Mistakes to Avoid in Offshore Fund Custodianship

Offshore funds live and die by how well their assets are safeguarded. You can have a brilliant investment strategy, a spotless track record, and committed LPs—but if custody goes wrong, the downside is catastrophic. I’ve seen talented managers lose months to avoidable onboarding delays, miss corporate actions that materially impacted returns, and end up tied in knots with regulators because the custody model didn’t match the jurisdiction. This guide distills hard-won lessons on what not to do, and what to do instead.

Why custodianship matters offshore

Custody is more than a safekeeping service. In offshore structures, it’s the hinge between investment execution, investor protection, and regulatory compliance.

Custodian: holds assets (or evidence of ownership), settles trades, processes corporate actions, handles cash accounts, and maintains records.

Depositary: under regimes like AIFMD/UCITS, adds oversight: cash monitoring, ownership verification, and—in many cases—strict liability for loss of assets held in custody.

Prime broker: extends leverage, lends securities, and often provides custody-like services—but with different legal terms, especially around rehypothecation and collateral.

Administrator: produces the NAV and financial statements, reconciles positions, and applies valuation policies.

Confusing these roles, or assuming one party can do everything, is a recurring source of operational, regulatory, and reputational risk.

Mistake 1: Treating all jurisdictions as the same

Offshore is not homogeneous. Cayman, BVI, Bermuda, Jersey/Guernsey, Mauritius, and Singapore have materially different expectations for custody, even before you consider where the assets actually trade and settle.

Cayman: Private funds typically must appoint a custodian unless an exemption applies, with alternative “asset verification” arrangements if not. Regulators expect clarity in offering documents and service agreements.

EU/UK marketing: If you touch AIFMD or UCITS, depositary rules kick in. That can mean strict liability for losses of financial instruments held in custody and prescriptive cash monitoring.

BVI/Bermuda/Channel Islands: Generally flexible but expect appropriate safekeeping and oversight for the strategy, plus robust governance and AML controls.

Asia hubs (Singapore, Hong Kong): Often require recognized custodians for retail products; for professional funds, regulators still scrutinize safekeeping arrangements and outsourcing risk.

A common failure: launching a Cayman fund marketed into parts of the EU with only a global custodian but no depositary-lite solution. The marketing pathway dictates the custody model, not the other way around. Map your investor jurisdictions, then design custody accordingly.

Mistake 2: Inadequate due diligence on the custodian and sub-custody network

Global custodians are only as strong as their sub-custodian networks. Most “global” banks operate in 90–100+ markets via local partners. Weak links show up in high-risk markets, where insolvency regimes, capital controls, and corporate action practices vary wildly.

What to test:

Financial strength and credit ratings, plus parent guarantees. Ask for capital ratios and resolution plans.

Legal segregation model: how are assets protected in custodian insolvency? Request jurisdictional legal opinions, not just a brochure statement.

Sub-custodian due diligence: frequency of reviews, criteria, and contingency plans. Ask for the list of markets where they use third parties, and their exit triggers.

SOC 1 Type II and SOC 2 reports, ISO 27001 certification, and any material exceptions.

Operational throughput: settlement efficiency rates, average fail rates by market, corporate actions error rate, and dispute resolution times. Many international markets see settlement fail rates in a 2–5% band; what matters is how quickly breaks are resolved and who owns the fix.

Onsite visits or virtual walk-throughs of control environments, ticket flows, and exception management.

An example from the trenches: a fund with an 8% allocation to a frontier market saw a local sub-custodian’s corporate action misposte—entitlements were credited to an omnibus account and missed the fund’s record date. It took six weeks and legal escalation to unwind. The custodian eventually compensated, but the avoidable distraction cost the IR team precious credibility.

Mistake 3: Overlooking asset segregation and account structure

Legal title and segregation are not paperwork formalities; they define who gets paid if something breaks.

Omnibus vs. segregated accounts: Omnibus accounts at the CSD can be efficient but complicate claims in stress. Individual segregated accounts (ISAs) cost more but provide cleaner ownership trails in some jurisdictions.

Nominee structures: Understand how the nominee is recognized locally. In some markets, the nominee is the legal owner on the register; you need documentary pathways to assert beneficial ownership.

Cash accounts: Pooled operating accounts are operationally convenient but increase contagion risk. Use dedicated cash accounts per fund and currency. Clarify set-off rights in your agreements.

Prime brokerage: Rehypothecation can materially alter your risk position. Negotiate rehypothecation caps or opt out for certain assets, and align with the fund’s LPA. Many funds set a 0–25% cap depending on strategy and leverage tolerance.

Ask your custodian to document where each asset is held (CSD/ICSD/local bank), the exact name on the account, and whether there are any liens or set-off rights. If the answer isn’t crystal clear, dig deeper.

Mistake 4: Weak oversight and SLA management

Custody is not a “set and forget” service. Without active oversight, small issues accumulate into performance drag and compliance risk.

Build an SLA that matters:

Clear KPIs: settlement timeliness (same-day, T+1, T+2), corporate actions accuracy and election deadlines, FX execution benchmarks (vs. WM/Reuters or similar), cash break thresholds, and query response times.

Reporting cadence: daily exception reports, weekly dashboards, monthly service reviews, quarterly performance deep dives.

Escalation paths: named contacts, 24/7 escalation for markets in different time zones, and executive contacts for major incidents.

Service credits tied to chronic underperformance, with the right to terminate for cause if thresholds are consistently missed.

Exit plan: data format standards, cost and timeline for data extraction, and cooperation obligations during transitions.

I like to ask custodians for their “first 90 days” stabilization plan. If they don’t have one, you’re likely to experience a rough start.

Mistake 5: Ignoring FX, cash, and liquidity controls

FX and cash are fertile ground for hidden leakage. Two or three basis points here and there compound over a year.

FX execution: If you rely on “auto-FX,” you’ll typically pay wider spreads. For material flows, use competitive quotes or standing instructions tied to independent benchmarks. Post-2024 T+1 in the US compressed the window for funding trades—tight process beats assumptions.

Interest on cash: Clarify interest rates on idle balances, whether cash is swept into money market funds, and who bears liquidity or credit risk. For VNAV funds, confirm how gates or fees would be handled.

Cash controls: Dual authorization, segregated signatories, and daily reconciliations. Custodians should run real-time sanctions screens on inbound/outbound flows.

Blocked currencies and capital controls: Prepare for markets where cash repatriation delays are business-as-usual. Maintain forecasted liquidity buffers and alternative funding lines for those exposures.

A simple fix that saves pain: a “no FX above threshold without PM approval” rule, plus daily FX P&L attribution in the admin pack.

Mistake 6: Mismanaging collateral and derivatives custody

Derivatives custody is a different sport—documentation-heavy, margin-intensive, and operationally unforgiving.

UMR and initial margin: If you’re in scope, you’ll need a custodian capable of segregated IM (third-party or tri-party), with robust SIMM support and dispute resolution. Clarify eligibility of collateral, haircuts, interest treatment, and daily call windows.

Variation margin settlement: Late VM leads to dispute spirals. Align cut-offs with your trading desks and ensure margin calls route automatically to the right approvers.

Legal docs: CSAs, control agreements, tri-party agreements—all need to be perfectly consistent with custody agreements. Don’t leave this to counterparties’ templates.

Collateral optimization: Custodians can help, but guard against “optimization” that creates concentration in harder-to-mobilize assets.

I’ve seen funds lose trading days because their IM could not be ported during a counterparty downgrade. Pre-negotiate porting mechanics and line up alternative agents before the storm.

Mistake 7: Custody for illiquid and non-traditional assets

Private equity, private credit, real estate, infrastructure, aviation, maritime, and trade finance don’t sit neatly in a CSD. Custody revolves around document control, verification, and oversight.

Private equity/VC: The depositary (or “custody” function in non-EU regimes) verifies ownership by reviewing share certificates, registers of members, SPV operating agreements, and completion mechanics. Keep a clean, current data room—share registers, signed documents, and cap tables updated within days of each close.

Real assets: Title deeds, mortgages, UCC filings, lease agreements, and insurance certificates need centralized safekeeping with version control. Custodians should log key dates: expiries, renewals, and covenants.

Private credit: Loan agreements, security packages, notices, intercreditor agreements. Cash controls for drawdowns and amortizations must be airtight; tie cash movements to facility schedules and agent bank notices.

Fund-of-funds/secondaries: NAV confirmation routines, side letter compliance checks, and capital call/ distribution testing.

Digital assets: If permitted, require institutional custody with MPC or HSM-based key management, segregation at the wallet level, SOC reports, robust withdrawal whitelists, and 24/7 monitoring. Clarify how forks/airdrops are handled and how Travel Rule data will be managed. Avoid exchange custody for strategic holdings; if you must, ring-fence and limit exposure.

Common misstep: treating document safekeeping as a compliance box-tick rather than a workflow. Embed your custodian into the closing checklist so documents only move from “draft” to “final” when they’re lodged and verified.

Mistake 8: Poor onboarding and KYC preparation

Most onboarding delays aren’t caused by the custodian—they’re caused by incomplete information from the fund.

Entity mapping: Provide a clean org chart with all SPVs, GPs, AIFMs, advisors, and UBOs. Include tax residency, registration numbers, and controlling interests.

Documents: Certified constitutional documents, LPAs/PPMs, board minutes authorizing account opening, signatory lists, specimen signatures, and resolutions. For trusts and foundations, gather deeds and letters of wishes.

FATCA/CRS: GIIN, classification, and current W-8/W-9 forms. Errors here cause tax withholding and reporting headaches later.

Authorized traders and access controls: Pre-define who can instruct FX, subscriptions, redemptions, corporate action elections, and collateral movements. Use named roles rather than individuals to simplify turnover.

Expect 4–8 weeks for a straightforward structure and 8–12 weeks for complex multi-entity setups, especially if multiple jurisdictions are involved. Set that expectation with investors, then beat it by arriving prepared.

Mistake 9: Underestimating regulatory and tax nuances

What looks like “just custody” often hides regulatory hooks.

AIFMD/UCITS: Understand depositary liability. Loss of financial instruments held in custody can trigger strict liability with narrow carve-outs. Ensure your prime brokerage and custodian agreements align with the depositary’s oversight.

SEC Custody Rule: US advisors to offshore funds must still meet surprise exam or qualified custodian requirements. Administrator-only models don’t satisfy custody for assets like cash and listed securities.

Sanctions and AML: Custodians won’t touch sanctioned markets or parties. The 2022 Russia sanctions showed how quickly assets can become untradeable. Screen investors and investments early and often.

Withholding tax: Relief at source vs. quick refund impacts net returns. Decide who files reclaims (custodian, tax agent, or administrator), power-of-attorney logistics, reclaim timelines, and fees. Expect delays of 6–24 months in some markets. Small funds often leave 10–40 bps of annual performance on the table by neglecting this.

Data protection: GDPR and similar regimes limit where and how you can store investor data. Confirm custodian data residency, cross-border transfer mechanisms, and subcontractor lists.

Make the administrator, custodian, and tax advisors talk to each other. Silos breed avoidable leakage.

Mistake 10: Failing to plan for stress, exit, or insolvency

Hope is not a strategy. Custodian or sub-custodian insolvency, market closures, or geopolitical shocks happen.

Insolvency protections: Ensure assets are legally segregated and ring-fenced. Request clarity on set-off rights and potential liens. In some jurisdictions, client assets may be subject to local insolvency stays—know the playbook.

Porting: Have a secondary custodian on standby or at least an onboarding-ready dossier. Time-to-port is a critical metric; under 30 days is ambitious but achievable with preparation.

Data portability: Agree on data schemas for positions, transactions, corporate action history, and cash ledgers. Test a mock export annually.

Physical access: For illiquid assets, confirm where original documents are stored and how you regain control in a dispute. Digital vaults should have redundant access paths.

War/sanctions events: Document policies for asset write-downs, ring-fencing, and investor communications. Build “kill switches” for new exposures.

Managers who survived 2020–2022 with minimal damage had written escalation memos and two-way contact trees that included board members, GCs, and service-provider executives. Write yours before you need it.

Mistake 11: Cybersecurity and data residency gaps

Custody is a data business. A cyber incident can be as damaging as a market crash.

Security posture: SOC 2 reports, ISO 27001 certification, regular penetration testing, and incident response plans with target recovery times (RTO/RPO).

Access controls: SSO/MFA, least privilege, and transaction-level approvals. Avoid email-based instructions; use secure portals or SWIFT.

Data residency: Know where investor and transaction data is stored and backed up. Cross-border transfer mechanisms should be contractually documented.

Vendor chain: Subcontractors (including fintech interfaces) must meet the same standards. Ask for the vendor inventory relevant to your account.

Include cyber in your onsite review. Ask, “When was your last material incident and what changed because of it?” The quality of the answer is telling.

Mistake 12: Treating administrator and custodian as one

Combining functions can be efficient, but it erodes independence if not managed well.

Reconciliations: Independent three-way reconciliations (custodian, admin, manager) catch breaks early. Don’t let one party be both the source and the validator.

Pricing and valuation: The admin should source prices independently and challenge anomalies. The custodian’s records are not a valuation source, they’re a settlement record.

Change control: If one provider changes a process, the other must be notified formally. Missed change control creates stale price feeds, failed corporate action elections, and NAV errors.

If you do consolidate providers, bolster your in-house oversight or hire an independent oversight firm to keep the “four-eyes” principle intact.

Mistake 13: Not negotiating fees and hidden costs

Custody pricing is a maze. The headline safekeeping fee is only the start.

Transparent schedule: Safekeeping bps by asset class and market, settlement fees (DVP/FO/FO), corporate actions handling, proxy voting, FX spreads or all-in rates, cash wire fees, tax reclaim fees, sub-custodian pass-throughs, SWIFT charges, and exceptional services (e.g., complex restructurings).

Volume and tiering: Push for tiered pricing as AUM or transaction volumes grow. Bundle derivative collateral services if you use them heavily.

FX: For auto-FX, cap the spread or benchmark against WM/Reuters 4pm (or time-relevant) with quarterly reviews and givebacks if variance exceeds agreed thresholds.

Interest on cash: Don’t accept “market minus mystery.” Tie rates to transparent benchmarks (e.g., SOFR minus X).

Service credits: Monetary credits for chronic misses, not just “we’ll look into it.”

Benchmark annually. Even 5–10 bps saved on total custody-related costs can add meaningful net performance over time.

Mistake 14: Ignoring time zones, market practices, and corporate actions

Corporate actions and local quirks can quietly dent returns.

Deadlines: Elections often require T-1 or earlier to be safe due to time-zone lag. Japan, for instance, will punish late elections with default outcomes. Build buffers.

Pre-funding: Rights issues or placings may require pre-funding. Agree in advance how to fund and who approves.

Proxy voting: Confirm cut-offs, power-of-attorney requirements, and whether your votes are lodged through the chain. If you have an ESG mandate, audit that votes match policy.

T+1 markets: The US move to T+1 compresses operational windows. Realign cut-offs with your admin and custodian to avoid settlement fails and CSDR-like penalties where applicable.

One real example: a fund missed a Dutch voluntary event election due to a “soft” internal deadline. The default option shaved 60 bps off the position’s outcome. Small governance tweaks would have prevented it.

Mistake 15: Skipping regular reviews and onsite audits

Initial due diligence is not enough. Markets evolve, teams turnover, and what worked last year starts fraying at the edges.

Quarterly service reviews: Track SLAs, incident logs, root-cause fixes, and open actions. Keep minutes and owners.

Annual risk assessment: Revisit sub-custodian maps, sanctions exposures, new-market entries, and product changes (e.g., entry into crypto or private credit).

Onsite or virtual audits: Walk the floor, meet the people who run your account day-to-day, and review exception queues and sampling.

Board reporting: Custody risk should appear on the board’s risk dashboard with trend lines and heatmaps.

Treat your custodian like a critical vendor, not a utility.

Practical framework: how to get it right, step by step

Here’s a repeatable plan teams can use to avoid the traps above.

Define requirements

Strategy profile, asset classes, geographies, derivatives, leverage, and investor jurisdictions.

Regulatory drivers (AIFMD depositary vs. custody only, SEC Custody Rule), target go-live date, and expected flows.

Build a shortlist

Match providers’ strengths to your markets and asset types. For illiquid-heavy funds, prioritize depositary oversight experience and document custody capabilities.

Issue a focused RFP

Ask for specific KPIs, sub-custodian lists, legal segregation models, sample reports, and onboarding timelines. Request market-by-market coverage details.

Conduct deep due diligence

SOC reports, cyber posture, financial strength, and sub-custodian oversight. Interview operations leads, not just sales.

Run legal in parallel

Align custody, PB, admin, and depositary agreements. Cross-check rehypothecation, set-off, liability, and dispute terms. Insert data portability clauses.

Design your operating model

Define instruction channels, approvals, cut-offs, and escalation paths. Map who does what for corporate actions, FX, tax reclaims, and collateral.

Prepare onboarding documentation early

Entity charts, KYC, FATCA/CRS, signatories, and board resolutions. Pre-fill tax forms and secure Power of Attorney for tax and proxy services.

Build controls and dashboards

Settlement dashboards, daily cash/position reconciliations, FX benchmark reports, and corporate action calendars. Define thresholds and alerts.

Test before going live

Dry runs of trade settlements, cash movements, corporate action elections, and margin calls. Validate file formats and SFTP/API connections.

Stabilize post go-live

Daily calls for the first two weeks, weekly thereafter for the first quarter. Track incidents and complete root-cause analyses.

Educate internal teams

Train PMs, traders, and finance on cut-offs, election policies, and the “no surprise” rule for big flows and unusual assets.

Review, benchmark, and iterate

Quarterly performance reviews and annual fee benchmarking. Update the custody model as your strategy evolves.

Due diligence checklist

Use this to structure your custodian assessment.

Legal and regulatory

Custody agreement with clear segregation and liability terms

Jurisdictional legal opinions on asset protection and insolvency

AIFMD/UCITS depositary capabilities (if needed)

Sanctions and AML policies

Financial and structural

Credit ratings, capital ratios, and parent guarantees

Sub-custodian list and oversight framework

Insurance coverage and limits

Operations and reporting

Settlement metrics by market

Corporate actions processing workflows and cut-offs

Cash controls and sanction screening

Reporting formats (positions, transactions, cash, exceptions)

Data portability and extract capabilities

Technology and cyber

SOC 1 Type II and SOC 2 reports

ISO 27001 certification

Access controls (MFA, SSO), secure instruction channels

Incident response plan and testing frequency

Collateral and derivatives

UMR readiness, IM segregation options, dispute processes

Eligible collateral schedules and haircuts

VM cut-offs and settlement SLAs

Fees and commercial terms

Full fee schedule including pass-throughs

FX benchmarks and spreads

Service credits and termination rights

Exit and transition assistance

Onboarding documentation list

Gather these upfront to avoid back-and-forths:

Certified constitutional documents (fund, GP, manager)

Organizational chart with UBOs and control percentages

Board resolutions authorizing accounts and signatories

Specimen signatures and ID/address proofs for signatories and UBOs

LPA/PPM and side letters (especially those affecting custody or valuation)

FATCA/CRS forms, GIIN, and tax residency certificates where needed

W-8/W-9 forms (as applicable), powers of attorney for tax reclaims and proxy voting

Sanctions screening attestations and AML policy summaries

Authorized trader lists and instruction matrices

Service-specific forms (corporate actions standing instructions, FX preferences, collateral agreements)

KPIs that actually move the needle

Track these consistently:

Settlement efficiency: percentage settled on intended date by market; aged fails over T+3

Corporate actions: error rates, missed elections, and timeliness of notifications

Cash: reconciliation breaks over threshold and days-to-resolution

FX: average spread versus benchmark and exceptions where variance exceeds cap

Collateral: margin disputes count and time-to-resolution; late VM/IM occurrences

Tax: reclaim cycle times, hit/miss rates, and net benefit captured

Service: average response time to queries, escalation resolution times, and ticket backlog

Aim for a one-page dashboard your CIO and CFO will actually read.

Common pitfalls by strategy

Hedge funds with PBs: Over-reliance on PB custody without aligning rehypothecation caps with investor documents. Fix: explicitly limit PB rights, and move long-term holdings to a non-rehypothecatable custody account.

Private equity: Treating the depositary as a rubber stamp. Fix: involve them at term sheet stage to align closing checklists and evidence of ownership.

Real assets: Dispersed document custody among law firms and SPVs. Fix: centralize in a digital vault with the custodian, with controlled access and audit trails.

Fund-of-funds: Poor monitoring of underlying fund gates and side pockets. Fix: require the custodian/admin to produce a liquidity ladder tied to legal terms.

Crypto strategies: Custody at exchanges. Fix: use institutional custodians with cold storage, MPC, segregation, and independent attestation; cap exchange exposure.

Red flags I watch for in custody pitches

“We can do everything” without showing sub-custodian maps.

Vague answers on insolvency and segregation.

No service delivery lead in the meeting—only sales.

One-size-fits-all SLAs, with no willingness to set measurable KPIs.

Inability to demonstrate system screenshots and live exception queues.

Evasive about FX execution policy or spreads.

If you hear these, keep probing or keep walking.

How to handle fees and value conversations with your custodian

Approach it like a partnership with accountability:

Start with transparency: ask for the fully loaded “as-used” bill for a client like you (de-identified) to see typical pass-throughs.

Tie price to performance: propose fee at risk for chronic KPI misses, balanced by longer commitments if they exceed targets.

Share your roadmap: if you plan to scale into new markets or derivatives, use that growth to negotiate tiered pricing now.

Ask for innovation: dashboards, APIs, and straight-through processing reduce their cost to serve—those savings should be shared.

Candidly, the best results I’ve seen come when managers share data and forecasts. Custodians resource more confidently when they know what’s coming.

How to avoid missed corporate actions and dividends

A focused micro-playbook:

Set a daily 8/8 rule: custodians send CA notifications by 8 a.m. your time; your team reviews and flags exceptions by 8 p.m. the same day.

Maintain an “election authority list” with backups. No single point of failure.

Default policy library: pre-set policies for common voluntary events to reduce decision latency.

Record and reconcile entitlements weekly; audit against market confirmations.

Keep cash buffers for pre-funding rights and odd-lot tenders to avoid last-minute scrambles.

This rhythm alone has saved clients measurable basis points annually.

Investor communication around custodianship

Sophisticated LPs ask about custody. Use it to build trust:

Disclose your custody model, including depositary arrangements and prime brokerage rehypothecation limits.

Share KPIs in quarterly letters (at least high-level metrics and notable incidents).

Explain withholding tax strategies and captured benefits—investors appreciate real numbers.

Outline your contingency plan for custodian failure in your risk section.

Managers who are proactive here tend to see fewer side letter headaches.

A few numbers to anchor expectations

Onboarding timelines: 4–12 weeks depending on complexity and jurisdictions.

Settlement fail rates: 2–5% in some international markets on any given day, with variance by market and asset class; target same-day resolution for plain vanilla breaks.

Withholding tax: net recovery can add 10–40 bps annually for international equity portfolios when executed well.

FX leakage: unmanaged auto-FX can cost 5–20 bps per year depending on flow patterns; disciplined benchmarking trims this significantly.

Corporate actions: missed or defaulted elections in active portfolios often show up as 5–15 bps of annual drag when processes are loose; tight governance reduces this close to zero.

These are directional ranges from real-world programs; your mileage will vary, but the pattern is consistent.

Final thoughts: put custody on the investment agenda

Custodianship looks like back office until it doesn’t. The mistakes above—jurisdictional mismatches, weak oversight, sloppy onboarding, benign neglect of FX and tax, and vague exit plans—are all fixable with structure and attention. Treat custody as part of your edge: negotiate it, measure it, and communicate it. The payoff is fewer distractions, better net performance, and investors who sleep well because you’ve shown them exactly how their assets are protected.

Build the right model once, keep tuning it, and you’ll avoid the hard lessons others learn the expensive way.