Offshore Funds Offer Profit, Protection & Privacy: How Do We Buy Them Safely?

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Offshore Funds Offer Profit, Protection & Privacy

How Do We Buy Them Safely? By Mark Nestmann

Some of the best performing mutual funds in the world are off-limits to U.S. investors. In most cases, U.S. regulations make it nearly impossible for U.S. investors to find out about them.

In this article, I’m going to lift the censorship on some of the best funds you’ve never heard of—including funds that have produced outstanding returns during both the bull and bear markets. I’ll also tell you the do’s and don’ts of investing in offshore funds.
But first, let me give you hint of what you’ve been missing…

Fund #1: This fund, which specializes in managed futures and options contracts, has returned 21.5% each year since 1996, even in the midst of the worst bear market since the 1930s.

Fund #2: This fund, which uses a diversified multi-manager hedge fund strategy, has gained 13.2% each year since 1989.

Fund #3: This fund, which has the lowest risk of all hedge funds in its class, has gained an average of 9.3% annually since 1995 and has never had a losing year. How many mutual funds traded on U.S. exchanges can say that?

Fund #4: This fund, which has gained 12% per year since 1997, employs a global asset allocation approach investing in value stocks and had no losing years during the 2000-2003 bear market.

Fund #5: This fund, which has gained 15% since its creation in November 2001, is managed by continuously scoring and ranking a database of 3000 stocks. The managers buy the high scorers long and sell the low scorers short. Profits come from the relative movement in the long versus the short portfolio.

I’ll let you know the names of these funds and how to buy them in a moment. (It’s OK to peek!) But first, I’ll explain some of the reasons why offshore funds are such a great long-term investment.

Six Reasons Why You Need Offshore Funds in Your Long-Term Portfolio

1. Greater choice. The United States is the world’s biggest securities market, but the overwhelming majority of mutual funds traded worldwide aren’t available on U.S exchanges. Indeed, of the more than 80,000 funds trading worldwide, only about 10,000 are registered in the United States.

2. Offshore funds can take speculative positions prohibited by domestic securities laws. It’s very difficult for a fund traded on U.S. markets to switch from a long (bullish) to short (bearish) position without expensive and time-consuming approval from regulators. Yet in the hands of an experienced portfolio manager, this kind of flexibility can lead to exceptional long-term profits.

3. Offshore funds can employ risk-hedging techniques that are impossible to use in domestic funds. This strategy can actually make offshore funds safer than domestic funds. For instance, U.S.-registered stock funds can’t shift their focus to the futures markets without obtaining clearance from government regulators—even if these markets look far more promising to the fund managers. Such restrictions are virtually non-existent in properly chosen offshore jurisdictions.

This method is the "secret" of four of our top five recommended funds. They are "hedge" funds, managed in such a way as to be negatively correlated with stocks and bonds. Such funds aren’t as profitable in bull markets as either stocks or bonds, but are much safer during bear markets. They offer safe, consistent, long-term performance.

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4. Offshore funds can offer foreign currency diversification. Many offshore funds are denominated in the euro, Swiss franc or British pound, unlike U.S.-domiciled funds denominated only in U.S. dollars.

5. Offshore funds offer privacy. Offshore funds take your wealth off the domestic "radar screen" and make it invisible to predatory lawyers and the myriad asset tracking services that can determine the owner of virtually any U.S. security.

6. Offshore funds can be held in retirement plans. There are no restrictions on placing offshore funds in retirement plans, although you must find a trustee willing to administer your plan if it contains foreign assets. (I’ll show you how to do that in a moment.)

How to Buy Offshore Funds

If your bank or broker won’t tell you about offshore funds, where can you go to learn about them?

One good place to start is the Internet. Check out: http://www.funds-sp.com This Web site from Standard & Poors has a fantastic search tool that permits you to search for detailed fund performance information on over 80,000 funds; from Austrian-registered investment funds to Japanese investment trusts.

Another good resource is your offshore bank. Many offshore banks, including The Sovereign Society’s Offshore Convenient Account partner banks in Austria and Denmark, have their own families of offshore funds with excellent long-term performance records. By purchasing funds affiliated with your offshore bank, you are also likely to save on commissions.

Finally, The Sovereign Society’s Council of Experts has conducted extensive research on offshore funds. Our top recommendations all have superb long-term track records and have proven to provide superior performance even in the midst of the 2000-2003 bear market.
When you decide which offshore funds you wish to purchase, you have a couple of good options:

Buy them through your offshore bank account. Most offshore banks will purchase offshore funds for you as they would any other security. The purchase will be made in the name of the bank, not your name, and the bank will hold the securities for you in safe custody as any other shares.

Buy them through an investment advisor. While the vast majority of investment advisors are not familiar with offshore funds, several members of The Sovereign Society’s Council of Experts can provide assistance in this regard: namely, Larry Grossman, Eric Roseman and Dr. Erich Stöger (contact information below). Fees and minimum investment thresholds may apply.

Unfortunately, it is usually not possible for U.S. persons to purchase offshore funds directly from the fund promoter. Most fund promoters prohibit direct investment from the United States to avoid regulatory hassles with the U.S. Securities & Exchange Commission.

Avoiding Tax Traps in Offshore Funds

Offshore funds present some of the most profitable investment opportunities internationally. However, there are certain "tax traps" for unwary U.S. investors who purchase offshore funds without considering the tax consequences. These tax traps are designed to prevent U.S. investors in offshore funds from deferring payment of taxes on their profits. I’ll explain how they operate in a moment.

Under U.S. law, U.S. mutual funds are required to distribute all income or gain to their shareholders each year. Offshore funds are obviously not subject to these rules, and indeed many of them provide the opportunity to defer income or gain indefinitely. The U.S. 1986 tax reform act contains a provision that imposes steep taxes on deferred gains in offshore funds organized as foreign corporations. The law also taxes the income allocated each year at the highest tax bracket that existed that year. Then, the tax for each prior year is subject to compound interest at the prevailing rate for an underpayment of tax.

There are four practical ways to avoid these traps:

1. Purchase the funds through your Individual Retirement Account or pension plan. That way, all gains are legally tax deferred until you begin receiving distributions from the plan. There are no restrictions on offshore investments in retirement plans, although it is often difficult to find a U.S. custodian who will consent to having the funds placed offshore. However, the Council of Experts members listed as contacts in this article can assist in finding cooperative trustees.

2. Purchase the funds through an offshore life insurance policy or variable annuity. Such structures require expert tax advice to construct, but again, the Council of Experts members listed as contacts can provide assistance in this regard.

3. Create a structure involving an offshore trust and a charitable remainder trust to purchase the funds. Again, this requires expert tax advice and you need an independent trustee to administer those investments

4. Purchase only offshore funds organized as "partnerships" for U.S. tax purposes. This insures that all income or gain from your investment flows directly through to you, with no opportunity for tax deferral. Just be careful to avoid situations where a foreign partnership makes an investment in a foreign mutual fund.

The best way for typical investors to purchase offshore funds is using the strategies I just described. If your situation is unusual, there are two more complex procedures by which you can avoid the high tax on distributions of accumulated earnings charges, according to Sovereign Society Tax Advisor Vernon Jacobs.

Our Five Top Offshore Funds

I promised you that we would reveal the names of our top recommended funds in this article. Here they are:

Fund #1 (up +21.5% per annum since 1996) is Man-AHL Diversified PLC. Link: http://www.maninvestmentproducts.com. No front-end load; declining redemption fees starting at 3% for the first two years following purchase declining to zero after seven years. Note: This has been an extremely profitable fund, but unlike the remaining four picks, is not designed to minimize risk through hedging strategies.

Fund #2 (up +13.2% per annum since 1989) is GAM Diversity. The euro share class (offering currency diversification) is GAM Diversity Euro Class. Link: http://www.gam.com. 5% front-end load, 0% redemption fee.

Fund # 3 (up +9.3% per annum since 1995) is Pioneer-Momentum All-Weather Fund. Link: http://www.momentumuk.com. 5% front-end load, 0% redemption fee.

Fund #4 (up +12% per annum since 1997) is SocGen International Sicav. Link: http://www.sgam.fr. Front-end load up to 3%.

Fund #5 (up 15% since its formation in November 2001) is Trafalgar Hedge Fund LP. This fund is organized as a partnership for U.S. tax efficiency. Shares in U.S. dollars, euros and British pounds are available. There is no front-end load; management reserves the right to charge a fee for redemptions that occur less than a year after your initial investment.

Contacts

For more information on investing in the lucrative offshore fund market, contact any of the following members of The Sovereign Society’s Council of Experts:

Larry Grossman

Managing Director, Sovereign International Asset Management, LLC. WATS: (888) 609-7425. Fax: +1 (727) 784-6181. E-mail:grossman@worldwideplanning.com. Link: http://www.worldwideplanning.com. Grossman is a Certified Financial Planner and a Certified Investment Management Analyst. He was one of the first financial advisors to develop a tax-compliant method for taking IRAs and pension funds offshore.

Eric Roseman

President, ENR Asset Management, Inc. Toll-free (U.S.A./Canada): +1 (877) 989-8027. Tel.: +1 (514) 989-8027. Fax: +1 (514) 989-7060. E-mail: enr@qc.aibn.com. Roseman’s firm specializes in customizing multi-manager mutual fund portfolios for high net-worth investors by blending different fund strategies with the objective of increasing returns while reducing overall risk.

Dr. Erich Stöger

President, EurAxxess, Ltd. WATS (USA): 1 (800) 331-0996. Tel.: +(41) 1 980-4281. Fax: +(41) 1 980-4255. E-mail: info@euraxxess.com. Link: http://www.euraxxess.com. With over 30 years experience in private banking, Dr. Stöger has wide experience in selection of offshore funds and in taking U.S.-qualified retirement plans offshore.

Vernon Jacobs

Tax Advisor to The Sovereign Society. E-mail: jacobs1@kc.rr.com. Link: http://www.offshorepress.com. Jacobs is a CPA and has substantial experience assisting U.S. investors in offshore funds with tax compliance issues.

(The Sovereign Society, its principals and the advisors listed in this article may have positions in the securities recommended herein and may hold and or dispose of the same.)