OFC History - Offshore Products & Services
Hedge Funds
The history of hedge funds can be traced back to 1949 when Alfred W Jones established the first hedge fund structure. Jones implemented a strategy of "hedging" his long stock positions by selling short other stocks to protect against market risk. He also borrowed money and used the leverage to increase the potential return of the fund. Jones referred to this approach as using speculative tools for conservative purposes. The fund structure and investment strategy used by Jones was featured in a 1966 Fortune magazine article. The article revealed how the fund of Alfred Jones had significantly out performed the highest performing mutual funds from that year. The article attracted the attention of wealthy investors seeking better returns. By 1968, records show that there were approximately 200 hedge funds in existence.
Due to the prevailing market conditions, the hedge fund industry then experienced very lean times in the bear markets of 1969 / 70 and 1973 / 74 with numerous hedge fund managers producing substanial losses. In 1984, findings from research of the hedge fund industry by Sandra Manske of Tremont Partners revealed that only 68 such funds could be identified.
The hedge fund industry remained relatively quite during the 1980's until it experienced a resurgence in the early 1990's. The financial press then began highlighting the returns being achieved by the ground breaking hedge fund managers George Soros (Quantum Fund) and Julian Robertson (Tiger Fund and its offshore sister the Jaguar Fund). Soros and Robertson used modern strategies such as foreign currency trading and financial derivitives such as the trading of futures, options and swaps which did not exist in 1939.
These new hedging tools which are not available to the mutual fund industry led to several new hedge fund trading strategies and with big returns and favourable financial press publicity, the hedge fund industry really took off. Estimates indicate that there were 300 hedge funds in existence in 1990. In 2000, such investment structures had increased to 3,000 and then in 2003 it was estimated that there were some 6,000 hedge funds.
Captive Insurance
A captive insurance company is defined as a limited purpose wholly owned insurance company formed to insure some of the exposures and risks pertaining to its parent or affiliates of its parent.
Captive Insurance type activity can be traced back to the 1500's where this concept was used by shipowners who met in London over a cup of coffee. Then in the 1800's textile manufacturers used the captive insurance model in response to high fire insurance premiums. Subsequent organisations to jump on the Captive Insurance bandwagon ranged from Churchs, Candy Manufacturers and the Medical Profession. Over the last 20 years there has been a large growth in the number of captive insurance companies being set up. Today, a significant proportion of Fortune 500 companies own and operate Capitive Insurance Companies. A companies motives for entering the Captive Insurance market will vary, however, common advantages offered are lower costs than paying traditional insurance premiums, a great amount of control, a broader line of coverage and an enhanced cash flow from a financial perspective.
In the 1960's, Bermuda became an offshore financial centre and several Captive structures were formed there. The Caymans emerged as a Captive Insurance domicile in the late 1970's
Other common insurance companies with an offshore presence are Reinsurance companies. Reinsurance companies sell policies to other insurance companies enabling them to reduce risk and protect themselves from very large losses.
Mutual Funds
A mutual fund is an investment vehicle which allows like minded individual investors to pool their money and benefit from professional money management. The investment manager for a small fee will then select stocks, bonds and other investments which are consistent with the funds objectives as set out in the prospectus.
In 1924, the first official mutual fund was established. It was called the Massachusetts Investors Trust. The stock market crash in 1929 stunted the growth of mutual funds. However, with additional mutual fund regulations and renewed investor confidence, mutual funds began to really take off again in the 1960's and 1970's.
Today, there are thousands of mutual funds in existence with trillions of dollars invested. With no tax on dividends or capital gains, offshore financial centres are the domicile of several offshore mutual funds. Mutual funds offer the advantages of liquidity and diversification and are also relatively easy to use and understand.
