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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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