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Hedge fund managers have to fork over billions of dollars in taxes next year for gains they accumulated on deferred income from offshore funds as a long-standing tax loophole expires.
The Wall Street Journal reported Thursday that Steven Cohen, the billionaire founder of SAC Capital Advisors, has $1 billion of deferred offshore income likely subject to the tax, while David Einhorn of Greenlight Capital and Daniel Loeb of Third Point face tax bills of more than $100 million. The Joint Committee on Taxation estimated in 2008 that total payments from hedge fund managers could be at least $25 billion.
Hedge fund managers typically get paid a management fee of about 2 percent based on assets under management and then a performance fee that can be 20 percent or more of profits. The IRS had a long-standing policy that allowed managers of offshore funds to defer pay and avoid an immediate tax bill and also to let that deferred pay grow tax-free.
But the agency decided to close that loophole a decade ago, with a long lead-up time for managers to pay taxes on money accumulated before the law changed. The deadline is in nine months, the Journal said.
Hedge funds are still scrambling to find ways to raise the money to pay their tax bills or soften the blow, the paper reported.
Cohen is raising a new fund that will be bigger than the $16 billion SAC, in part to generate returns to pay the taxes on the income he deferred when he managed the firm, the Journal said, citing a person close to him. SAC Capital shut down in 2013 after Cohen pleaded guilty for failing to stop insider trading. He has continued to manage his own money in a family office called Point72 Asset Management.
Other managers are moving to states such as Florida that don't have personal income tax, or are examining ways to donate money to charity and get an offsetting deduction.
It's been a rough few years for managers trying to beat the markets and make returns that would generate performance fees. Preqin says total industry returns were 4.87 percent for the first half of this year, the best year for funds since the 16.9 percent return notched in 2009. They are still lagging the 8 percent return in the S&P 500 through June.