Here is an article published in New York Times about the relation between investment behavior and regulatory intensity regarding the location of hedge funds especially on offshore destinations such as Cayman Islands. In Europe, hedge funds as an alternative form of investment, distinguished from bonds and security investment, are subject to restrictive regulation and excessive taxation.
However, Ireland, United Kingdom and Switzerland have entailed sounder regulation as well as less restrictive tax hikes on hedge fund industry, establishing places, like Zurich and London, hedge fund capitals of Europe.
Since the fall of 2001, as the number of hedge fund registrations on Caymans began rising sharply, reflecting a good regulatory environment, financial secrecy laws and tax breaks which, working as an "investment magnet", soured hedge fund investment.
Some 8,500 investment funds are registered in the Cayman Islands, a near-tripling since 2001. In fact, nearly 75 percent of hedge funds are registered in the Cayman Islands. The territory’s tax advantages have turned it into one of the linchpins of the estimated $1.5 trillion global hedge fund business. The main advantage of the competitive financial law is that creating incentives to boost investment of particular funds, say hedge funds, reflects the investment behavior escaping high tax wedge and restrictive regulation rules which consider hedge funds as a regulation experiment and not as a business tool.
Taking risk into account, if you are a hedge fund manager, information awareness is the first tool in conducting the investment operations offered by a diversified financial products hedge fund industry which contains traditionally higher yield rates as well as higher perception of risk.
Consequently, hedge funds are garnering attention from tax policy. A major shift in the financial landscape of the majority of financial industry is a sign of a growing volume of red-tape and tax hampers hiking the performance and global competitive edge of hedge fund industry as well. Instead, sound regulatory environment and easing taxation is what, besides rapid proliferation, hefty assets and big returns, makes offshore jurisdictions attractive as fund management location.
In fact, running away from the IRS which imposed a corporate tax at 35 percent, is a pretty good reason to switch the investment location southward. All tax jurisdictions are competing against each other in offering the most hospitable regulatory location combined with tax incentives, further setting offshore destinations on top of the most favorable locations to invest, adding a big portion to the territorial economic performance.