don't let that stop you. Those and many other offshore mutual funds are available to anyone, US resident or otherwise, who is willing to put in the time and the money to search them out. In many cases, the effort is worthwhile. The offshore mutual fund business is booming, and while it's still largely the realm of the world's rich and not-so-famous, more and more of them are being made available to middle-income investors around the globe. Funds are considered "offshore'' if they are outside the jurisdiction of tax and securities laws of major countries. Such funds are based in the Channel islands off the coast of England, Luxembourg, Bermuda, Bahamas and Dublin, among other places. Returns on offshore funds often beat onshore funds. Over the past year, for example, the leading offshore US bond fund was the Caymans-based Merrill Lynch Americas fund, returning 57.77 percent in the year ending November 29, according to London-based Micropal Ltd., which tracks mutual funds. By comparison, the leading US domestic bond fund, the Touchstone Income fund, returned 28.90 percent. Likewise, three Dublin-based mutual funds outperformed all US-based global bond funds. They were the Baring GUF High Yield Bond fund, at 29.34 percent return, followed by GT Strategic Bond B fund, at 26.71 percent, and the BT GAF Global High Yield fund, at 26.54 percent. Among equity funds, however, the top gaining US funds posted better returns than offshore funds, both in global equities and US equities, Micropal said. Fontaine Trust Global Growth was the top performing US-based global equity fund at 45.63 percent, and the Interactive Investments Technology fund led US equity funds at 61.56 percent. "People who invest in offshore funds are looking to diversify,'' said Erwin Dikau, manager of the mutual funds department at Bank of Butterfield International in Grand Cayman. "You name an idea, and there's an offshore fund built around it. They come offshore for the returns too. Some funds are pretty aggressive.'' In the Cayman Islands alone, the mutual fund industry has grown to assets of more than $80 billion, just six years after the first funds were set up on the island, according to the Financial Services Office of the Cayman government. Worldwide, offshore funds account for some 25 percent of the $6 trillion in assets invested in mutual funds, according to Micropal. For small investors, offshore mutual fund investing in the Western Hemisphere isn't as easy as it is in Europe, where they can be bought and sold easily on stock exchanges in Luxembourg and Dublin. Offshore locales in the Caribbean are harder to get to, and government rules in the US, Canada and most major Latin American countries prevent most offshore funds from being marketed onshore. For US investors, it's even harder. Pressed by the Internal Revenue Service, most retail funds won't allow US individuals to buy shares, even if they fly to the Cayman Islands. There are, of course, ways to get around the rules. The easiest, though costly, is establishing an offshore company to conduct investments. Most offshore locales, including the Caymans, allow companies to set up -- tax-free -- without ever having to disclose who owns them. Those companies, whether owned by individuals or by the pooled interests of several people, can in turn purchase offshore funds, or onshore funds for that matter. The cost of setting up such a company in the Cayman Islands generally runs about $2,000, with an annual fee of $1,800 to the government to maintain the company, said Clive Harris, managing director at International Management Services Ltd., of Grand Cayman. It's cheaper in some other places, especially the British Virgin Islands, which boasts some 180,000 registered companies. Most non-US investors can buy offshore funds through their local stock brokers, although many do so through offshore bank accounts to avoid taxes. Cayman National Bank, for example, lists offshore equity funds from Fidelity, MFS, Putnam and GT, all available with initial investments of only a few thousand dollars to small investors with savings accounts at the bank. Another way to invest in mutual funds, and by far the most popular way in the Caymans, is to set up your own fund. For as little as $50,000 per investor, a "registered'' mutual fund can be set up in the Caymans to invest in virtually anything worldwide -- equities, bonds, real estate, venture capital. Most such funds have one or a few big investors, although some have as many as 1,000. They rarely go beyond that because of marketing rules in investors' host countries. The Caymans government charges fund companies $500 to register and another $500 a year in fees. Offshore mutual fund managers must avoid what are known as "the ten commandments'' in the US, said Noel Riley, a partner at Coopers & Lybrand in Grand Cayman. Those commandments include no communications with the general public, no holding of shareholders or directors meetings, no publishing of prices and no administration onshore. Most other major countries have similar rules. Still, "no rule says onshore persons can't own offshore funds,'' said Stanley Wright, managing director at Bank of Bermuda in Grand Cayman.

Booming times for offshore funds Why buy offshore mutual funds in the first place? For one, it allows more choices to the investor and, as illustrated above, sometimes higher returns.

There's also a tax advantage -- most offshore locations charge no taxes on income or capital gains.

Mutual fund administrators in the Caymans are quick to point out that there's very little tax savings for individuals since most are required to pay taxes on the profits when they repatriate them into their own countries. In reality, however, "The vast majority of offshore investors don't disclose their sources of income,'' said Shawn Flynn, manager of mutual funds for Swiss Bank & Trust Corp. in Grand Cayman.

Offshore locales, because of their secrecy laws, have made it easy for US investors to lie on line 11 of Schedule B, where the IRS asks about foreign bank accounts.

Even if the profits are declared, there is the tax advantage of being able to roll over the profits continually, building capital, and to buy and sell funds at whim, without paying yearly capital gains and income taxes. In that way, offshore funds save money in much the same way as a US 401K retirement account, Dikau said.

The IRS has eliminated that advantage in part by requiring investors to pro-rate gains over the entire holding period.

For many investors, especially wealthy individuals and institutions, repatriating profits is not an issue because they never intend to bring the money back onshore. There are few things that can be bought from an onshore account that can't also be bought from an offshore account, and offshore accounts can eventually be willed to siblings without paying inheritance taxes.

For most large investors, however, the tax advantages are secondary. Indeed, the biggest investors in offshore mutual funds are institutions, which usually disclose their offshore profits anyway. For them, the flexibility of government regulations is the key.

While a US fund may take three years to set up and gain approval from regulatory authorities, a Cayman Islands fund can be in business in as little as two weeks. What's more, registered Cayman funds have no restrictions on what they can hold and no limits on the percentage of a portfolio made up by any single investment.

Small investor groups often set up such funds to take advantage of "windows of opportunity,'' Dikau said. Over the past two weeks, for example, several bear market funds were set up in the Caymans, anticipating a possible downturn in the Dow Jones Industrial Average.