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I.R.S. Cracks Down on Hedge Fund Tax Strategy

nytimes.com

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Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#41

Post by auntienomen »

Tycho wrote: post #40
throwaway6497 wrote: post #19

This made my jaw drop: "Its Medallion fund, which now manages money for its employees only, was the most prolific user of basket options. The fund has earned an average annual return of more than 35 percent for two decades." $25 billion is all employees money; Even if we exclude Simon's money ($14 billion) it is a ton. 35% avg annualized returns for 20 years. Simply stunning.

Actually the Medallion fund is only about $6 billion I believe. The rest of the money is managed in funds which are open to non-employees (and those ones don't make anything close to 35% annualised returns).

One other wibble: the 35% isn't the average, but rather the smallest annual return.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#42

Post by Tycho »

I think the most interesting part is not the tax, but this:

The options also were attractive because they limited the risk of loss to the amount paid for each option, Renaissance said. “No other investment structure of which we are aware provides both high leverage and loss protection,” Renaissance said.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#43

Post by hiou »

discardorama wrote: post #24

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

As far as I am aware the Medallion fund is not in any way publicly available. I believe it's an exclusive fund to a small number of investors who are involved directly with Renaissance. It would make a lot of sense to it's success as not having to scale past a certain point allows them to avoid a lot of uncertainty when taking models live.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#44

Post by gnopgnip »

JoshTriplett wrote: post #30
pcurve wrote: post #14

Maybe all cap gains should just be taxed at the same rate. 1 year threshold his so artificial.

There's a massive difference between the long-term and short-term gains rates. And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing, and cannot afford to pay higher taxes.

Raising those rates would have very little impact for retirees as many are in the 15%-25% marginal tax brackets as it is.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#45

Post by joshstrange »

discardorama wrote: post #24

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

> "you can't beat the market in the long term"

Without cheating that may be true.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#46

Post by leereeves »

jsprogrammer wrote: post #34
dragonwriter wrote: post #26

Earlier quoted context omitted.

> Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Trading an asset vs. holding it is a non-fictional concept very much grounded in reality. Attributing significance to it is, in a sense, arbitrary in the same sense that any assignment of significance is, but its definitely not a fictional concept divorced from reality.

"Trading an asset" What exactly are you trading? Bits in a database that mark ownership of a fraction of a fictional entity?

Not a 'fictional' entity; a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#47

Post by JoshTriplett »

gnopgnip wrote: post #44
JoshTriplett wrote: post #30

Earlier quoted context omitted.

There's a massive difference between the long-term and short-term gains rates. And, hedge fund folks aside, long-term capital gains are also the taxes that apply to retirees drawing income from years of investments. Raising those rates would cause serious problems for folks who have already done all their financial planning and investing, and cannot afford to pay higher taxes.

Raising those rates would have very little impact for retirees as many are in the 15%-25% marginal tax brackets as it is.

If you're in the 15% or 25% marginal tax bracket for income, you're in the 0% or 15% long-term capital gains tax bracket (respectively). That's a 15% or 10% tax hike, which is much more than "very little impact".

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#48

Post by marvin »

jsprogrammer wrote: post #34
dragonwriter wrote: post #26

Earlier quoted context omitted.

> Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Trading an asset vs. holding it is a non-fictional concept very much grounded in reality. Attributing significance to it is, in a sense, arbitrary in the same sense that any assignment of significance is, but its definitely not a fictional concept divorced from reality.

"Trading an asset" What exactly are you trading? Bits in a database that mark ownership of a fraction of a fictional entity?

There is nothing fictional about the ownership of a fraction of a profitable enterprise. This shouldn't be more difficult than the concept of negative numbers, or any other useful non-physical concept. Ditto for options or any other construct that has a mathematical or market-based value.

Re: I.R.S. Cracks Down on Hedge Fund Tax Strategy

#50

Post by logfromblammo »

discardorama wrote: post #24

> The fund [Medallion] has earned an average annual return of more than 35 percent for two decades. OK, can someone explain this? Most people say that "you can't beat the market in the long term", "market is efficient", etc. So how can these people have done so well over more than 20 years??

There are several plausible hypotheses.

My personal favorite is, "They trade on non-public information, and use a complex trade algorithm for the purposes of plausible deniability."

Another is, "They got lucky."

Another likely one is "The reporter did not calculate average annual return correctly."

One that I find dubious: "They actually are that good at investing."

For giggles: "They are using hedge funds to launder drug money."

I'm sure there are other ways to explain it, but that return just sounds way too good to be true.

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