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Often missed or played down in many media reports and analyses, cutting costs through paying less tax is an important feature of financial sustenance for many companies. And this concept is gaining even more ground as firm struggle to meet their profit expectations amid these turbulent markets.

Hedge funds are no different, and the latest substantial increase in the number of funds registered in the Cayman Islands - a virtually tax-free jurisdiction - underline the importance of the role played by tax in the alternative investment industry.

At the end of June, 10,037 funds were registered in Cayman, up from 9,413 at the end of last year, according to the industry regulator, the Cayman Islands Monetary Authority. This increase comes despite a year-long credit crisis that has slashed returns for many hedge funds and cut both capital inflows and the number of new funds launched in North America and Europe.

US and European hedge fund managers set up investment vehicles in Cayman to attract global investors, as it is often more tax-efficient for them to invest in offshore vehicles than in domestic hedge funds. The same applies to US-based non-taxpayers such as educational endowments.

Cayman continues to face regular verbal harassment in the US Congress over its alleged role in encouraging tax avoidance or evasion, but it has done nothing to constrain the steady flow of new funds being established in the jurisdiction. The leading offshore hedge fund domicile for nearly a decade, it continues to outpace comfortably rival jurisdictions such as the British Virgin Islands, Jersey, Bermuda and Guernsey.

For all the efforts of European countries to encourage the establishment of hedge funds at home, there's no sign that Cayman's dominance will be challenged any time soon.

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