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The
Benefits of Less Regulation
Regulation
covers the avoidance of fraud (to protect investors
from their own ignorance or cupidity), the avoidance
of money-laundering (nothing to do with bona fide investors)
and has prudential aspects, i.e. it tries to prevent
investment managers from making risky investments that
could lead to loss for investors.
The problem
is that well-meaning regulations act as a strait-jacket
for investment managers - they create an environment
that is suitable for widows and orphans, as they used
to be called, but one that is devoid of opportunities
for the expert, or even for the moderately well-informed
investor. Most people thinking about offshore investment
are probably well above average in terms of their ability
to avoid fraud, to understand markets, and to select
superior investments. These people are ill-served by
'widow and orphan' regulation, and have to look outside
their domestic markets for good returns.
This is
not to say that good returns and risk can be wholly
divorced. It's obvious that junk bonds are riskier investments
than triple A sovereign debt, and hence have a higher
coupon. It was equally obvious that Russian GKOs, yielding
100% a year, were a risky investment - but the banks
which invested in them for five years knew that, and
were not surprised when they lost their capital in 1998,
even though they made a song and dance about it after
the event.
Hedge funds
have illustrated the benefits of investment freedom
very clearly: they initially almost all chose offshore
bases, mostly for regulatory reasons, and their high
minimum investment levels will traditionally have deterred
the most vulnerable types of investor. Most investors
in such funds received returns of 20% or 30% a year
for ten to fifteen years until recent years, when an
explosion in the number of funds made it harder to make
good profits from alternative strategies.
Hysterical
accusations that hedge funds increase market volatility
are far from the truth: if anything, the opposite is
the case. It is the dramatic increase in global liquidity
that has increased the apparent size of swings. Hedge
funds and derivatives tend to dampen volatility, not
increase it.
It is also
far from the truth to say that 'onshore = safe' and
'offshore = risky'. Many offshore jurisdictions have
high-quality regulatory regimes that quite clearly separate
the risky goats from the safe sheep, without constraining
investor choice. One of the main goals of www.investorsoffshore.com
and its associated sites, www.lowtax.net
and www.tax-news.com
is to explain the regulatory environment in individual
offshore jurisdictions, and to contrast it with the
regime in 'high-tax' areas.
See Regulation
of Alternative Investment for a fuller description
of regulatory regimes in 'high-tax' and 'low-tax' areas,
and the freedoms or lack of them which apply to investors
in various different residential situations.
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