Can You Make Long Term Profits With Offshore Mutual Funds?

First though, let's look at what a mutual offshore fund actually is. A mutual offshore fund is merely a fund domiciled in a different jurisdiction than the one the investor resides in. Different jurisdictions have different laws and regulations so an offshore fund may be able to invest using a different style or strategy than its onshore counterparts. That means there may be a broader range of securities that an offshore fund may choose from. The criteria for investment securities are less rigid, and the weighting of the offshore fund may differ from jurisdiction to jurisdiction.

The reason that some countries cannot invest directly into some offshore funds is either because they have not satisfied the securities commissions in the respective countries, or because the offshore fund has not had their prospectus approved for distribution in these countries. For example: Australia has a population of around 19 million, of which maybe 5,000 would be interested in investing in a particular investment. So for the funds to gain access to such a small market it is not economically viable. However, this is not to say that a structure set up in the right jurisdiction would not allow the investor to gain access to these investment opportunities.

Now that you know what a mutual offshore fund is and how it operates, let's move onto the regulations that govern those offshore funds. The offshore funds, as with their onshore counterparts, are extensively regulated, with large factors:

- extensive disclosure requirements;
- strict series of regulation requirements; and
- distribution on at least a semi-annual basis of a detail report of the company's activities to its shareholders.

The report must contain information on the financial status of the offshore fund, securities held in the offshore fund's portfolio; compensation paid to the directors, as well as the purchase and sale of any and all securities within the investment portfolio. In addition, certain management tasks must be carried out by a board of directors - at least 40% of whom must be independent.

Now let's take a look at an offshore fund's prospectus. Don't cringe - we're going to take you through the information you need to know, and what you have be wary of, in plain English. Mutual offshore fund prospectuses can be pretty dry reading, but you absolutely must review them thoroughly before investing or you could be very sorry later. Things to keep an especially sharp eye out for include the following:

- Mention of a pending lawsuit or regulatory review, which offshore funds are required by law to disclose.
- Any disclosures that highlight the risks involved in the investment. These statements are normally found in the 'investment objectives' area.
- An unusually high expense ratio, which measures the offshore fund's costs as a percentage of assets.

If you find any of these - or, worse still - a combination of all three, you might want to reconsider investing in the offshore fund. And remember: you have a far greater chance of coming out on top if you refuse to go for the short-term gain, and instead buy for the long-term performance.