The largest expense for most non-institutional hedge fund investors is not performance fees — it is taxes. Even for hedge strategies that are able to utilize long term capital gains the tax bite can still be substantial. If a U.S. citizen wishes to invest in an off-shore hedge fund then the tax situation can be so horrendous that it effectively places such investments out of bounds.
One way an investor can defer or avoid tax on their hedge fund investment is by utilizing a Swiss Private Placement Annuity. By using a Swiss Private Placement Annuity it is possible to invest in virtually any type of investment including domestic US and off-shore hedge funds. Besides the flexibility and tax advantages, when properly structured, Swiss Private Placement Annuities can offer protection from creditors and can be excluded from bankruptcy proceedings.
While an investor in a variable Swiss annuity is required to hold a diversified portfolio of assets, there are situations where an investment in a single asset (such as a hedge fund) may satisfy the diversification requirement. For example this can occur when the investment is in a hedge fund that itself satisfies the diversification requirements. There are limitations though, all beneficial interest in the hedge fund must be held by one or more segregated asset accounts of one or more insurance companies and access to the hedge fund must only be through the purchase of a variable contract (see Swiss Annuities & Life Insurance by Marco Gentenbeim and Mario A. Mata — pages
207 - 212).
Due to the above limitations, a hedge fund manager might possibly consider setting up a separate hedge fund that is solely dedicated to annuity investments in conjunction with various Swiss insurance companies. Of course, he would need to consult with tax and legal professionals before he embarked on such a project (see Swiss Annuities & Life Insurance by Marco Gentenbeim and Mario A. Mata — page 127).