Investing Offshore

Diversification through investing offshore can reduce your portfolio volatility while maintaining returns. In addition to providing portfolio diversification, offshore investments provide a high degree of choice and flexibility. A large percentage of the over 80,000 funds traded worldwide are located offshore. Investing in these funds must often be accomplished through an offshore entity due to regulations in the investor’s home country. The removal of domestic restrictions allows fund managers to alter positions quickly and easily. Moreover, international funds may be denominated in any major currency.

Not only does international investing provide additional choice and flexibility, it also can provide an excellent level of privacy to financial transactions thereby reducing an investor’s potential exposure to frivolous litigation.

An international trust with an offshore LLC can be the only vehicle that a non-U.S. investment manager or brokerage will accept when dealing with a U.S. citizen. The advisor will want to be representing an entity, such as a trust or LLC, rather than directly working for a U.S. citizen or resident.

While we offer information on legal structures and strategies for investors wanting to move assets outside their home country, we are frequently asked what investment opportunities are available once the funds have been moved. We are not investment advisors, and this is not designed to be investment advice. Rather, we’ll try to offer an explanation of the type of investment classes and options that are popular with investors once they’ve moved their available capital outside U.S. borders. Some of these investment classes are restricted to accredited investors, while others are open to virtually anyone.

Let us outline these in broad terms by starting with more conservative options and moving to more aggressive options:

This is undoubtedly the most popular asset protection investment for many investors. Gold has been a store of wealth for thousands of years, and most of many investors view it that way, rather than as an investment. One hundred years ago, an ounce of gold was US$20, and it bought a finely tailored man’s suit. Today, it is US$1,325, and it still buys a finely tailored man’s suit. It is simply a constant store of value that may go up and down in the short run but that will always go up in direct relation to the destruction of paper currency’s value over time.

Some attorneys recommend a minimum of 10% of a client’s wealth be in gold, but we have heard of investors with up to 100% of their assets in gold. One attorney contact of ours estimates the average portfolio consisting of 25% to 33% gold. Silver is more volatile than gold, but many people believe that silver will outperform gold in the next few years. Also, silver is actually consumed by industry, whereas gold is not, meaning that, over time, we could experience a shortage of silver, which, could, in turn push the price up dramatically. Many lawyers will advise clients put an allocation of at least 5% to 10% of their portfolios in silver, but some clients have much or nearly all of their net worth in silver.

These are obviously low risk and low return. Rates are a bit higher offshore because of the supply/demand dynamic. You might expect to earn 2% to 5% depending on the amount and term of the CD.

A number of offshore investors want to diversify away from the dollar and consider holding 25% to 50% of their financial assets in non-dollar denominations. Of course, you could maintain these non-dollar funds directly in the foreign currency and collect whatever interest is paid on deposits in that currency (in most cases, the rate of interest will be very low; in Switzerland, it’s zero), or you could make investments in the foreign currencies in, say, government or corporate bonds, equities, funds, etc. The investment risk and return profile spans the gamut and isn’t necessarily more or less; it’s just from a foreign currency base.

Many people these days are looking to own foreign real estate as both an investment and as an alternate personal offshore nest for themselves. Real estate investments span the spectrum, as well, from speculative to conservative. Options many investors seem to like include raw beachfront property, residential, condos, and commercial office property. Fixed returns are available through some attractive “sale/lease” backs being offered by premium developers and hoteliers. Frequently, investors look to leverage foreign real estate into residency or even second citizenship options in the country where they buy.

Read more about investing in international real estate.

Agriculture as a separate investment class has become increasingly popular as of late. Some clients choose to purchase their own freehold pieces of agricultural property and produce their own crops full or part time. Some countries, like Uruguay, offer active programs to help investors locate suitable farmland.

Additionally, developers with their own projects are always looking for investors or farm plot owners for such things as teak, coffee, mango, and avocado production. These products all have different time horizons, sometimes with double-digit internal rates of return (IRRs).

Hedge Funds of Funds are designed to cut down on the volatility of any particular hedge fund, while capturing the dynamics available in hedge funds that are not available to mutual funds. Two main dynamics associated with hedge funds put them in a class far superior to mutual funds. First, a hedge fund has total flexibility to be “long” or “short” in its positions, while a mutual fund can only be “long” on the shares in its portfolios.

Second, the hedge fund manager is compensated based on how much money he makes for you in absolute terms, not in reference to an index. A mutual fund manager can earn big bonuses if he outperforms his index (even in years when he loses money for you), but mutual fund managers generally are incentivized simply to match their index and, further, to buy whatever investments are in the index. That is why the best and brightest investment people want to leave mutual funds and run their own hedge funds. That is also why bad hedge fund managers don’t last very long in the marketplace, as bad hedge fund managers don’t earn themselves what are called “performance fees.”

With a “fund of funds” comprising 8 to 10 sub funds, you would expect returns to average 10% to 12% over a five-year time horizon, with good years realizing 20% and bad years right around zero.

Individual hedge funds can be much more volatile depending on sector, leverage, etc. We have seen individual funds up 200% in one good year and down 35% in a bad year. We have colleagues that work with a number of successful fund managers who average returns in the range of 15% to 20%. One longtime manager we know has 27 “plus” years and 2 “negative” years in the last 29 years. Many top-notch hedge funds are open only to foreign and offshore investors who are also accredited investors.

Sector funds target either specific industries, such as junior mining companies, or regions, such as emerging markets. A lawyer friend tells us he likes BRIC-oriented funds presently and is most bullish on Southeast Asian funds that target Laos, Myanmar, Vietnam, and Cambodia. These Asian tiers could produce IRRs in excess of 30% over the next decade as capitalism expands rapidly.

Private equity funds look at a mix of non-publically traded investment opportunities or investments that are not immediately liquid. If you have a 10-year time horizon, you might reasonably expect returns of two, three, or four times the money you invest. Obviously, some of those investments might never become liquid, or you could suffer a loss of your capital, but private equity has historically been the greatest tool for significantly growing wealth, especially on a generational basis.

Private equity on its own can be even more lucrative than funds, but the downside is a complete loss of investment capital. Nevertheless, a great many private equity deals promising 5, 10, even 20 times returns are available to sophisticated investors who have the ability to do their own due diligence and vet the potential investment opportunity. Due to regulatory limitations, opportunities exist offshore particularly in the field of medical tourism, medical devices, and non-FDA-approved treatments, as well as other regulated areas of banking and insurance that are prohibited from advertising their investment opportunities within the United States.

This is for the right investor seeking opportunistic returns, usually 50% to 100% per annum. A private offshore investment advisor can make you aware of these opportunities on your own or in conjunction with a small group of accredited investors. These projects generally plug a void that exists between a project’s equity and its debt limitations, seeking to achieve superior equity-type returns with collateralized debt risks for a short period of time, generally 6 to 36 months. Minimum investments can be US$1 to US$5 million or more.

Examples of such opportunities include:

• Interim hotel construction finance where long-term finance is already in place.
• Wholesale acquisition of agricultural land where contracts exist to sell retail sub parcels.
• General project finance where equity-holders have significant assets (stocks, gold, etc.) that they do not wish to liquidate but that are willing to pledge in amounts above the value of the funds required, generally as a bridge until long-term (cheaper) financing is available.

These are for only the most aggressive investors and should be undertaken only by extremely knowledgeable professionals or through investment vehicles operated by individuals with such knowledge and experience.

These types of leveraged “bets” can produce return of more than 100 the invested amount if events unfold as the trader is betting they will…or the options can expire worthless. Top advisors urge this class of investment should be undertaken, if at all, with only a very small percentage (1% to 3%) of your investment portfolio.