As Romney's campaign has repeatedly stated, investors in these funds do pay U.S. taxes on their income. But there are significant financial incentives in having a Cayman address. First of all, the British territory has no direct taxes, and makes it exceptionally easy to set up a new company -- it only costs about $600. A fund with a Cayman address also allows foreign investors to invest in U.S.-run funds -- such as the bricks-and-mortar incarnation of BCIP Associates on Huntington Avenue in Boston -- while avoiding double-taxation in both the United States and their home countries.

A managing partner of Maples and Calder told Bloomberg in 2009 that “having a registered office address in the Cayman Islands is driven by commercial considerations, not by tax avoidance," but there are tax advantages for U.S. investors. Under U.S. tax law, a person is taxed on all foreign income. But a foreign corporation is not taxed on foreign income until it is distributed to shareholders, meaning greater returns for investors like Romney. The Caymans also allow U.S. non-profit entities like pension funds and university endowments to invest in hedge funds without paying the "unrelated business income tax," which could be as high as 35 percent if those funds were based in the United States.

There are also concerns that the complexity and lack of transparency in Cayman Islands transactions can make tax evasion and money laundering easier, though there's no evidence that Bain or Romney were involved in these activities and the vast majority of Cayman Islands transactions are entirely legal.

This is not to say they're popular. The organization Citizens for Tax Justice estimates that the U.S. federal government loses as much as $100 billion per year in revenue due to tax havens. Sen. Carl Levin has proposed legislation that would treat foreign-registered, U.S.-based corporations as American companies for the purposes of tax law. Legislation to shut down the Caymans as a tax haven has been proposed in the British parliament. Given the nearly $5 trillion held by U.S. corporations and individuals in tax-haven countries, though, these motions are likely to face some stiff, and well-funded resistance.

As for Romney, he argues, "I don't think you want someone as the candidate for president who pays more taxes than he owes." Fair enough, but it will be up to voters to decide what the definition of the word "owes" is.

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