Setting up an investment service offshore can be a risky and costly business as Alaska-based McKinley Capital Management found out when it decided to start up one in Bermuda.

It took two years, 360,000 air miles of travel, a lot of money on lawyers, marketing and administration...and delay on getting a listing on the Irish exchange before McKinley was able to get its offshore hedge fund product off the ground. In the end the effort more than paid off for the company, which set up McKinley Select (Bermuda) Ltd. in 1996. You have to do it right or your company may end up falling flat on its face, McKinley's chief investment officer Robert Gilliam said yesterday.

A bungled offshore can result in clients running away in droves from the main onshore business.

"You are remembered for your failures,'' Mr. Gilliam told a conference on offshore funds at the Southampton Princess Hotel. "There is a major risk in an onshore company deciding to go offshore. There is a great financial risk to developing a product.'' Even though the company did a cost to benefit analysis during its decision to set up McKinley Select the calculations fell apart under the weight of actually going about the procedures.

The company decided to set up an offshore subsidiary as its success onshore was being limited by how much money it could accept into its products being offered at home base in Anchorage.

The company looked onshore as a further development as its products. McKinley discovered there were 3,000 other offshore hedge funds to compete with.

It decided to go with what it knew best -- modern portfolio management through quantitative computer models -- rather than attempting to develop a unique product.

Next it needed a law firm which knew the offshore market. This is one area which blew its costs out the window. Since there are only about two dozen firms that had the capacity to create the proper structure, McKinley ended up hiring a lawyer who cost $180 an hour. Costs escalated to $420 an hour when the lawyer was made a partner.

"It's very expensive to know what the rules are,'' he said.

Attempting to get a listing on the Irish exchange ended up taking four more months than McKinley had calculated, adding to costs. But the most important decision McKinley had to make was how to market its product. It approached a few offshore marketing experts, three or four of which promised to introduce the form to the Sultan of Brunei. A few also promised introductions to oil barons in Saudi Arabia.

Marketing firms cost less, but McKinley decided to go alone. That way it could control how its products were marketed and it could continue to deal with clients on a more personal basis.

The next risk was choosing an administrator. The firm had a choice of dealing with a large administrator or a small one. McKinley decided to go with a smaller player -- the Bermuda Commercial Bank -- because it felt it would get more individual attention. He advised onshore investment firms to be financially prepared before deciding to step into the offshore world.

However, the rewards for the firm paid off in the end. The experience extended McKinley's capacity to accept more money, and develop new products. The firm now has a more diversifed investor base, geographically as well as by type. It also helped the firm look at investments outside the US.