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The Business Insider – Nassim Taleb and his hedge-fund partner Mark Spitznagel weigh in in the FT with an analysis of the world’s problem (too much debt) and a reasonable solution (convert some of the debt to equity).
As usual, Taleb lards up his argument with guru-speak and smug swipes at every other economist on the planet, which undermine the point. But in this case, the point is a good one.
Converting debt to equity is what corporations do when they go bankrupt. GM and Chrysler just did it, and the airlines will do it next time they go bust. Same for the hundreds of other companies that go broke every year.
Sarasota Herald-Tribune – Richard W. Fields says he has come up with a win-win financial strategy for the downturn. He is investing in lawsuits.
Not in trip-and-fall cases, mind you, but in disputes that are far larger, more costly and potentially more lucrative, often pitting major corporations against each other.
Mr. Fields is chief executive of Juridica Capital Management. which runs a fund that invests in one side of a lawsuit in exchange for a share of any winnings.
The Hill – President Obama proposed new taxes Monday that will hit hedge funds, corporations and the wealthy to help jumpstart healthcare reform and pay for the rest of his ambitious agenda.
Obama’s revised budget plan calls for putting an end to the loopholes enjoyed mostly by international companies.
Forex Pros – Global financial turmoil and recent attacks in Mumbai will likely spur foreign fund houses still looking to enter the high potential India market to hedge their risks with local partnerships rather than going it alone.
Factors such as high brand building costs and knowledge of local issues have already spurred most international players to favour joint ventures over "greenfield" operations as they seek to tap the relatively fast-growing and savings-rich economy.
The requirement that foreign fund houses put up $50 million in capital for a wholly owned operation, compared with a tenth of that or less for a joint venture, is also seen fuelling the trend as hard-hit Western money managers seek to preserve cash.
West Palm Beach (HedgeCo.net)- In a recent IRS Revenue Ruling addressing the tax treatment of management fees incurred in a “fund of funds” structure, the IRS’s has severely restricted UPTs (upper tier partnerships) from obtaining tax benefits from management fees.
In a typical fund of funds structure, an investment is made by a limited partner into an UTP which in turn invests in several lower teir partnerships (LTPs). Both groups pay an annual management fee to an investment manager based on assets under management. Since each LTP was, on the facts assumed by the IRS, engaged in the trading of securities, the management fee is an ordinary and necessary business expense and can still recieve tax benefits.
However, the UTP’s sole activity consisted of acquiring, holding, and disposing of interests in the LTPs while receiving a share of income, gain, loss, deduction and credit, therefore ruling these fees non-deductable in most cases.
In the ruling, the IRS examined prior cases of entitlement to deductions and these cases also viewed the partner, even a limited partner, as engaged in the trade or business of the partnership.
Editing by Alex Akesson Editor for HedgeCo LLC Email: alex@hedgeco.net
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The Internal Revenue Service (“IRS”) has recently issued new rulings and regulations that have an impact on tax filings by many hedge funds. The new rulings deal with the deduction of investment interest expense for trading funds and fund-level expenses incurred by fund-of-hedge funds.
Investment Interest Expense
The ruling recently issued by the IRS regarding investment interest expense will not dramatically change how trader funds report investment interest expense. Rather Revenue Ruling 2008-38 clarifies the position taken by the majority of the hedge fund industry for trader funds.
Many trader funds would take the position on the Schedule K-1s issued to its investors stating that investors that do not materially participate in the fund’s activity can deduct investment interest expense from trading activities as an ordinary business expense subject to the investment interest expense limitation. Prior to this new guidance issued by the IRS, there was question regarding where this deduction should be claimed on an individual’s tax return. The new ruling states that investment interest expense incurred on debt allocable to property held for investment, subject to the investment interest expense limitation, is now deductible in computing ordinary income or loss from partnerships on Schedule E.
Fund-of-Hedge Fund Expenses
There has been much debate regarding how fund-of-hedge fund expenses are deducted by many tax professionals and fund managers. Some have taken the position that a fund-of-funds is in the business of investing in other investment partners, others have taken the position that a fund-of-fund invests in other funds, while many others are somewhere in between. However, this gray area has now been cleared up by guidance issued by the IRS.
The IRS has recently issued Revenue Ruling 2008-39 which addresses how fund-of-hedge funds expenses are deducted in arriving at taxable income, specifically how management fees are deducted.
In the past, many managers have bifurcated their fund-level expenses between ordinary and portfolio deductions based upon the type of funds that they invest in. For example, if 60 percent of the fair value of the fund’s underlying investments are invested in trader funds with the remaining 40 percent in investor funds, the manager would take the position that 60 percent of its fund-level expenses were deductible as trade or business deductions and 40 percent as portfolio deductions. However, Revenue Ruling 2008-39 states that a fund-of-hedge funds invests in and disposes of interests in other funds. The conduct of holding the investments in other funds is deemed to be holding limited partnership interests for the production of income within the meaning of Internal Revenue Code §212. Expenses incurred within the meaning of §212 are treated as portfolio deductions. Portfolio deductions are only deductible to the extent that they exceed 2 percent of adjusted gross income and are not deductible in arriving at alternative minimum taxable income.
Filing Deadlines
The IRS has issued Temporary Treasury Regulations §1.6081-2T which reduces the extension period for partnership tax returns. Prior to these treasury regulations, partnerships were allowed an automatic six-month extension of time to file its partnership tax return. Under the new regulations, partnerships will only be granted an automatic five-month extension which creates additional stress and pressure on fund-of-hedge fund managers to issue their Schedule K-1s. The new regulations are effective for applications of extension of time to file returns after July 1, 2008.
If you would like to discuss how these changes will affect your fund or would like to discuss other issues that face your fund, please feel free to contact Sean Tafaro or Michael Callahan at (303) 753-1959.
Seattle Times- The House on Wednesday approved a plan to protect more than 20 million families from an expensive levy called the alternative minimum tax (AMT) while raising taxes on hedge-fund managers and oil companies. But the measure has little hope of Senate passage, Senate leaders said.
The House voted 233-189 to prevent the AMT from expanding next April to ensnare millions of middle-class taxpayers, adding thousands of dollars to their tax bills.
To replace the lost revenue, more than $61.5 billion, the House agreed to more than double the tax rate on income from investment-services partnerships such as hedge funds, to deny oil and gas companies a lucrative deduction for domestic production, and to require credit-card companies to report their transactions with retailers to the Internal Revenue Service, among other provisions.
