One of the most important steps when launching a hedge fund is to decide where to domicile it. The Cayman Islands is home to most hedge funds, largely because no tax is levied on them there.

Investors do not avoid tax by investing in a tax-free fund: they pay the same amount in the end, whether a fund is tax-free or not. The advantage to an investor of a tax-free fund is that they can avoid the possibility of having to make tax reclaims. With an offshore fund, they can also time when they brings their earnings onshore, and hence control the timing of their tax assessments.