The Cayman Islands have been a hot spot for offshore investment for a long time, but what kinds of investments are they and are they worth it?
Investment funds are a popular way of generating additional revenue out of your already hard-earned cash.
Cayman Islands investment funds are particularly popular because they have some added benefits that you can’t get in the UK or other parts of the world. There are also some drawbacks of investing in a fund there, which we’ll get to later on.
In this post, we’re going to cover what investment funds are, and what types of funds are most common in the Cayman Islands. We’ll then share with you the pros and cons of setting one up there. So, if you’re looking for a way to sensibly invest your spare cash, don’t go anywhere…
What are Investment Funds?
Before we get into the pros and cons of Cayman Island investment funds, it’s important to know what investment funds are so we know what we’re dealing with.
Investment funds have a supply of capital shared between different investors, which is used to collectively buy securities. Despite the fund being a shared pool of capital, each individual investor retains ownership of their personal shares in the fund.
Decisions on how the investment fund’s capital is invested are down to the fund manager, not the individual investors. The manager decides which securities the fund should hold, in what quantities, and when to buy and sell them.
The only decisions investors make are which fund they buy into. This could either be a broad fund which buys all sorts of different securities, or a narrow one that buys securities in a specific sector. The investor can also decide whether to buy into a high or low risk fund.
What are the Most Common Types of Investment Funds in the Cayman Islands?
There are many different types of offshore investment funds, all of which are slightly different and have their own merits. We’re going to briefly go over the most popular ones in the Cayman Islands to give you an idea of the types of funds you can invest in.
These funds give investors the opportunity to pool their money into a single investment managed by a professional. These investment funds tend to buy stocks, bonds and other securities all dependant on its objectives.
These are the most common type of investment fund in the Cayman Islands with close to 11,000 of them registered with the local regulator CIMA. Similar to mutual funds, hedge funds have a pool of money from multiple investors which is managed by a fund manager.
This manager exists in every hedge fund, no matter how it’s structured, and will always invest the money in a way that achieves the fund’s goals.
Exchange-Traded Funds (ETF)
An ETF is a pool of securities that trade on an exchange, the same way stocks are traded on the stock exchange. ETFs usually contain different types of investments including stocks, commodities, and bonds. It’s a good idea to check if the ETF you’re investing in only holds securities in one country or internationally.
Money Market Funds (MMF)
MMFs are a type of mutual fund that invests in cash and cash equivalent securities only. These investments tend to be liquid and short-term with high quality of credit, such as certificates of deposit, and other such instruments.
What are the Pros and Cons of Cayman Islands Investment Funds?
Now that we have a better idea of what investment funds are and what types of investments are made in the Cayman Islands, it’s time to give you the pros and cons of investing in one.
Pros of Cayman Islands Investment Funds
Here is an extensive list of all the reasons you should invest in a Cayman Islands investment fund:
This benefit applies mostly to hedge funds as they are much more flexible than the other types, hence the popularity of them in the Cayman Islands.
Instead of being a rigid investment in a portfolio of stocks, bonds and other securities, hedge funds are flexible. This is because the investments are controlled by fund managers who are very tactile and flexible investors.
Also, people don’t trade hedge funds publicly, so there are no governing bodies regulating how well they perform. This frees up the manager to use strategies that are usually regulated, such as short selling, derivatives, and leverage tactics.
Expert Advice and Transparency
The professionals who run hedge funds and mutual funds are experts in their field and know how to invest your money.
These investment fund professionals are not only great at investing your money, they are also great with financial management. They will even give you detailed information on how your investment is being spent, and share future plans for your investment with you.
Basically, you won’t have to do any investment work yourself. It’s up to you how much attention you pay to the investments the managers are making.
Tax benefits are one of the main reasons people invest in funds in the Cayman Islands because there is no corporation or income tax on money earned outside its territory. This includes dividends or interest earned on investments.
Instead of paying taxes, offshore companies pay an annual licensing fee to the Cayman Island’s government based on the amount of share capital the company has.
Protection of Assets and Confidentiality
Most tax havens have very tight privacy laws which makes it easy for individuals and business owners to hide their assets and identities from their own governments.
Moving your assets to the islands can prevent financial harm from various legal actions, such as foreclosure or seizure of assets from creditors. If you put your money into an investment fund in the Cayman Islands, you’ll also be protected by these same privacy laws.
Investing in countries outside your home country can reduce market risk by spreading it across various economies, investment types and assets. This is particularly true for hedge and mutual investment funds, as they often buy shares internationally to make the most out of your investment.
Cons of Cayman Islands Investment Funds
If, after reading these benefits, offshore investment funds sound too good to be true, you should read the following negative aspects to balance your opinion:
Changes in Tax Laws
If you looked at the above benefits, especially the tax benefits, and you thought it might be a good way to avoid paying taxes in your home country, it’s probably not the best idea.
Because of the relative popularity of offshore investment funds, they have garnered quite a lot of political attention. The tax laws associated with these funds have tightened to make loopholes more difficult in an attempt to make using them to evade taxes illegal.
This is one of those areas that western governments haven’t been able to fully clamp down on, but they are determined and will continue to close loopholes to get their taxes.
One example of this would be the US government, who now require citizens to file annual reports on foreign account holdings, tax US citizens on their worldwide income, and require banks to report information about their foreign customers.
If they find out that you are evading taxes using investment funds, they will prosecute you. As we said earlier, the Cayman Islands value privacy highly, but your government will have its own ways of acquiring the information they need to prosecute.
Cost and Complexity
Offshore investment funds can often be expensive to get involved in. Many offshore funds require a minimum investment of between $100,000 and $1 million.
The people who run these offshore funds know they’re in high demand. So, they sell them to wealthy people who can afford their fees, thus pricing their investments accordingly.
For example, mutual funds charge what’s called an expense ratio. Expense ratios are a measure of what it costs to manage the fund, and managers calculate it annually. You won’t be billed for this fee, but it will come out of your returns.
Many of the higher-cost funds claim to be worth the extra cost because they perform well. That said, having that extra cost for management can slowly chip away a chunk of your profits.
Another thing investment funds sometimes do with your money is market the fund with it. This means your returns are being used to promote the fund to other investors. These costs are often called 12B-1 fees so watch out for them if you choose to invest.
Should You Invest?
In this post, we’ve given you everything you need to know to make an informed decision on whether you should invest in a Cayman Islands investment fund. You now know what investment funds are, what the most common types are, and have read a full list of pros and cons.
If you’re still unsure as to whether you should invest, it’s important to remember that the costs of investing and government regulations on tax evasion are something to think about. But, at the end of the day, these funds tend to make more money than they lose.
Thank you for reading this post, and good luck with your investments!