and, often, the investors’ home countries. “Offshore” does not mean secret or untaxed. It means the fund is organized in a neutral location that:

Adds no extra layer of local tax on fund income (tax neutrality)

Uses a legal and regulatory system that global investors understand

Provides a stable, efficient environment to raise and deploy capital across borders

Most offshore funds fall into two buckets:

Open-ended funds: hedge funds, liquid alternatives, and certain credit strategies with subscriptions and redemptions.

Closed-ended funds: private equity, venture capital, infrastructure, real assets, and special situations with capital calls and fixed terms.

The Caribbean specializes in both, with flexible vehicles like exempted companies, limited partnerships, segregated portfolio companies (SPCs), and unit trusts.

Why the Caribbean Became the Default

1) Tax neutrality without treaty gamesmanship

Investors want to be taxed in their own jurisdictions, not in a fund’s jurisdiction. Caribbean funds generally don’t impose local income or capital gains taxes, so tax is assessed where it belongs—at the investor or investment level. Unlike treaty hubs that are designed to access bilateral tax treaties, Caribbean funds are typically “non-treaty” platforms. That’s by design: the structure stands on neutrality and transparency, not treaty shopping.

For managers, neutrality simplifies allocations across a global investor base (U.S. taxable, U.S. tax-exempt, European, Asian, Middle Eastern) without creating unexpected withholding or filing obligations in the fund domicile.

2) Predictable legal systems grounded in English common law

The Cayman Islands, BVI, and Bermuda offer robust company and partnership statutes, clear insolvency regimes, and commercial courts with deep fund experience. When you’re negotiating side letters, clarifying redemption suspensions, or facing a complex valuation dispute, having a predictable legal backdrop is worth more than clever marketing. Institutional LPs care about enforceability. So do managers—especially during stress events.

3) Proportionate, risk-based regulation

Caribbean regulators have matured quickly. The Cayman Monetary Authority (CIMA), BVI Financial Services Commission (FSC), and Bermuda Monetary Authority (BMA) supervise thousands of funds with regimes that aim to protect investors without choking innovation. Oversight is real—audits, valuation procedures, AML/KYC, and, for many funds, local auditor involvement—yet the practical burden is calibrated to professional investors rather than retail distribution.

4) Speed to market

A clean launch in the Caribbean can go from term sheet to first close in 6–10 weeks if the strategy and service providers are ready. Company or partnership formation can be completed in days. Compare that with months in heavier regimes. For managers timing a seed, a market dislocation, or an acquisition pipeline, speed matters.

5) Deep service-provider ecosystems

The Caribbean is not just law and statutes. It’s a dense network of administrators, auditors, directors, and registered offices with fund-specific expertise. That means:

Administrators who already support your prime broker’s integration

Auditors who know how to handle side pockets, complex derivatives, or loan-level waterfalls

Independent directors who have navigated real-world crises (gates, suspensions, cyber incidents, restatements)

This scale keeps costs competitive and expectations aligned.

6) Investor familiarity

Institutional allocators know the Caribbean playbook. Many have standard side letter templates tailored to Cayman or BVI. They’re comfortable with the typical governance standards, reporting cadence, and audit cycles. Familiarity reduces friction and encourages faster diligence.

As a ballpark data point: industry surveys frequently estimate that roughly two-thirds to three-quarters of global hedge funds by number are domiciled in the Cayman Islands. Cayman’s registry has consistently supervised on the order of tens of thousands of regulated funds and private funds combined. The exact figures move each year, but the center of gravity is not in doubt.

7) Practicalities: USD currency, U.S.-friendly time zones

Funds and their brokers operate in U.S. dollars. Caribbean time zones line up with New York and Toronto, keeping daily operations efficient.

The Leading Jurisdictions and What Sets Them Apart

Cayman Islands

Cayman is the premier domicile for global hedge funds and a major center for private funds.

Vehicles: Exempted companies, exempted limited partnerships (ELPs), unit trusts, segregated portfolio companies (SPCs).

Regulation: Open-ended funds are overseen primarily under the Mutual Funds Act; closed-ended funds fall under the Private Funds Act. Most funds register with CIMA, appoint approved auditors, adopt valuation and safekeeping procedures, and comply with AML/KYC and FATCA/CRS.

Governance: Independent directors are common. Cayman encourages—but does not rigidly dictate—board composition. AML roles (MLRO, DMLRO, AMLCO) are standard.

Investment managers: Cayman investment managers historically used an exempt regime; today many are “registered persons” under the Securities Investment Business Act (SIBA) with ongoing AML and regulatory filings.

Why it’s favored: Scale, predictability, investor acceptance, and legal depth.

British Virgin Islands (BVI)

BVI is a flexible, cost-effective alternative, particularly for emerging managers, digital asset strategies, and Asia-facing managers.

Vehicles: BVI business companies, limited partnerships, and SPCs.

Regulation: The Securities and Investment Business Act (SIBA) governs funds. BVI introduced “incubator” and “approved” funds—lighter-touch structures for startups with limits on AUM and investor counts—plus professional/public funds for more established offerings.

Strengths: Competitive setup and running costs, efficient company law, and experienced service providers. Good for smaller teams proving a strategy before upgrading structure.

Bermuda

Bermuda skews institutional and specialty.

Vehicles: Exempted companies, partnerships, and segregated accounts companies (SACs).

Regulation: The Bermuda Monetary Authority runs a respected regime. Bermuda’s SAC structure is widely used for insurance-linked securities (ILS) and reinsurance-related funds.

Strengths: Institutional credibility, proximity to insurance markets, strong governance culture.

Others at a glance

Bahamas: Mature fund regime, used for both open- and closed-ended funds, and convenient for certain U.S.-adjacent strategies.

Barbados: Less common for hedge funds; more relevant where tax treaties are part of the planning for specific private capital deals.

Anguilla and others: Niche use cases and smaller scale.

Common Fund Structures You’ll See

Master-feeder (hedge funds)

U.S. feeder (often a Delaware LP or LLC) for U.S. taxable investors.

Offshore feeder (Cayman exempted company) for non-U.S. and U.S. tax-exempt investors.

Cayman master fund pools both feeders’ capital, executes trades, and centralizes financing and operations.

Why: U.S. tax-exempt investors (pension plans, endowments) often cannot tolerate “unrelated business taxable income” (UBTI). Running certain strategies (e.g., leveraged trading) through the Cayman master can mitigate UBTI exposure compared with investing directly into a U.S. vehicle. Non-U.S. investors often prefer not to create a U.S. tax filing nexus. The master-feeder solves both.

Variations:

Mini-master: U.S. onshore fund is the master, and a Cayman feeder feeds into it. Simpler for managers already trading onshore, but can be less optimal for some investor profiles.

Blockers: Corporate blockers can be used for specific asset classes (e.g., U.S. real estate or operating partnerships) to manage ECI and UBTI.

Parallel funds (private capital)

For private equity or credit, you’ll often see:

Cayman ELP for non-U.S. and U.S. tax-exempt investors.

Delaware LP for U.S. taxable investors.

Optional entity-level blockers for particular assets.

The manager raises capital in both vehicles with harmonized terms and invests side by side. This keeps tax outcomes optimized without forcing a one-size-fits-all.

Segregated portfolio companies (SPCs) and segregated accounts companies (SACs)

SPCs (Cayman/BVI) and SACs (Bermuda) allow multiple share classes under one legal umbrella with statutory segregation of assets and liabilities by “cell.” Use cases:

Multi-strategy platforms where each book has its own risk and fee terms.

Managed account platforms for institutional clients.

Insurance-linked or catastrophe bond strategies.

Unit trusts

Common for certain Asian investor bases and pension systems that prefer trust structures. Cayman unit trusts remain popular for Japan-oriented strategies and select private wealth channels.

Regulatory and Compliance Essentials

I’ve helped launch funds that cleared regulatory hurdles quickly and others that stumbled because teams underestimated compliance. Treat these items as core, not afterthoughts.

AML/KYC

Appoint AML officers (MLRO, DMLRO, AMLCO) with clear policies for customer due diligence, ongoing monitoring, PEP screening, and sanctions checks.

Be ready to obtain source-of-funds/source-of-wealth documentation from investors. High-quality administrators will enforce this.

Keep your AML business risk assessment current. Regulators ask for it.

Audits and valuation

Most regulated funds must appoint a local auditor approved by the regulator (e.g., CIMA). Global firms typically work through local offices to sign the audit.

Adopt and follow a valuation policy—fair value hierarchy, pricing sources, overrides, model governance, and NAV error thresholds. For less liquid portfolios, document your challenge process and board oversight.

FATCA/CRS reporting

Decide whether the administrator or a separate reporting firm will handle filings. Either way, the board is accountable.

Economic substance

Funds are generally out of scope for “economic substance” tests in many Caribbean jurisdictions. Investment managers and certain holding entities may be in scope if conducting “relevant activities.”

If you operate a Cayman investment manager, understand whether you’re a “registered person” under SIBA and what that implies for substance and ongoing filings.

Don’t conflate board presence with substance. Substance relates to core income-generating activities.

Directors and governance

Cayman requires registration for certain directors (e.g., under the Directors Registration and Licensing Act). Expect fit-and-proper and ongoing obligations.

Best practice: appoint at least one independent director for hedge funds and two for larger platforms. For private funds, consider an independent on the GP board or an advisory committee with genuine oversight.

Minute meetings properly. If you ever face a dispute, your minutes are your best friend.

EU/UK marketing (AIFMD/NPPR)

Offshore funds can be marketed in Europe under National Private Placement Regimes (NPPR), subject to local filings, disclosures, and Annex IV reporting in some countries.

If Europe is a major channel, consider parallel Luxembourg/Ireland structures or reverse-solicitation policies vetted by counsel.

The UK has its own NPPR since Brexit; treat it separately.

Tax Considerations for Key Investor Types

Always involve tax counsel early. Here’s a simplified field guide, not advice:

U.S. taxable investors: Often prefer U.S. onshore feeders for reporting simplicity (K-1s) and to manage PFIC/CFC complexities. They can still access a Cayman master through a master-feeder.

U.S. tax-exempt investors: Sensitive to UBTI. Offshore feeders and master funds, sometimes with blockers, are used to suppress UBTI from leverage or operating income.

Non-U.S. investors: Usually prefer avoiding a U.S. tax nexus. Offshore feeders help minimize U.S. filings while investing globally.

Withholding: The Caribbean typically imposes no local withholding on fund distributions. Withholding at the asset level (e.g., U.S. dividends) still applies.

Treaties: Cayman and BVI have limited treaty networks; funds rarely rely on treaties. If treaties are critical, a different domicile (e.g., Luxembourg, Barbados for specific cases) may be considered.

How to Launch: A Practical Step-by-Step

Here’s a condensed playbook I share with managers:

1) Define your investor map

Who are your first 10 investors by type and jurisdiction?

What are their must-haves (onshore K-1s, Cayman comfort, side letters)?

2) Pick your structure

Hedge funds: master-feeder or mini-master, with or without blockers.

Private funds: Cayman ELP + Delaware parallel, with coinvest and feeder options.

Specialty: SPC/SAC for multi-cell platforms, unit trusts for certain Asian channels.

3) Assemble your team

Legal counsel: fund counsel with deep Caribbean experience.

Administrator: insist on systems aligned with your asset class (loan admin for private credit; digital asset controls for crypto).

Auditor: top-tier or respected mid-tier with local sign-off capability.

Directors: independent professionals with relevant strategy background.

Bank/Prime/Custody: lock in KYC early; account openings often delay launches.

4) Draft the documents

Offering documents (PPM/OM), constitutional documents, subscription docs, investment management agreement, admin agreement, prime broker/custody docs, side letter templates, valuation policy, AML manual, and, for private funds, LPA with waterfall/calculation mechanics.

Align liquidity terms with portfolio reality. Mismatched redemption terms cause crises later.

5) Regulatory filings and registrations

Fund registration with CIMA/BVI FSC/BMA as needed.

FATCA/CRS registration.

Director registrations, SIBA “registered person” filings (Cayman), and beneficial ownership system filings where applicable.

6) Test the pipes

NAV production dry run with the administrator.

Confirm data feeds from prime brokers, loan agents, valuation sources.

Set trade capture and exception management procedures.

7) Launch and monitor

Start with a soft close if possible: a smaller first asset base to test NAV production, investor reporting, and compliance workflows.

Calibrate board meeting cadence (at least quarterly is common) and institute early performance and risk reporting norms.

Timelines and costs (broad ranges, not quotes)

Formation: 2–5 business days for companies/partnerships.

Full fund launch: 6–10 weeks from kick-off to first close; faster for simple feeders or managed accounts; longer if you’re also registering managers, setting up complex side pockets, or opening multiple bank accounts.

Setup costs for a hedge fund: roughly $150k–$400k inclusive of legal, administrator onboarding, audit planning, directors, and regulatory fees. Start-up platforms can be cheaper; complex multi-strategy funds can exceed this.

Annual operating costs: commonly $150k–$500k+, depending on AUM, audit scope, administrator complexity, number of share classes/cells, and director mix.

These are directional. Get detailed quotes tailored to your strategy, AUM trajectory, and investor demands.

Common Mistakes and How to Avoid Them

Mismatch between liquidity and assets: Offering monthly liquidity on a book of side-lettered loans is asking for trouble. Fix it upfront—use longer gates, notice periods, or closed-ended structures.

Underestimating KYC/AML: Founders often assume the admin will “just take care of it.” They will—if you collect full documents. Plan investor onboarding workflows early to prevent last-minute capital delays.

Over-reliance on a single director: One independent director is a start; for institutional funds, two experienced independents reduce key-person risk and strengthen oversight.

Weak valuation governance: For less liquid strategies, create an internal valuation committee and document overrides. Auditors will probe models and inputs—be ready.

EU marketing blind spots: Pitching in Europe without NPPR filings or compliant disclosures can trigger enforcement. Map your marketing plan jurisdiction by jurisdiction.

Neglecting side letter consistency: Track MFN clauses and consult counsel before granting preferential liquidity or fee breaks. Inconsistent side letters break trust and can violate offering terms.

Ignoring ERISA: If U.S. benefit plan investors cross certain thresholds, “plan assets” rules may apply. Use appropriate relief (e.g., venture capital operating company or real estate operating company exemptions) or structure accordingly.

Waiting too long to set up reporting: Monthly estimates, capital account statements, and FATCA/CRS require workflows. Test reporting templates before the first close.

Real-World Examples

1) Global macro hedge fund raising from U.S. taxable, U.S. tax-exempt, and non-U.S. investors

Structure: Delaware LP feeder (U.S. taxable), Cayman company feeder (non-U.S. and U.S. tax-exempt), Cayman company master.

Why: The Cayman master allows the strategy to use leverage without generating UBTI for U.S. tax-exempt investors and avoids a U.S. filing nexus for non-U.S. investors.

Notes: The manager appoints two independent Cayman-resident directors, adopts a robust valuation policy for OTC derivatives, and sets a quarterly dealing NAV with a 25% gate to manage liquidity shocks.

2) Private credit fund focused on sponsor-backed loans

Structure: Cayman ELP for non-U.S./U.S. tax-exempt investors and a Delaware parallel for U.S. taxable investors; blockers used selectively for U.S. flow-through income.

Why: Private loans pay off over multi-year periods; a closed-ended structure fits. The Cayman ELP is familiar to international LPs, while the Delaware parallel simplifies K-1 reporting for U.S. taxable investors.

Notes: The LPA includes an institutional-grade waterfall, clawback mechanics, and a valuation committee with third-party pricing checks on illiquid positions.

3) Digital assets fund using an SPC

Structure: Cayman SPC with separate cells for market-neutral, venture tokens, and staking strategies, each with distinct liquidity and fees.

Why: The SPC isolates liabilities per cell while sharing governance and administration. Investors can allocate to specific risk buckets without cross-contamination.

Notes: Extra emphasis on custody procedures, wallet segregation, and audit trails. The admin and auditor must have crypto-native capabilities—non-negotiable.

How the Caribbean Compares with Alternatives

Delaware-only: Ideal for U.S.-only capital. Simple and cost-effective, but not suitable for non-U.S. investors who want to avoid U.S. filing obligations. Often paired with a Cayman vehicle when the investor base broadens.

Luxembourg/Ireland: Gold standard for European distribution, AIFMD compliance, and UCITS/retail options. Strong governance, bankable in the EU, but typically slower and more expensive to launch. Excellent for pan-European marketing and regulated products.

Singapore/Hong Kong: Rising alternatives with strong reputations, helpful for Asia-focused strategies. Launch timelines and costs can be higher, and some investors still default to Cayman for hedge fund strategies.

Jersey/Guernsey: Well-regarded for UK/EU-facing private funds via private placement, with high governance standards. Often chosen for sponsor location proximity and investor familiarity in Europe.

Mauritius: Useful for Africa/India deal flows when treaty benefits are central to the thesis, but less common for global hedge funds.

A practical approach many managers take: pick Cayman for the flagship, then add Luxembourg/Ireland or Jersey/Guernsey parallels as the investor base globalizes.

Quick FAQs

Are offshore funds legal? Yes. They’re heavily used by pension funds, endowments, sovereign wealth funds, and global institutions. The compliance burden is meaningful and growing.

Do offshore funds hide investor identities? No. Regulators have access to beneficial ownership and AML information. Administrators run robust KYC. Confidentiality is balanced with regulatory transparency.

Can retail investors buy offshore funds? Generally no. Caribbean funds are typically for professional or sophisticated investors under private placement regimes.

How long does a wind-down take? A solvent voluntary liquidation can be measured in months (often 3–6+), depending on asset realizations, audits, and redemptions. Plan ahead; final audits and tax clearances take time.

What Changed Over the Last Decade—and Why Funds Still Pick the Caribbean

The Caribbean has tightened standards dramatically: expanded fund registration, AML enhancements, private fund regulation, economic substance rules for relevant activities, and coordinated tax transparency through FATCA and CRS. Managers now expect annual audits, formal valuation procedures, AML officer appointments, and reporting timelines. That’s a feature, not a bug. Institutional money wants predictable governance.

Despite the uptick in requirements, Cayman, BVI, and Bermuda continue to dominate because they offer a pragmatic balance: rigorous enough to satisfy institutions and regulators, flexible enough for innovation, and efficient enough to hit market windows.

A Manager’s Checklist for Choosing the Right Domicile

Investor profile

Will U.S. tax-exempts and non-U.S. investors participate on day one?

Do key LPs have strong preferences (e.g., Cayman or Luxembourg only)?

Strategy and liquidity

Liquid trading vs. private assets? Consider hedge fund vs. private fund regimes.

Any asset classes likely to generate ECI or UBTI?

Distribution plan

Marketing in the EU/UK? Map NPPR filings or consider parallel EU structures.

Asia channels favor unit trusts? Consider Cayman unit trust capability.

Governance

Independent directors with strategy-specific expertise identified?

Valuation and risk frameworks ready for audit scrutiny?

Budget and timeline

Can you support $150k–$500k+ in annual run-rate costs?

Do you have a realistic 6–10 week launch plan with service providers booked?

Operations

Administrator’s systems aligned with asset class and reporting needs?

Custody/prime broker integrations tested before investor capital arrives?

Compliance

AML program documented, officers appointed, investor onboarding playbook set?

FATCA/CRS registrations and reporting roles assigned?

Personal Takeaways from Launches That Went Right (and Wrong)

Governance pays for itself. Independent directors who challenge you on valuation, liquidity, and conflicts save you from costly mistakes later. The best directors lean in without micromanaging.

Operations beat strategy when it comes to investor trust. I’ve seen stellar strategies lose momentum because NAVs were late or capital calls were error-prone. Get the pipes right.

Keep documents simple where you can. A clear valuation policy and clean side letter architecture reduce negotiation time and legal spend.

Underpromise on timelines. Bank accounts and KYC kill aggressive launch dates more often than legal drafting does. Pad two to four weeks for operational realities.

Trends to Watch

Private credit and real assets growth: Expect more Cayman ELPs with Delaware parallels and increased emphasis on valuation controls and loan-level administration.

Tokenization and digital assets: Cayman and BVI have frameworks to accommodate digital assets, but custody/documentation standards are tightening. Investors now expect SOC reports, chain analytics, and formal incident response.

ESG and transparency: LPs want consistency in disclosures and plausible data collection. Offshore structures can handle this—just ensure your reporting is credible and aligned with investor expectations.

Regulatory convergence: More standardization around audits, safekeeping, and conflicts policies across jurisdictions. The Caribbean will remain competitive because it adapts without over-engineering.

Bringing It All Together

Caribbean fund domiciles work because they blend tax neutrality, predictable law, practical regulation, deep service ecosystems, and investor familiarity. Cayman remains the center for hedge funds and an anchor for private funds. BVI provides a nimble, cost-effective option for emerging managers and specialized strategies. Bermuda stands out for institutional governance and insurance-linked niches.

If you’re choosing a domicile, let your investor profile, strategy liquidity, and distribution plan drive the decision. Get the structure right, invest in governance, and build an operations stack that scales. The Caribbean gives you a well-tested foundation; what you build on it is what investors remember.