Hedge Funds domiciled or administered in the Bahamas can be an area of opportunity for financial professionals. The Bahamas  has long been a reputable jurisdiction for traditional banking, due to its political stability, fairly modern communication infrastructure and  skilled workforce of accountants, lawyers, trustees and investment managers. Those same factors may make the Bahamas increasingly attractive to the hedge fund industry.

According to the Bahamas Financial Services Board;  This environment has seen The Bahamas administer the full spectrum of funds including equity, bonds, money market, fund of funds and hedge funds. Securities traded in these funds are unlimited and include derivatives, mortgage backed securities, real estate and currencies.

Portfolios of hedge funds may include fixed income securities, currencies, exchange-traded futures, over-the-counter derivatives, futures contracts, commodity options and other non-securities investments.

Offshore hedge funds are investment vehicles organized in offshore financial centers according to Greencompany.com a hedge fund advisor.

Offshore financial centers (“OFC”) are large centers for the establishment and administration of mutual funds and hedge funds. Hedge funds legally domiciled in an OFC hold around one-half of the hedge fund assets reported by the TASS hedge fund database, with the British Virgin Island and the Cayman Islands being the most popular locations. The Bahamas is playing catch up, and with the creation of Smart Fund vehicles, it just may stand a chance. Management of hedge funds is often conducted in or near major international financial centers such as London and New York, but the actual fund is registered in an OFC. In many OFCs, the low costs of setting up a company, along with a kind tax environment, makes them attractive to establishing companies.

These types of funds offer securities primarily to non-U.S. investors and to U.S. tax-exempt investors. Money managers who have significant potential investors outside the United States typically create offshore hedge funds. With regard to investors, U.S. taxpayers generally prefer to be in a domestically organized vehicle that is a flow-through entity for tax purposes, such as a limited partnership or a limited liability corporation.

In addition, Single-strategy managers continue to gravitate to traditional Caribbean locations and Bermuda, where costs are lower and the regulatory burden lighter than in Dublin and Luxembourg. Basic administrative fees are similar in all jurisdictions, but regulatory oversight adds to the expense in the European centers. For instance, in Dublin, funds need to have a custodian, which is not the case in the Cayman Islands. While banks and large fund companies like to have regulations for their retail vehicles to reassure investors, the majority of hedge fund managers are small operators, for whom the extra costs can be a major burden.

With all the above, being said, the Bahamas and the rest of the Caribbean seems poised to continue to be attractive destinations for hedge funds and their accompanying services. A recent news article from Caribbeannetnews.com gives a concrete example of this.  In January 2007, it said Overseas hedge funds based in Caribbean tax havens have been attracting investment capital from Japan where interest rates are next to nil.

Of Japanese securities investment abroad in January-November last year, about 5.84 trillion yen (56.7 billion dollars) flowed into hedge funds set up in the Cayman Islands, Bahamas and elsewhere in the Caribbean, the Nihon Keizai Shimbun said.

It was the largest amount of Caribbean-bound capital flow on record and represented a 150-percent increase from a year earlier, the leading business daily said.

It eclipsed the amount that found its way to Europe in the same period and started to approach the level sent to the United States, the report said.

The amount accounted for 31.7 percent of all Japanese securities investment in the 11 months. It was the first time that the share of Caribbean-bound capital topped 30 percent, it said.