23 ms·

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

90 points by jgalt212 11y ago

chollida1 11y ago
In my opinion this is a much better article on the subject. http://www.bloomberg.com/news/articles/2014-07-21/renaissance-avoided-more-than-6-billion-tax-report-says http://www.bloomberg.com/news/articles/2014-07-21/renaissanc... Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower. This obviously creates a situation where people will do their best to make their trading fall into the later category. What Deutsche did was to sell hedge funds an option on a basket(collection) of stocks that was held longer than a year. Not surprisingly, a year is long enough to qualify for hte lower long term investment tax on capital gains. The IRS has called shenanigans on this and the below quote is probably the biggest reason why: > "Illustrating how rapidly the contents of the “baskets” were shuffled, one option reviewed by the committee had more than 129 million underlying trades in a single year, the subcommittee said. Many of Renaissance’s stock investments lasted mere minutes or seconds, it said."
- gohrt 11y ago
  The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions. I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock? It's even the same word: A retail business sells its stock (product), and sells it's stock (shares) Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Taxing consumption is relatively straighforward to describe (but hard to implement), and taxing wealth is slightly harder (since it's hard to mark the value of some assets)
  - eli 11y ago
    The difference is the people who make the tax rules want to encourage one kind of behavior over another, regardless of anything else. You're free to think that's a fundamentally bad idea, but it isn't "arbitrary," it's the basic idea of Behavioral Economics.
    - ovi256 11y ago
      They could have done that much better with linear interpolation instead of a step function. Today's step function, with made-up tax percentages: 20% if held for less than a year, 10% if a year or more. You end up with a bunch of trades held for a year and a minute. My proposal, with interpolation: 20% if held for less than 6 months 10% if held for 18 months or more Between 6 and 18 months, we interpolate between 20 and 10%. The difference between waiting 364 or 365 days is now minimum. I chose 6 and 18 because they're 12 +/- 6. However, a different curve could be drawn. The idea is to replace the step with a gradual increase.
      - dtparr 11y ago
        That sounds like a nightmare to do without software computing it. I realize you and likely everyone reading this use tax software, but many people still do them by hand, and this would involve an individual tax-rate lookup for each transaction rather than just grouping them into short/long-term capital gains.
        kbenson 11y ago
        Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports? I don't think this level of extra computational burden is a good counter-argument against more sane tax policies in this day and age.
        MaulingMonkey 11y ago
        > Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports? I use an intermediary, but have to report individual stocks nonetheless (fraud avoidance?) And you can only require what they can provide. During tax season, I have to dive through filing cabinets to fish out the cost basis information that's missing on older investments made before they were required[1] to start recording that information, plus double checking splits online to make sure this wasn't a partial sale that I have to calculate the cost basis on. They report what they have on Form 1099-B. Right now you have to file a separate Form 8949 for each combination of: (Short Term, Long Term) x (Reported to IRS & Me via 1099-B, Reported to only Me via 1099-B, Unreported to Me), plus Schedule D, plus maybe Schedule B. Last year that was "only" five pages of tax forms filed for two stock transactions + various dividends, plus a few worksheets that you don't file. I forget if there was a cabinet dive. Given how obtuse tax forms get, a tax-rate lookup for each transaction would probably involve a worksheet per stock, just to do the date time calculation of "how long was this stock held". [1] At least, I think I read they were required to start tracking this.
  - tosseraccount 11y ago
    I buy a stock for $10. 2 years later, I sell it for $20. I get taxed on a $10 capital gains income tax. How is this not "logical" ? Can you explain better?
    - gohrt 11y ago
      You can nest a financial asset arbitrary layers deep in funds and holding companies. See other comments in this subthread that illustrate the various ways to structure assets.
  - dragonwriter 11y ago
    > 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.
    - jsprogrammer 11y ago
      "Trading an asset" What exactly are you trading? Bits in a database that mark ownership of a fraction of a fictional entity?
      - leereeves 11y ago
        Not a 'fictional' entity; a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people.
        jsprogrammer 11y ago
        The fiction is to believe that 'a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people' is an entity.
        tghw 11y ago
        You're basically saying that contracts are fictional. Try entering into a contract, then behaving as if it's fictional by ignoring your responsibilities in the contract, and you will quickly find out how real they are.
        jsprogrammer 11y ago
        >You're basically saying that contracts are fictional. Nope (although, that may be true, in some sense), I am not saying that. I am saying the thing many refer to as an 'entity', as in, 'the corporate entity', is a fictional thing. It has no real, inherent or independent physical existence apart from the people that choose to represent it.
  - justicezyx 11y ago
    How can it be arbitrary given the fact is so astoundingly crazy?...
  - madez 11y ago
    “A retail business (...) sells it's stock” How is this to parse? The contraction “it’s” means either “it has” or “it is”. So, the quoted expression expands either way to a syntactically malformed expression with two verbs. Could it be intended to mean the following? A retail business’ (...) sells — it has stock
    - gohrt 11y ago
      Its a typo.
      - madez 11y ago
        Ah, okay! Thanks for the clarification. I wondered if there was maybe some kind of arcane colloquial rule I didn't know of.
  - s73v3r 11y ago
    Stockholders who hold less than a year are going to have very different goals for the company than those who hold for several years. That's the difference.
- JumpCrisscross 11y ago
  A fairer way to resolve this might be letting Renaissance pay the long-term while Deutsche pays at least the difference between the short-term and the long-term rates. If Deutsche Bank wants to pay Renaissance's taxes for the latter, that's fine by me.
ISL 11y ago
U.S. Constitution, Article I, Section 9: No Bill of Attainder or ex post facto Law shall be passed. How does that square with the article's "The new I.R.S. guidance will be retroactive, applying to all transactions as far back as Jan. 1, 2011." ?
- jeremyt 11y ago
  Well, in this case the IRS isn't passing a retroactive law, they are clarifying the interpretation of an existing law.
  - tanderson92 11y ago
    The need to clarify the point implies that it was interpreted differently in the past. So this change in interpretation being applied retroactively is what the OP is concerned with.
    - dragonwriter 11y ago
      Interpretation isn't law, so in any legal dispute over the IRS actions under the current interpretation, the law which would be controlling is not retroactive. Not to mention that there is solid precedent that retroactive taxes are not, in general, ex post facto laws in the first place, such that even if this was Congress adopting a retroactive tax law, it still wouldn't fall afoul of the ex post facto prohibition.
      - tanderson92 11y ago
        > Interpretation isn't law, so in any legal dispute over the > IRS actions under the current interpretation, the law which > would be controlling is not retroactive. This is to me a very weak argument (not that I disagree that this may be the standard that is applied in practice). If the Congress passed a law saying "the IRS can set tax code as it sees fit" and the IRS proceeds to levy taxes all the way back to 1980 on people as however it so desires, you should not be allowed to use that law as grounds for not having violated the ex post facto requirement. If this is the current understanding of what is allowed, I must vigorously object to whichever judgement left this precedent.
pcurve 11y ago
Maybe all cap gains should just be taxed at the same rate. 1 year threshold his so artificial.
- mikeyouse 11y ago
  I think this is a fine idea.. Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion, but it'd go a long way toward removing complexity.
  - dragonwriter 11y ago
    > Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion Well, their accountants and financial advisers might, since their work of structuring things to make sure most gains are long-term and in the right categories would be less valuable. But cutting taxes for all taxpayers -- including the rich -- on short-term games, and for most taxpayers on several categories of long-term games, may not that widely object to by people paying capital gains taxes in the first place.
- ska 11y ago
  I don't see how that is more artificial than taxing cap gains at a different rate than salary, or any number of other examples in the tax codes. All of these things are done to change the incentives about something, you can't expect them to be consistent without reference to those goals (and even then...)
  - ska 11y ago
    really? I'm honestly confused at responding to this with downvoting.
    - tuckermi 11y ago
      I am confused as well. With that said, there is a comment from 'dragonwriter' further up in the thread that I think touches on this: "In a tax system with progressive marginal rates on annual income, treating income resulting from action over multiple years as earned in the year realized results in a artificial increase in the tax burden on those with that kind of income pattern. So, there's a sense in which treating capital gains earned over multiple years differently than capital gains earned over a single year or less (the latter taxed as general income), given the progressive nature of the tax system."
throwaway6497 11y ago
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.
- Tycho 11y ago
  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).
  - auntienomen 11y ago
    One other wibble: the 35% isn't the average, but rather the smallest annual return.
    - ssanders82 11y ago
      "average annual return of more than 35 percent" I don't think they meant every year was greater than 35%, I interpreted it as the overall average is more than 35%.
  - MagicWishMonkey 11y ago
    Do you know which funds are available to non-employees?
    - Tycho 11y ago
      The ones I know of are RIEF (Renaissance Institutional Equities Fund) RIDA (Renaissance Institutional Diversified Alpha) RIFF (Renaissance Institutional Futures Fund) Of course there's probably still very large minimum investment thresholds.
discardorama 11y ago
> 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??
- gphil 11y ago
  Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.
  - Tycho 11y ago
    That's completely incorrect... the chances of a fund having that record through luck alone are astronomically low.
    - gnopgnip 11y ago
      Survivorship bias. The funds that do not have great records are eventually closed leaving only the ones that are successful
      - marvin 11y ago
        So presumably, there is a 75% chance that the Medallion fund will lose money (hedge fund = zero sum) for the first time ever, during the next few years. I don't think this interpretation of the maths is correct.
      - auntienomen 11y ago
        You haven't done the math. Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances. RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binary model. Survivorship bias does not begin to explain this; there have not been anything resembling 33 million hedge funds over the course of history. I think 30000 hedge funds is a fairly generous estimate. Exercise: Suppose Medallion's returns are at least a standard deviation above zero, every year. Calculate the odds of this happening.
Tycho 11y ago
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.
- refurb 11y ago
  Anyone else find this kind of "scammy" sounding? How can they have a 35% average annual return over the past 25 years and guarantee that you won't take a loss at all? Reminds me of Madoff.
  - Tycho 11y ago
    I think the most likely explanation is that they were just shifting all the tail risk to DB and Barclays, who didn't know any better or thought the portfolios would never experience losses beyond the option premium.
fuzzieozzie 11y ago
Hedge funds adding value.
programminggeek 11y ago
If we didn't use the tax code to create bizarre incentives, we'd arguably have more honest behavior.
hkmurakami 11y ago
>The new I.R.S. guidance will be retroactive, applying to all transactions as far back as Jan. 1, 2011. Regardless of the particulars of any taxation expectations, there's something about retroactive policy changes that seems to defy the spirit of law to me.
sitihn 11y ago
Long-term investments stabilize the economy and should be encouraged through the tax-code.
sitihn 11y ago
Long-term investments provide stability to the economy and should be encouraged through the tax-code. Renaissance pursued a strategy of tax avoidance and should be punished.
jdsgold 11y ago
what if a hedge fund bought an at the money call option on the underlying security and sold an in the money put at an arbitrary price such as a dollar in order to convert the short term capital gains to long term capital gains

90 points by jgalt212 11y ago

In my opinion this is a much better article on the subject. http://www.bloomberg.com/news/articles/2014-07-21/renaissance-avoided-more-than-6-billion-tax-report-says http://www.bloomberg.com/news/articles/2014-07-21/renaissanc... Essentially the US has a few different taxes you can pay as an investor. There is a short term tax on trading profits and a longer term holder tax for "investors" which is lower. This obviously creates a situation where people will do their best to make their trading fall into the later category. What Deutsche did was to sell hedge funds an option on a basket(collection) of stocks that was held longer than a year. Not surprisingly, a year is long enough to qualify for hte lower long term investment tax on capital gains. The IRS has called shenanigans on this and the below quote is probably the biggest reason why: > "Illustrating how rapidly the contents of the “baskets” were shuffled, one option reviewed by the committee had more than 129 million underlying trades in a single year, the subcommittee said. Many of Renaissance’s stock investments lasted mere minutes or seconds, it said."

gohrt 11y ago
The rules are deeply arbitrary, and goes to the nature of financials as being rather abstract concepts with arbitrary definitions. I buy stock in a firm, that firm makes a lot of profit, but I don't liquidate my position. How is that different (short-term vs long-term gains) from me selling their stock and buying another stock? It's even the same word: A retail business sells its stock (product), and sells it's stock (shares) Ultimately, taxing "realized" gains can never be logical, since "realization" is a fictional concept not grounded in reality. Taxing consumption is relatively straighforward to describe (but hard to implement), and taxing wealth is slightly harder (since it's hard to mark the value of some assets)
- eli 11y ago
  The difference is the people who make the tax rules want to encourage one kind of behavior over another, regardless of anything else. You're free to think that's a fundamentally bad idea, but it isn't "arbitrary," it's the basic idea of Behavioral Economics.
  - ovi256 11y ago
    They could have done that much better with linear interpolation instead of a step function. Today's step function, with made-up tax percentages: 20% if held for less than a year, 10% if a year or more. You end up with a bunch of trades held for a year and a minute. My proposal, with interpolation: 20% if held for less than 6 months 10% if held for 18 months or more Between 6 and 18 months, we interpolate between 20 and 10%. The difference between waiting 364 or 365 days is now minimum. I chose 6 and 18 because they're 12 +/- 6. However, a different curve could be drawn. The idea is to replace the step with a gradual increase.
    - dtparr 11y ago
      That sounds like a nightmare to do without software computing it. I realize you and likely everyone reading this use tax software, but many people still do them by hand, and this would involve an individual tax-rate lookup for each transaction rather than just grouping them into short/long-term capital gains.
      - kbenson 11y ago
        Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports? I don't think this level of extra computational burden is a good counter-argument against more sane tax policies in this day and age.
        MaulingMonkey 11y ago
        > Do any people doing them by hand actually make these investments directly, or do they use intermediaries? Is it that hard to require the intermediaries provide end of year reports? I use an intermediary, but have to report individual stocks nonetheless (fraud avoidance?) And you can only require what they can provide. During tax season, I have to dive through filing cabinets to fish out the cost basis information that's missing on older investments made before they were required[1] to start recording that information, plus double checking splits online to make sure this wasn't a partial sale that I have to calculate the cost basis on. They report what they have on Form 1099-B. Right now you have to file a separate Form 8949 for each combination of: (Short Term, Long Term) x (Reported to IRS & Me via 1099-B, Reported to only Me via 1099-B, Unreported to Me), plus Schedule D, plus maybe Schedule B. Last year that was "only" five pages of tax forms filed for two stock transactions + various dividends, plus a few worksheets that you don't file. I forget if there was a cabinet dive. Given how obtuse tax forms get, a tax-rate lookup for each transaction would probably involve a worksheet per stock, just to do the date time calculation of "how long was this stock held". [1] At least, I think I read they were required to start tracking this.
- tosseraccount 11y ago
  I buy a stock for $10. 2 years later, I sell it for $20. I get taxed on a $10 capital gains income tax. How is this not "logical" ? Can you explain better?
  - gohrt 11y ago
    You can nest a financial asset arbitrary layers deep in funds and holding companies. See other comments in this subthread that illustrate the various ways to structure assets.
- dragonwriter 11y ago
  > 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.
  - jsprogrammer 11y ago
    "Trading an asset" What exactly are you trading? Bits in a database that mark ownership of a fraction of a fictional entity?
    - leereeves 11y ago
      Not a 'fictional' entity; a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people.
      - jsprogrammer 11y ago
        The fiction is to believe that 'a legal construct (perhaps multilayered) that groups ownership of real assets and/or obligations of real people' is an entity.
        tghw 11y ago
        You're basically saying that contracts are fictional. Try entering into a contract, then behaving as if it's fictional by ignoring your responsibilities in the contract, and you will quickly find out how real they are.
        jsprogrammer 11y ago
        >You're basically saying that contracts are fictional. Nope (although, that may be true, in some sense), I am not saying that. I am saying the thing many refer to as an 'entity', as in, 'the corporate entity', is a fictional thing. It has no real, inherent or independent physical existence apart from the people that choose to represent it.
- justicezyx 11y ago
  How can it be arbitrary given the fact is so astoundingly crazy?...
- madez 11y ago
  “A retail business (...) sells it's stock” How is this to parse? The contraction “it’s” means either “it has” or “it is”. So, the quoted expression expands either way to a syntactically malformed expression with two verbs. Could it be intended to mean the following? A retail business’ (...) sells — it has stock
  - gohrt 11y ago
    Its a typo.
    - madez 11y ago
      Ah, okay! Thanks for the clarification. I wondered if there was maybe some kind of arcane colloquial rule I didn't know of.
- s73v3r 11y ago
  Stockholders who hold less than a year are going to have very different goals for the company than those who hold for several years. That's the difference.
JumpCrisscross 11y ago
A fairer way to resolve this might be letting Renaissance pay the long-term while Deutsche pays at least the difference between the short-term and the long-term rates. If Deutsche Bank wants to pay Renaissance's taxes for the latter, that's fine by me.

ISL 11y ago

U.S. Constitution, Article I, Section 9: No Bill of Attainder or ex post facto Law shall be passed. How does that square with the article's "The new I.R.S. guidance will be retroactive, applying to all transactions as far back as Jan. 1, 2011." ?

jeremyt 11y ago
Well, in this case the IRS isn't passing a retroactive law, they are clarifying the interpretation of an existing law.
- tanderson92 11y ago
  The need to clarify the point implies that it was interpreted differently in the past. So this change in interpretation being applied retroactively is what the OP is concerned with.
  - dragonwriter 11y ago
    Interpretation isn't law, so in any legal dispute over the IRS actions under the current interpretation, the law which would be controlling is not retroactive. Not to mention that there is solid precedent that retroactive taxes are not, in general, ex post facto laws in the first place, such that even if this was Congress adopting a retroactive tax law, it still wouldn't fall afoul of the ex post facto prohibition.
    - tanderson92 11y ago
      > Interpretation isn't law, so in any legal dispute over the > IRS actions under the current interpretation, the law which > would be controlling is not retroactive. This is to me a very weak argument (not that I disagree that this may be the standard that is applied in practice). If the Congress passed a law saying "the IRS can set tax code as it sees fit" and the IRS proceeds to levy taxes all the way back to 1980 on people as however it so desires, you should not be allowed to use that law as grounds for not having violated the ex post facto requirement. If this is the current understanding of what is allowed, I must vigorously object to whichever judgement left this precedent.

pcurve 11y ago

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

mikeyouse 11y ago
I think this is a fine idea.. Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion, but it'd go a long way toward removing complexity.
- dragonwriter 11y ago
  > Just tax them at whatever your marginal tax rate is less 5% and call it a day. The rich would howl at the suggestion Well, their accountants and financial advisers might, since their work of structuring things to make sure most gains are long-term and in the right categories would be less valuable. But cutting taxes for all taxpayers -- including the rich -- on short-term games, and for most taxpayers on several categories of long-term games, may not that widely object to by people paying capital gains taxes in the first place.
ska 11y ago
I don't see how that is more artificial than taxing cap gains at a different rate than salary, or any number of other examples in the tax codes. All of these things are done to change the incentives about something, you can't expect them to be consistent without reference to those goals (and even then...)
- ska 11y ago
  really? I'm honestly confused at responding to this with downvoting.
  - tuckermi 11y ago
    I am confused as well. With that said, there is a comment from 'dragonwriter' further up in the thread that I think touches on this: "In a tax system with progressive marginal rates on annual income, treating income resulting from action over multiple years as earned in the year realized results in a artificial increase in the tax burden on those with that kind of income pattern. So, there's a sense in which treating capital gains earned over multiple years differently than capital gains earned over a single year or less (the latter taxed as general income), given the progressive nature of the tax system."

throwaway6497 11y ago

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.

Tycho 11y ago
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).
- auntienomen 11y ago
  One other wibble: the 35% isn't the average, but rather the smallest annual return.
  - ssanders82 11y ago
    "average annual return of more than 35 percent" I don't think they meant every year was greater than 35%, I interpreted it as the overall average is more than 35%.
- MagicWishMonkey 11y ago
  Do you know which funds are available to non-employees?
  - Tycho 11y ago
    The ones I know of are RIEF (Renaissance Institutional Equities Fund) RIDA (Renaissance Institutional Diversified Alpha) RIFF (Renaissance Institutional Futures Fund) Of course there's probably still very large minimum investment thresholds.

discardorama 11y ago

> 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??

gphil 11y ago
Because out of the many thousands of funds who attempt it, some are bound to end up beating the market. You can't know in advance which funds are going to the be the best over the next two decades.
- Tycho 11y ago
  That's completely incorrect... the chances of a fund having that record through luck alone are astronomically low.
  - gnopgnip 11y ago
    Survivorship bias. The funds that do not have great records are eventually closed leaving only the ones that are successful
    - marvin 11y ago
      So presumably, there is a 75% chance that the Medallion fund will lose money (hedge fund = zero sum) for the first time ever, during the next few years. I don't think this interpretation of the maths is correct.
    - auntienomen 11y ago
      You haven't done the math. Let me illustrate: We'll assume that trading returns have a binary distribution. Traders win or lose with equal probability. This is not a great model, but it's good for making ballpark estimates, because it overestimates the odds of a track record like Renaissances. RenTec's Medallion fund has not had a down year in the past 25. The odds of this are at most 1 in 33 million, using our binary model. Survivorship bias does not begin to explain this; there have not been anything resembling 33 million hedge funds over the course of history. I think 30000 hedge funds is a fairly generous estimate. Exercise: Suppose Medallion's returns are at least a standard deviation above zero, every year. Calculate the odds of this happening.

Tycho 11y ago

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.

refurb 11y ago
Anyone else find this kind of "scammy" sounding? How can they have a 35% average annual return over the past 25 years and guarantee that you won't take a loss at all? Reminds me of Madoff.
- Tycho 11y ago
  I think the most likely explanation is that they were just shifting all the tail risk to DB and Barclays, who didn't know any better or thought the portfolios would never experience losses beyond the option premium.

fuzzieozzie 11y ago

Hedge funds adding value.

programminggeek 11y ago

If we didn't use the tax code to create bizarre incentives, we'd arguably have more honest behavior.

hkmurakami 11y ago

>The new I.R.S. guidance will be retroactive, applying to all transactions as far back as Jan. 1, 2011. Regardless of the particulars of any taxation expectations, there's something about retroactive policy changes that seems to defy the spirit of law to me.

sitihn 11y ago

Long-term investments stabilize the economy and should be encouraged through the tax-code.

sitihn 11y ago

Long-term investments provide stability to the economy and should be encouraged through the tax-code. Renaissance pursued a strategy of tax avoidance and should be punished.

jdsgold 11y ago

what if a hedge fund bought an at the money call option on the underlying security and sold an in the money put at an arbitrary price such as a dollar in order to convert the short term capital gains to long term capital gains