Canadian Hedge Fund Managers Setting up Offshore

A number of Canadian Fund Managers have expanded outside of Canada. This knowledge article will outline a variety of key considerations those managers should consider before moving their operations outside of Canada. This knowledge article is not designed to be all inclusive and managers must ensure to obtain appropriate professional advice as every business has unique factors to consider.

Why Do Canadian Managers Look to go Offshore?
There are several reasons why a Canadian fund manager start to look offshore with the most common reasons:

  • A successful track record has been developed in the domestic market and the manager wants to grow therefore looking to access larger pools of investor capital or
  • Tax efficiency for trading strategy

Time and time again the largest reason for setting up offshore is access to investor capital so let’s look at some of logistical components of setting up offshore.

Capital Raising

The biggest difference between the domestic Canadian market capital raising and the offshore market is the distribution models. Most Canadian managers are integrated into the Fund SERV network in Canada which is a provider of electronic business services to the Canadian investment industry. Fundserv’s core service is to provide the network infrastructure for its customers to place and reconcile orders through efficient and secure data exchange. Therefore, relationships with the broker dealers is critical for distribution in Canada and therefore the investor profile tends to be a larger number of investors with lower capital transaction sizes.

In the offshore structure the complexity of capital raising can be challenging as questions such as below need to be discussed.

In what markets are you looking to attract investors?

What type of investors in those markets are you looking to attract? For example the US you could be looking for taxable, non-taxable and or ERISA funds.

Have you consulted legal counsel in each of these markets especially for markets such as Europe where solicitation and reverse solicitation have implications.

The biggest mistake seen in the offshore market is the belief that if you build the offshore structure they will come. The reality is capital raising offshore requires an integrated effort from compliance, legal, investor services and operations ensuring the firm does not run afoul of the matrix of regulations from dealing offshore.

Mind and Management

Canadian Revenue agency has a key element to address when looking offshore and that is ‘mind and management’ of the fund. Mind and Management determines whether the fund is carrying on business in Canada as a result of the Canadian management. Under Canadian tax legislation, the ‘safe harbour’ provision specifies designated investment services that may be carried on by the Canadian manager of an offshore hedge fund without risk of causing the fund to be carrying on business in Canada and thereby subjecting the fund to Canadian tax. Guidance regarding this can vary from firm to firm and therefore it is important to ensure you have counsel that has engaged in this structuring with other firms.

Some important considerations when looking at Mind and Management must include;

  • Appointing an administrator such as Krypton Fund Services or others that are located outside of Canada
  • Appointing a board of directors for the fund that comprises at least a majority (if not all) independent directors that are not resident in Canada. Krypton can help with this and has a list of several directors in the offshore market.
  • Ensuring the governance of the fund takes place outside of Canada
  • Non-participating voting shares in the fund (typically referred to as ‘founder’ or ‘management’ shares) must be held independently of the fund manager

Fund Structuring

Setting up an offshore fund once you determine trading strategy and investors can offer several selection opportunities.

First, you should determine whether the fund is open ended or closed ended and this should match your liquidity requirements of the underlying trading strategy and investor base. An open-ended investment fund is one that may issue and redeem its participating shares on a continuous basis at their net asset value. An investor in an open-ended investment fund generally has the right to require such investment fund to redeem his or her investments at the current net asset value on an ongoing basis in line with the Offering Memorandum.

A closed ended fund does not provide the right to demand redemption of their units. Rather, investors’ units are typically redeemed at net asset value at the end of a pre-determined investment period.

Secondary, you should determine the fund legal structure personality in whether the structure is formed as a unit trust, partnership and or corporate structure.

Lastly, do you require a regulated fund structure or private fund structure, this will largely be determined by the type of investors the fund is targeting.

Setting up an offshore structure for a Canadian manager can offer a larger market for their investment strategy. Careful consideration should be made by appointing a group of advisors including an independent administrator like Krypton Fund Services, along with your Canadian legal counsel, offshore legal counsel and Canadian tax advisor. Proper planning can help a fund establish if it makes sense to move offshore, what the target market is for the fund and appropriate structure to achieve the investment managers goals.

About Krypton Fund Services

Krypton Fund Services (‘Krypton’) is a new boutique fund services company with a sole purpose of providing Excellent Client Service. The core focus of our business is Client focused with service and accountability as the framework of everything we do. We pride ourselves on a very client-centric approach that is not a cookie cutter offering.

Our platform provides regulatory reporting, fund administration, registrar and transfer agent, project management and setup, to a wide range of family office investment portfolios, investment funds, private and special purpose vehicles operating predominantly in the alternative investment arena.

Contact information:
Roderick White, CEO
Email: [email protected]
Suite No. 1222
Rosebank Centre
11 Bermudiana Road
Pembroke, HM08