How to Structure Offshore Funds for Alternative Assets

If you’re raising capital for private equity, credit, infrastructure, real estate, or digital assets, structuring the fund offshore can open doors. The right setup gives investors a familiar wrapper, reduces friction around tax and regulation, and keeps operations clean. The wrong one adds cost, drags on returns, and slows capital formation. After years of building and fixing these vehicles, I’ve boiled the process down to practical steps and clear trade‑offs you can apply right away.

The big picture: what an offshore fund actually is

At its core, an offshore fund is a pooled investment vehicle domiciled in a jurisdiction outside the sponsor’s home market, designed for cross‑border capital and a specific asset strategy. Offshore doesn’t mean exotic; it means neutral. You’re marrying:

A legal wrapper investors recognize and can underwrite efficiently.

A tax profile that avoids unnecessary leakage.

A regulatory regime that’s proportional to your strategy and investor base.

An operational backbone that can run at scale.

Alternative assets often combine long hold periods, complex cash flows, and diverse investor types (US taxable, US tax‑exempt, EU professional investors, family offices in Asia). The architecture has to respect that complexity without overengineering. My rule of thumb: design for 80% of your capital at launch—then use parallel funds, AIVs, and blockers to accommodate the edge cases.

Map your investor base and asset profile

A good structure starts with two honest lists: who’s investing and what you’re buying.

Investor segmentation that drives design

US taxable individuals and family offices: often prefer pass‑through treatment and treaty access; sensitive to PFIC rules in corporate feeders.

US tax‑exempt (pensions, endowments, foundations): want to avoid UBTI from ECI and debt‑financed income—often invest through offshore blockers or offshore feeders into a master.

Non‑US investors: typically want a tax‑neutral vehicle with no unexpected withholding; care about treaties for certain assets (especially credit and real estate).

EU/UK professional investors: AIFMD and marketing permissions are central; may prefer EU domiciles (Luxembourg or Ireland) and depositary oversight.

Insurance balance sheets and sovereigns: prefer robust governance, strong service providers, and jurisdictional stability.

If you expect more than 25–30% of capital from any one category, optimize the base structure for that group and serve others via feeders or parallels.

Asset strategy and liquidity profile

Private equity and venture: closed‑end, illiquid, multi‑year deployment and return of capital; common use of AIVs for tax and co‑investment.

Private credit: often open‑ended or evergreen with periodic liquidity; NAV lines prevalent; significant cross‑border withholding/treaty work.

Real estate and infrastructure: asset‑holding SPVs in local jurisdictions; debt financing and WHT planning; UK and EU tax rules loom large.

Hedge strategies or hybrid: may use side pockets or closed‑end sleeves; liquidity terms must match asset turnover.

Digital assets: custody and licensing frameworks matter; valuation and audit require early alignment.

If asset‑liability timing mismatches appear (for example, offering quarterly liquidity while buying 5‑year loans), adjust terms or choose a closed‑end structure.

Picking the right jurisdiction

The “best” jurisdiction is the one your investors already accept and your strategy can operate in smoothly. Here’s how the major options line up.

Cayman Islands

Fit: hedge funds, private credit, PE/VC, digital assets; global investor familiarity.

Why managers choose it: speed to market, cost‑effective, neutral tax profile. Historically, roughly 70% of global hedge funds are domiciled in Cayman.

Structures: Exempted Limited Partnership (ELP), company, Segregated Portfolio Company (SPC), unit trust (less common).

Considerations: Economic Substance and AML/Beneficial Ownership regimes are well‑defined; VASP regime for digital assets; not ideal for EU retail distribution.

Luxembourg

Fit: pan‑European strategies, institutional investors, real assets and private credit; investors seeking EU governance features.

Why managers choose it: AIFMD framework, treaty network, strong service ecosystem. Luxembourg regulated fund assets exceed EUR 5 trillion; RAIFs have grown to well over 1,500 vehicles.

Structures: RAIF (fast market favorite), SIF, SICAV, SCSp (LP‑style), SCS, S.A.; optional umbrella funds with compartments.

Considerations: Requires AIFM (in or out of EU), depositary, admin and audit locally; strong but costlier infrastructure; good treaty access if structured properly.

Ireland

Fit: credit, hedge, real assets; distribution focus; common with US sponsors for EU access.

Why managers choose it: ICAV for corporate funds; QIAIF authorization can be achieved in as little as 24 hours for qualifying investors; strong admin and depositary market.

Structures: ICAV (umbrella‑friendly), ILP, Unit Trust; QIAIF regime for professional investors.

Considerations: Similar governance and depositary needs to Luxembourg; strong for liquidity funds and loan origination.

Channel Islands (Jersey, Guernsey)

Fit: private equity, infrastructure, family office co‑investment.

Why managers choose them: stable, pragmatic regulators; GP‑friendly and strong directors’ market.

Structures: Jersey Expert Fund, Jersey Private Fund; Guernsey Private Investment Fund; LPs and companies.

Considerations: Not in EU, so marketing into EU relies on NPPR; excellent for targeted fundraising.

BVI and Singapore

BVI: efficient for SPVs and some fund setups; cost‑effective; often used for holding structures under fund umbrellas.

Singapore: the Variable Capital Company (VCC) is gaining traction; MAS licensing environment; strong for Asia‑focused strategies and family office platforms.

If you plan to market widely across the EU, Luxembourg or Ireland tend to reduce friction. If your base is global and institutional with significant US tax‑exempt capital, Cayman or Channel Islands paired with NPPR in target EU states can be efficient.

Core legal structures you’ll actually use

Most offshore funds are built from a small toolkit.

Exempted Limited Partnership (ELP) and SCSp/ILP equivalents

Best for: private equity, venture, private credit, infrastructure, real estate.

Why: contractual flexibility, pass‑through tax at the fund level in many cases, and well‑understood governance (GP/LP model).

Features: GP entity controls; LP Advisory Committee; capital commitments, drawdowns, carried interest waterfall.

Corporate funds (Cayman exempted company, ICAV, SICAV)

Best for: hedge and hybrid strategies, evergreen or semi‑liquid funds, or when investor wants share classes and umbrella sub‑funds.

Why: easier to run periodic subscriptions/redemptions, robust share class mechanics, equalization options.

Trade‑off: corporate status for US investors can trigger PFIC concerns; often solved via master‑feeder.

Segregated Portfolio Company (SPC) and umbrella funds

Best for: multi‑strategy platforms and managed accounts with ring‑fenced liabilities.

Reality check: liability segregation helps, but service providers still diligence each cell/sub‑fund. Use where strategies share service providers and governance.

Unit trusts

Best for: certain Asian investor bases and insurance structures; also used in Japan.

Trade‑off: less flexible than partnerships in some respects; use where investor familiarity demands it.

AIVs, blockers, feeders, and co‑investment vehicles

AIV (Alternative Investment Vehicle): created to make or hold specific investments for tax or regulatory reasons.

Blocker corporations: used to convert ECI for US tax‑exempts or non‑US investors into dividend income. Commonly Delaware or Cayman blockers for US ECI; Luxembourg/Ireland blockers to access treaties.

Feeder funds: onshore (e.g., Delaware LP) and offshore (e.g., Cayman company/LP) feeding a master; aligns US taxable, US tax‑exempt, and non‑US interests.

Co‑investment SPVs: standalone or managed via fund side letters; align fees and governance.

Common architectures that actually work

Classic master–feeder

Structure: Offshore corporate feeder for US tax‑exempt and non‑US; onshore pass‑through feeder for US taxable; master fund trades/holds assets.

Use case: hedge/hybrid strategies, open‑ended credit.

Benefit: tax optimization for different investor types; operational efficiency at the master.

Parallel funds

Structure: Two or more funds invest side‑by‑side, each customized for tax/reg/marketing needs (e.g., Cayman ELP and Luxembourg SCSp).

Use case: private equity, real assets with European and global investors.

Benefit: treaty eligibility and ERISA/UBTI solutions; keeps waterfalls separate and clean.

Umbrella with sub‑funds

Structure: ICAV or RAIF umbrella hosting multiple sub‑funds/compartments with segregated liability.

Use case: multi‑strategy sponsors; easy to add vintages or sleeves.

Benefit: shared governance and service stack; cost efficiencies.

AIVs and deal‑by‑deal sleeves

Use case: specific investments with unique tax attributes (e.g., US real estate with FIRPTA concerns, or a loan requiring a treaty‑resident lender).

Benefit: protect the main fund’s tax profile without contaminating the whole vehicle.

Tax design: the non‑negotiables

This is where experienced structuring pays for itself. Get the big calls right, and you avoid years of drag. Here’s what consistently matters.

US tax considerations

ECI and UBTI: Income effectively connected with a US trade or business (ECI)—like operating income or loan origination—can create UBTI for US tax‑exempt investors. Solution: use blockers or invest via master‑feeder where the offshore feeder blocks UBTI.

PFIC rules: US taxable investors in offshore corporate funds face punitive PFIC regimes unless mitigated. Solution: offer a US pass‑through feeder or deliver QEF reporting if feasible (often not for complex alternatives).

FIRPTA for real estate: Non‑US investors in US real property can be taxed on gains. Solutions: REIT structures or blocker planning; AIVs to ring‑fence US real estate.

ERISA plan asset rules: If “benefit plan investors” exceed 25% of any class of equity, the fund’s assets can be deemed plan assets. Solutions: maintain below 25%, rely on VCOC/REOC exceptions, or adjust marketing. Include robust ERISA language and monitoring.

Management fee waivers: Tax deferral and character conversion tools are under heavy scrutiny. Only use with strong economics and contemporaneous documentation.

EU/UK and global considerations

AIFMD: If your main investor base is in the EU, using an EU AIF with an authorized AIFM and depositary simplifies marketing and ongoing permissions. For non‑EU funds marketed via NPPR, be ready for “depositary‑lite” arrangements and reporting.

ATAD and interest limitation rules: Affect deductibility of interest and hybrid instruments across Europe. Coordinate fund finance and asset‑level leverage with local tax counsel.

Withholding tax: Private credit often runs into WHT on interest. A treaty‑resident lending platform (Luxembourg or Ireland) with proper substance can materially improve net returns.

UK property: Non‑resident capital gains tax (NRCGT) applies; planning via REITs, unit trusts, or company structures is common.

Substance: Economic substance requirements exist in many jurisdictions. Ensure the GP/manager has real decision‑making and documentation; hire independent directors who actually attend and challenge.

Practical tax build

Select the “neutral” vehicle for capital aggregation (Cayman ELP or EU SCSp/ILP).

Add feeders/blockers tailored to investor groups (US taxable pass‑through; offshore for US tax‑exempt and non‑US).

For credit and real estate, place treaty‑resident AIVs at the asset‑holding level.

Draft a tax manual: allocation methods, ECI/UBTI management, WHT reclaim process, PFIC or QEF approach if applicable.

Regulatory perimeter and investor protections

Investors will ask about your compliance footprint before they wire a dollar. Have crisp answers.

SEC, CFTC, and US regimes

SEC registration: Advisers with over $150 million in private fund AUM generally must register with the SEC unless an exemption applies. Even exempt reporting advisers (ERAs) have reporting duties.

Custody rule: Registered advisers must use qualified custodians and deliver audited financials within specific timelines; align your admin and audit calendars early.

CFTC: If you trade commodity interests, CPO/CTA rules may apply. Some funds rely on de minimis or 4.13(a)(3) exemptions; confirm with counsel.

AIFMD and UK rules

EU AIF with EU AIFM: Full compliance but best for broad EU distribution; depositary required.

Non‑EU AIF with NPPR: Requires local filings in each member state; often “depositary‑lite” and Annex IV reporting.

UK: Post‑Brexit UK AIFMD regime mirrors many EU aspects; rely on UK NPPR when marketing there.

AML/KYC and tax transparency

FATCA and CRS: Your fund is an “Investment Entity.” Register for a GIIN (if FATCA), appoint a responsible officer, and agree a reporting workflow with your administrator.

AML policy: Use risk‑based procedures, screen investors, and record beneficial ownership. Auditors will test these controls.

Economics, terms, and alignment that work

The toughest conversations happen when terms don’t fit the asset or the investor profile.

Closed‑end vs evergreen

Closed‑end (PE/RE/infra): commitment model, investment period, harvest period, capital calls, distributions via a waterfall.

Evergreen/open‑ended (credit/hedge/hybrid): periodic subscriptions/redemptions, gates, side pockets for illiquids, ongoing equalization or series accounting.

Fees and carry mechanics

Management fee: 1.0–2.0% of commitments or NAV, stepping down after investment period in closed‑end funds.

Performance: 20% carry with 8% hurdle is still common, but credit funds may run 10–15%; European waterfall (deal‑by‑deal vs whole‑of‑fund) must match strategy and LP expectations.

GP commitment: 1–3% of commitments shows alignment; allow cash or management fee waiver only if defensible.

Clawback and escrow: A 20–30% carry escrow plus GP clawback with joint and several GP sponsor guarantees is typical for closed‑end vehicles.

Liquidity and valuation

Match redemption terms to asset turnover; use hard gates (e.g., 10–25% NAV per quarter) and suspensions only for emergencies.

Valuation policy: follow IPEV for PE or fair value hierarchy for open‑ended; set frequency (quarterly for PE; monthly or quarterly for credit/hedge) and external pricing checks.

Fund finance

Subscription lines: common for smoothing calls and enhancing IRR optics; keep usage within LP‑agreed limits (e.g., 20–30% of commitments; 180–365 days average tenor).

NAV facilities: useful for refinancing or later‑stage liquidity; disclose clearly; align covenants with portfolio.

ERISA/UBTI nuance: subscription line interest may create UBTI at blocker level; coordinate with tax and LPs.

Governance, substance, and operations

Investors care who’s minding the store.

Board and GP oversight

Independent directors: two experienced, conflict‑aware directors reduce risk; expect USD 10–25k per director per year in Cayman/Channel Islands; more in EU funds with depositary oversight.

LPAC: define conflict approvals (co‑investment allocation, valuation overrides, recycling, follow‑on decisions).

Policies: valuation, conflicts, side letter MFN, cybersecurity, business continuity.

Service providers and workflows

Administrator: NAV calculation, investor services, FATCA/CRS, waterfall support. For closed‑end funds, insist on capital account reporting that mirrors LPA mechanics.

Auditor: engage early; alternative assets require well‑planned audit files and valuation support.

Legal counsel: onshore and offshore teams; tax counsel covering US/EU/asset‑level rules.

Depositary/custodian: mandatory for EU AIFs; for non‑EU funds, consider depositary‑lite when marketing into EU.

Banking and custody

Prime brokers and custodians: align with asset strategy; for private credit, custodians handle loan docs and cash; for digital assets, consider qualified custodians with MPC or cold storage and travel rule compliance.

FX and cash controls: segregate operating accounts; dual approvals; administrator as payment agent when feasible.

Special topics by asset class

Private credit

WHT planning: Luxembourg or Irish lending platforms often reduce withholding; ensure sufficient substance (local directors, office support, decision‑making).

Risk: borrower concentration, documentation standards, and portfolio monitoring; NAV covenants on financing can restrict maneuvers.

Liquidity: offer periodic liquidity only with meaningful gates and stress tests.

Real estate and infrastructure

Local SPVs: hold assets through jurisdictional companies or partnerships for stamp duty mitigation and financing.

Tax: FIRPTA/NRCGT and local WHTs dictate whether to use REITs, companies, or transparent entities; AIVs keep the main fund clean.

Operations: property‑level cash controls, OPEX reserves, and construction draw oversight.

Digital assets

Licensing: Cayman and BVI have VASP regimes; align with your trading and custody footprint. Bahamas, Switzerland, and Singapore offer alternatives with defined licensing paths.

Custody and audit: choose a custodian with SOC reports; agree on pricing sources and valuation committees; chain‑of‑custody documentation matters at audit.

Terms: use side pockets for illiquid tokens or venture‑style positions; restrict in‑kind redemptions unless operationally ready.

Marketing and distribution strategy

Great structures fail if you can’t market them.

US: comply with Regulation D; prepare Form D and state blue sky filings; confirm whether you’re a registered adviser or ERA; align pitch materials with ADV disclosures.

EU: decide between EU AIF with passporting vs non‑EU AIF via NPPR. For NPPR, choose target countries (e.g., Netherlands, Sweden, France, Germany) and complete local filings; expect Annex IV reporting.

UK: rely on UK NPPR; appoint a UK compliance distributor if needed.

Switzerland: distribution to professional clients needs a Swiss representative and paying agent.

Asia: Singapore (VCC) and Hong Kong (LPF) can be used for regional feeders; local private placement rules vary—budget time for KYC expectations.

Set a marketing calendar: first‑close investors often need more diligence; give 6–8 weeks for institutional ODD.

Budget, timeline, and resourcing

The best sponsors under‑promise and over‑deliver on timelines.

Timeline: 8–16 weeks from greenlight to first close is realistic if documents are standard. EU AIFs can take longer due to depositary and AIFM onboarding.

Legal set‑up costs (typical ranges):

Cayman master‑feeder with side letters: USD 150k–350k.

Luxembourg RAIF/SCSp with AIFM and depositary: EUR 250k–600k depending on complexity.

Ireland ICAV/QIAIF umbrella sub‑fund: EUR 200k–450k.

Ongoing annual costs:

Administrator: USD/EUR 100k–300k+ depending on complexity and investor count.

Auditor: USD/EUR 30k–150k.

Directors/board: USD/EUR 20k–75k total.

Depositary (EU): 3–8 bps of NAV plus minimums.

Fund finance: 150–350 bps over base for subscription lines in normal markets; legal and arrangement fees extra.

Resource the project like a real product launch: one internal project manager, core counsel, tax advisers in key jurisdictions, admin onboarded by week four, and draft investor materials ready by week six.

Common mistakes and how to avoid them

Mismatched liquidity: offering quarterly redemptions on assets that take a year to exit. Fix by using gates, lockups, or a closed‑end sleeve.

Over‑blocking: adding blockers everywhere “just in case,” causing tax drag. Use AIVs and investor‑specific solutions instead.

PFIC blind spots: putting US taxable investors into an offshore corporate fund without mitigation. Offer a US feeder or series with pass‑through treatment.

Ignoring ERISA 25%: drifting over the threshold mid‑fund. Track percentages by class and include remedies in the LPA.

Underpowered governance: appointing nominal directors who don’t challenge. Hire experienced, independent directors and hold real meetings with minutes.

Side letter sprawl: granting conflicting rights and an unworkable MFN. Maintain a side letter matrix, pre‑define MFN tiers, and centralize enforcement.

Poor valuation hygiene: ad hoc marks creating audit delays and investor distrust. Adopt a written policy and a recurring valuation committee.

Marketing without permissions: soft‑circling investors in the EU without NPPR filings. Sequence outreach with legal clearances.

Fee complexity: opaque equalization or catch‑up math that investors can’t reconcile. Use plain‑language examples and administrator‑verified models.

Rushing first close: onboarding investors before AML/KYC and bank accounts are fully live. Build a pre‑closing checklist and run a dry‑run with your admin.

Step‑by‑step launch roadmap

Define investor map and target markets: split by US taxable, US tax‑exempt, non‑US/EU/UK; estimate percentages.

Choose domicile and architecture: shortlist Cayman/Jersey vs Luxembourg/Ireland based on investors and assets. Decide master‑feeder, parallel, or umbrella.

Tax blueprint: design feeders/blockers/AIVs; decide treaty‑resident lending or real estate SPVs; draft tax memo and investor communication plan.

Select service providers: admin, auditor, legal (onshore/offshore), depositary (if EU), directors. Get fee quotes and SLAs.

First draft LPA/PPM/LLCs and GP docs: align with ILPA or market norms; include ERISA, MFN tiers, conflicted transactions, and valuation policy.

Build economics: management fee schedule, hurdle and carry mechanics, GP commitment, subscription/NAV facility parameters.

AIFM and licensing: appoint EU AIFM if needed; register for FATCA GIIN; assess SEC/CFTC registrations.

Operational set‑up: bank accounts, custody/prime, administrator onboarding; test capital call workflow and investor portal.

Marketing permissions: file Form D, EU NPPRs, UK NPPR, Swiss rep/paying agent as needed; lock down compliant pitch materials.

Data room and DDQ: prepare ODD materials, SOC reports from vendors, cybersecurity and BCP docs, valuation case studies.

Soft circle and side letters: negotiate key rights, standardize templates, maintain a side letter tracker; pre‑clear MFN logic with admin and counsel.

First close mechanics: KYC cleared, subscription docs checked by admin, capital call notice tested, fund finance line activated if used.

Two quick examples

Example 1: US credit with global LPs

Investor mix: 40% US tax‑exempt, 35% non‑US, 25% US taxable.

Asset: senior secured direct lending to European and US borrowers.

Structure: Cayman master; US LP feeder for US taxable; Cayman corporate feeder for non‑US and US tax‑exempt; Luxembourg SCSp AIV for EU lending with Lux GP and substance. The Lux AIV is the lender of record to optimize WHT.

Regulatory: ERA in the US; NPPR filings in the Netherlands and Germany; depositary‑lite.

Result: better after‑tax yields via the Lux AIV; US tax‑exempts avoid UBTI through the offshore feeder/blocker; clean reporting via administrator.

Example 2: Pan‑European value‑add real estate

Investor mix: 60% EU institutions, 20% UK pensions, 20% non‑EU sovereigns.

Asset: repositioning logistics assets; asset‑level leverage 50–60%.

Structure: Luxembourg RAIF in SCSp form; regulated AIFM; full depositary; compartment for each vintage; local SPVs per country; REIT entry considered in the UK for exit flexibility.

Regulatory: EU passporting; UK NPPR; Swiss professional marketing with rep/paying agent.

Result: smoother EU distribution, treaty access in several jurisdictions, and clear governance that matched investor preferences.

Practical drafting tips that save headaches

Keep definitions tight: “Investment Period,” “Follow‑On,” “Recycling,” and “Key Person” should align with your model. Build examples into schedules.

Waterfall math in plain English: include numerical examples of preferred return, catch‑up, and carry calculation; specify escrow and clawback timing.

Conflict policies with LPAC: pre‑define the matters that go to LPAC and the timeline for decisions; limit LPAC’s role to avoid fiduciary status.

Side pockets and suspensions: specify who can allocate and how; set clear testing criteria for illiquidity or pricing uncertainty.

Transfer and default provisions: align remedies with market norms; consider management discretion to waive or mitigate.

ESG and reporting: if investors want SFDR or TCFD‑style metrics, write what you can actually deliver; avoid over‑promising.

Measuring success: what investors look for

Net‑of‑tax return integrity: evidence that structure minimizes leakage for each investor cohort.

Operational readiness: clean onboarding, accurate capital accounts, timely reporting.

Governance and independence: directors who are credible, a depositary where required, and a functioning LPAC.

Transparency: clear fee and expense allocation, valuation policies, and fund finance disclosures.

Scalability: an umbrella, parallel, or AIV framework that supports growth without a rebuild.

Quick checklist before you press go

Investor map finalized and majority optimized in base structure.

Jurisdiction(s) selected with written pros/cons.

Tax memo covering ECI/UBTI/PFIC/FIRPTA/WHT and treaty strategies.

LPA/PPM complete with examples and MFN tiers; side letter matrix ready.

Service providers engaged; fee quotes and engagement letters signed.

Admin tested capital call/distribution workflow; portal live.

Depositary and AIFM (if EU) locked in; Annex IV process mapped.

FATCA/CRS classification and GIIN registration completed.

Marketing approvals filed (US/EU/UK/Swiss/others as relevant).

Audit firm reviewed valuation policy and opening balance sheet plan.

Fund finance line papered with investor notice templates.

Data room curated with ODD, cybersecurity, and business continuity materials.

Putting an offshore fund together is less about clever diagrams and more about sequencing, communication, and discipline. Build around your investors and your assets, keep the structure as simple as it can be and no simpler, and write policies you’re proud to follow. Done well, the setup fades into the background—and your team can focus on sourcing, underwriting, and delivering the gross‑to‑net your investors hired you for.