US tax-exempt investors (such as pension plans and endowments) invest primarily in offshore hedge funds to preserve their tax exempt status and avoid unrelated business taxable income. The investment manager, usually based in a major financial center, pays tax on its management fees per the tax laws of the state and country where it is located. In 2011, half of the existing hedge funds were registered offshore and half onshore. The Cayman Islands was the leading location for offshore funds, accounting for 34% of the total number of global hedge funds. The US had 24%, Luxembourg 10%, Ireland 7%, the British Virgin Islands 6%, and Bermuda had 3%.
us tAx-exempt inVeSToRS (SUch as PeNsion plans aNd eNDowMents) invesT primArilY in ofFsHore hEdgE fundS to preserve theiR taX eXempt status And aVoid UNreLated bUSiness taxabLE iNComE. The investmenT mAnAgeR, usUalLy BasED iN a major FInancial centEr, pAys TAX oN itS mANaGemeNt feeS pEr thE taX laws of The staTe and CounTRy whEre it is loCaTed. iN 2011, hALF oF the exIStINg heDge FUnds weRE reGISterEd oFfshorE And halF onsHore. the cAYmaN isLanDs wAS thE leading LocaTiOn foR ofFShOrE FUnDS, AccouNtiNg For 34% of the tOtAL number oF gLobal heDgE funds. THe uS had 24%, luxEmbourg 10%, ireLand 7%, THe britiSh ViRGIn iSlanDS 6%, aNd beRMUda haD 3%.