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A world of wealth

For high-net-worth individuals, offshore centres are widely recognised as providers of investment expertise, security and confidentiality. Generally accepted as having investible assets or more than £500,000, HNWIs account for a significant part of the offshore investment market.

An estimated £4 trillion in HNWI assets – almost one-third of the estimated total global HNWI market of £11 trillion – has been invested offshore.

The advantages provided by offshore financial centres extend well beyond their widely publicised tax advantages and draw a broad range of private investors.

Most offshore centres offer innovative trusts and other asset ownership structures as well as investment and bank-ing expertise, security and confiden-tiality. Another key benefit of offshore centres is their favourable legislative environment that has been adapted to attract investors. These tax advantages have resulted in an increasing number of dotcom entrepreneurs choosing to establish their ventures offshore.

Offshore centres provide an enormous diversity of investment services. These range from ready-made offshore funds to tailor-made wealth management services.

For HNWIs requiring a personalised wealth management service, most offshore centres provide a range of private banking, investment and fiduciary services which can be structured on an individual or family basis for the management, preservation and transmission of personal and family wealth. Others simply want to access the broad range of funds available offshore.

Hedge funds, asset-backed funds,private equity and venture capital funds, umbrella funds, unit trusts, limited partnerships, limited liability or limited-dur- ation companies, private family trustsand foundations are often domiciled in offshore centres. Private investors wanting to invest in offshore funds have over 7,000 to choose in 22 offshore centres.

Like their onshore counterparts, offshore wealth management providers are under increasing pressure to ensure good returns on investment.

The new generation of HNWIs – including entrepreneurs and dotcom millionaires – expect their offshore investment to work hard for them and to deliver above-average returns. This has resulted in a shift away from the traditionally lower yield investments in deposits and bonds towards high-performance equity products and more recently, alternative investments, many of which are to be found offshore.

The regulatory environment ofoffshore centres has fostered financial innovation. A good example is the development of hedge funds. Until recently, the outstanding returns achieved by such funds were only open to extremely wealthy individuals willing to invest a minimum of $1m.

Now investment houses have begun to bring together their investment expertise and offshore industry contacts to form the first generation of funds of hedge funds.

These funds can be accessible to investors from as little as £10,000 and aim for a combination of low volatility and absolute positive returns and spread the risk associated with hedge fund strategies over a number of funds.

Often exclusively available offshore, alternative funds of funds have proved their worth during recent slides in the market. While technology stocks, which delivered such outstanding returns in 1999, have tumbled and floundered of late, alternative class funds of funds were able to maintain steady, positive returns.

For example, the Bank of Bermuda&#39s alternative class fund of funds, launched towards the end of 1999, has provided returns of over 20 per cent since inception while the FTSE languishes some 200 points down this year.

As well as being at the forefront of new investment products, offshore centres can also provide the most appropriate asset ownership structure for the preservation and transmission of personal and family wealth. This is achieved through the use of private trust and company structures. These services ensure the flexible and efficient administration of complex trust, corporate and other ownership structures.

Many wealthy people set up family trusts or foundations in offshore centres to consolidate the manage- ment and protection of their investments. By establishing a trust, individuals are able to protect family wealth from irresponsible heirs who might be tempted to sell off the family silver, depriving future generations.

Using a team of skilled specialists, including investment advisers and managers, trustees, bankers, accountants and lawyers, the value of individual and family assets can be max- imised by managing the financial aspects as well as operating structures in which to place those assets and ensure their transfer to future generations. In addition, offshore trusts are often used by individuals wanting to protect their assets from political and economic instability.

The offshore fund centres are increasingly directing their marketing activities at particular markets and particular products. Luxemburg and Dublin focus on the European market with Guernsey, Jersey and the Isle of Man traditionally focusing on the UK market although they are becoming increasingly attractive to European investors, particularly with developments such as the establishment of the Channel Islands stock exchange in Guernsey. The Caribbean centres continue to focus on the US and Latin American markets.

There has been some debate about whether offshore centres will continue to attract HNWIs.

Clearly, the HNWI market is still developing rapidly both in terms of its size and with consumer requirements becoming more complex.

With a continuing favourable global environment for wealth creation, competition will undoubtedly intensify as HNWIs insist on increased performance through the allocation of their assets on a global basis.

This will mean that the offshore financial centres will need to expand and refine their products and services.

The bottom line is that the offshore centres will need to evolve quickly to become highly developed financial nerve centres.

If offshore centres are able to rise to the challenge, there is little doubt that they will play a key role in the wealth management industry for many years to come.


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