[FoRK] Seemingly, hedge fund managers do enjoy 15% tax rate

[Jeff Bone]

This article betrays precisely the confusion I've railed about before  
and that is rampant in the public sphere, namely, a complete lack of  
understanding of the difference between the activities of most hedge  
funds and private equity.  Or maybe this conflation is necessary to  
the journalists' purpose, as otherwise the tar doesn't stick quite so  
well to the brush.  Let's break this down:

> Yesterday, Robert E. Rubin, a former Treasury secretary in  
> PresidentBill Clinton’s administration, made the case for why  
> private equity and hedge fund managers should pay more than double  
> the low rate in taxes they now enjoy
>
Private equity is a long-term investment.  Active trading of stocks,  
bonds, currency, etc. --- IS NOT.  Shorting anything, for any length  
of time --- IS NOT.  And these are by far the more common practices  
among hedge funds.  NOT AT ALL what private equity does.
> Mr. Rubin, now the chairman of the executive committee at Citigroup,  
> was responding to a question posed to him about whether the 20  
> percent fee on profits that most private equity
>
Note that Mr. Rubin is talking about PRIVATE FREAKIN' EQUITY!?!  NOT  
what the journalist is saying, lumping both in together.

> James Simons, chairman of Renaissance Technologies, earned $1.7  
> billion last year while the average compensation of the top 25  
> managers was $570 million, according to Institutional Investor’s  
> Alpha magazine.
>

Renaissance is a HEDGE FUND.  The managers in question were primarily  
HEDGE FUND managers.  Most of the income in question is short-term,  
and is taxed as such, mostly at the MAXIMUM POSSIBLE RATE.

> Another area of interest to the committee is the ability of hedge  
> fund managers and private equity managers to defer large portions of  
> their income offshore, where it can increase tax free (they pay  
> taxes when they bring it back into the United States).
>
This isn't a super-secret thing they teach you when you enter the  
"hedge fund and private equities managers tax-dodging club."  ANYONE  
can do this.  Go ahead, try it --- I dare you!

> Private equity firms and hedge funds are generally structured as  
> partnerships, which means they have “flow-through” accounting: every  
> owner receives his or her share of the profits and pays taxes on it.  
> No corporate entity is taxed.
>
>

True.  Instead the partner pays taxes.  And for firms where the income  
is derived from active trading, that portion of the partner's income  
is taxed at the highest effective rate.

> Most private equity funds and hedge funds receive two kinds of fees:  
> a 2 percent management fee (2 percent of the assets they manage),  
> and a 20 percent incentive fee, or a 20 percent cut of the profits.
>
> There are crucial differences though. Many hedge funds trade in and  
> out of liquid securities, like stocks, very rapidly, so their gains  
> are taxed as ordinary income (because they do not hold them for more  
> than a year). Private equity funds, by contrast, borrow money to buy  
> companies, strive to improve the company’s operations in the private  
> market and take it public or sell it, generally in five to seven  
> years (though that time has recently been shrinking).
>
> The dispute does not center on whether the income generated by the  
> transaction should be treated as a long-term capital gain, but  
> whether private equity managers, who are not risking significant  
> amounts of their own money, but managing money for others, should  
> get the lower capital gains tax treatment.
>
>
>

This is indeed a legitimate tax policy question.  For that matter,  
this also largely applies to venture capitalists.

It also has nothing --- NOTHING --- to do with the activity of most  
hedge funds.

> many hedge funds are getting more involved in buying and selling  
> more illiquid assets, including companies, which would bring the  
> issue closer to home for them.

Which means that they're in essence becoming private equity firms.   
While I will argue vigorously and tirelessly that this is not the  
normal mode of operation for most of the folks on the Evil 25 list  
that we're discussing, I will concede that to the extent this is going  
on, the discussion is legitimate.  But for most of the pocket-lining  
that went on last year, it was made on positions held for periods of  
months, weeks, days, hours, minutes, seconds --- or less.  And a HUGE  
amount of it was made shorts, and I GUARAN-FUCKING-TEE you these  
people did not pay less than the maximum amount on MOST of that.



Sheesh, Russell...  that article's sloppy even by NYT standards, I'm  
surprised that you felt it added anything credible to the discussion.   
A couple of quotes from a former Treasurer out of context, that's all  
it takes to convince?



jb