Offshore Mutual Funds I. Introduction II. Benefits of an Offshore BVI Mutual Funds IV. Regulation of BVI Mutual Funds -- The Mutual Fund Act 1996 V. Formation of a Mutual Fund VI. BVI Mutual Fund FAQ III(a). Structure of Offshore Mutual Funds The four principal elements that govern the structure of mutual funds include: a) the nature of the underlying investments in which the mutual fund intends to specialize, b) the way in which the fund intends to market its shares, c) the way in which investors earn their returns and realize their investments, d) the way in which the fund's manager and other professionals earn their fees. Each of these issues is briefly considered below. III(b). The Underlying Investments Although most funds permit themselves the full range of investments, they generally specialize in a particular area, such as equities, bonds, currencies, or particular geographical areas or market sectors. Some funds may be hedge funds that rely to a greater or lesser extent upon the use of derivative instruments (i.e., options, futures and swaps based upon the underlying principal investment). In addition, some funds may rely heavily on the use of leverage or trade upon margin in order to boost returns. The latter are obviously the highest risk funds, in particular where these are also based upon derivatives. Where the intended investments are relatively liquid, the typical fund will be an "open-ended" fund, in which investors can subscribe and redeem their shares for cash on a regular basis. If the intended asset classes are illiquid investments, such as real estate developments or film finance, then a "closed-end" fund may be more appropriate. With this type of fund, subscriptions are limited by reference to the number of shares or a specified offer period. Investors only receive a return of capital after a specified period or when management so decides, in both cases after the fund has liquidated its investment. A fund may intend to invest in a variety of asset classes and to offer investors a choice of portfolio mix, with the option to switch between asset classes at minimal cost. A common structure is the "Fund of Funds" or "Umbrella Fund". Such funds work in one of two ways. The fund itself may establish a number of sub-funds in which investors can spread their investments. Subfunds may be for, e.g., equities, bonds or different currencies. Alternatively, the fund may offer a menu of third party funds from which investors can choose. This may give investors access on a pooled basis to funds to which they would have no access individually. A similar result can be achieved by creating a single fund with different share classes each representing a different type of investment (e.g. dollar, sterling and deutschmark denominated shares for investment in each currency). III(c). Method of Marketing Shares Mutual fund structure is also affected by where and to whom the funds are offered. For example, will the fund be offered to the general public or only to "sophisticated professional investors"? (Sophisticated professional investors normally means individuals with a net worth of at least one million dollars or institutions, including other funds.) In addition, is the fund marketing purely directed to the sponsor/manager's existing client base or discretionary managed accounts, or is it also directly or indirectly going out to other investors? Each of these will affect the various regulatory implications that need to be considered. At the end of the day, while there are some BVI regulatory requirements to be considered, regulations in the jurisdiction of the principal target markets will have the most bearing. III(d). Investor Returns The typical fund is an open-ended fund that issues redeemable shares and is intended to achieve capital growth. There are no restrictions on the number of shares that such funds can issue and there is a potential flow of subscriptions and redemptions, as investors make and redeem their investments. After a fixed initial period (no more than two or three months) during which the shares are offered at a fixed price, all subscriptions and redemptions are at the Net Asset Value. Being a growth fund, dividends are typically not paid. The frequency of redemption is governed by the liquidity of the underlying investment (i.e., how long the fund needs to realize cash to meet a redemption demand) and by the frequency of valuations. A fund can only redeem shares based on a formal Net Asset Valuation, so as to ensure proper pricing. Typically, redemption takes place on the last day of each month, following a Net Asset Valuation as at that date. With more liquid investments and if the fund is prepared to bear the administrative costs, valuations can be weekly or even daily. (The typical large institutional funds in the U.S. have daily valuations). A closed-end fund may pay dividends after an initial period but will only return capital on an irregular basis after the underlying asset is sold. Consider, for example, a real estate investment. While the development is being constructed, there is no return to the investor. Once built, an income stream will develop from rent received from tenants. After a period, the building may be sold realising a capital gain. III(e). Key Parties and their Fees and Expenses Sponsor, management and administration functions and their remuneration typically follow the following patterns: The Sponsor is the creator of the fund and will typically hold a number of voting shares (perhaps 100) in the fund, but these are not entitled to any distributions or share in the equity. All of the equity belongs to the investors, typically in the form of non-voting "preferred redeemable shares". The voting shares generally control management of the fund, apart from limited major decisions. The Investment Manager determines the investment strategy of the fund and makes the investment decisions. The manager earns fees in the range of 1 to 2% of the NAV per annum, calculated and paid on a regular basis. Typically, these exclude any brokerage commissions and trading expenses which are additional expenses of the fund. In addition, many managers take an incentive or participation fee, based upon any increase in the Net Asset Value. These may range from 6% to 50% of the profit or gain. Usually, there is some adjustment provision such that if the NAV goes down, the manager does not get any further fees until the NAV exceeds the previous high. Some investment managers take a percentage of each subscription as a commission, often up to 5%. This may be added to the investment or deducted from the net proceeds. Typically the fee is taken where the manager has to pay commission to other intermediaries. The Administrator acts as registrar and transfer agent, keeps the books and records of the fund, and calculates the NAV. Depending on the complexity of the fund, the administrator's fees could be as little as a few thousand dollars a year or as much as 0.5 to 0.65 % of the NAV per annum. Sometimes the administrator's fees are included within the management fee. In certain situations, the administrator subcontracts a part of the work, particularly the NAV certification, to the investment manager. The Custodian holds the fund's cash and investment assets. Commonly, part of the fund's assets are held by one or more brokers who execute trades on behalf of the fund. Custodial Fees can also be a fixed fee or a percentage of NAV. Where a broker acts as de facto custodian, it usually charges on a transactional basis. In addition, the fund will also be responsible for all of its own legal, accounting and other administrative expenses, excluding overhead expenses of the manager, administrator, etc. I. Introduction II. Benefits of an Offshore BVI Mutual Funds IV. Regulation of BVI Mutual Funds -- The Mutual Fund Act 1996 V. Formation of a Mutual Fund VI. BVI Mutual Fund FAQ

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