Senate Inquiry Faults Hedge Funds’ Tax Strategy
By ALEXANDRA STEVENSON
July 21, 2014 5:13 pm
WASHINGTON — A Senate investigation has found that hedge funds — including James H. Simons’ Renaissance Technologies and Steven A. Cohen’s SAC Capital Advisors — have claimed billions of dollars in tax savings through complex financial structures.
Between 1998 and 2013, more than a dozen hedge funds conducted hundreds of billions of dollars in trades using hundreds of structures, known as “basket options,” created by Barclays and Deutsche Bank, according to the Senate Permanent Subcommittee on Investigations.
“These banks and hedge funds involved in this case used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” said Senator Carl Levin, the Michigan Democrat who is chairman of the Senate subcommittee.
The findings — based largely on an investigation into the two biggest users of the products, Renaissance and George Weiss Associates, , a multi-strategy hedge fund based in New York — will be the subject of a Senate panel hearing on Tuesday in Washington. Peter Brown, co-chief executive of Renaissance, and senior executives from Barclays and Deutsche Bank are scheduled to testify.
The basket options under scrutiny were structured as accounts that allowed hedge funds to bypass taxes on short-term trades. Barclays and Deutsche Bank used the options to build special accounts for their hedge fund clients in their own names and claimed they owned the assets when it was, in fact, the hedge fund clients that exercised full control of the assets, determining each trade and reaping all the profits, the Senate investigation found.
Hedge funds like Renaissance Technologies would wait just after a year to “exercise the options,” claiming the profits should be taxed at a lower income tax rate for long-term capital gains on assets.
Over the same one-year period, Renaissance Technologies would execute on average between 26 million and 39 million trades in stocks and bonds, many of those positions being held for just a few seconds, according to the subcommittee’s findings.
The basket options also allowed hedge funds to borrow greater amounts of money to trade, far exceeding the federal leverage limits for Wall Street firms that are broker-dealers that were first enacted in the 1930s. Hedge funds borrow money to help amplify their returns.
Under the average brokerage account, investors are only allowed to borrow $1 for every $2 in the account. Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.
The hedge fund says that the options in question provided leverage and protection against downside loss and should be taxed at long-term rates rather than short term rates because they were held for more than a year.
“We believe that the tax treatment for the option transactions being reviewed by the P.S.I. is appropriate under current law,” Jonathan Gasthalter, a spokesman for Renaissance Technologies, said in an emailed statement.
The Senate subcommittee, led by Mr. Levin and Senator John McCain, Republican of Arizona, has cast a wide net across Wall Street and corporate America, investigating individuals and businesses like Apple, Caterpillar and Credit Suisse on their use of tax avoidance strategies.
Tuesday’s hearing comes amid a raging debate in government and policy circles over tax policy reform, a subject that has been pushed to the fore after a recent wave of American companies have announced acquisitions overseas intended in large part to reduce their corporate tax bill by effectively giving up their American citizenship.
“Waiting for tax reform is like ‘Waiting for Godot,’ ” Mr. Levin said at a press briefing on Monday. He also took a dig at the Internal Revenue Service, which has been investigating Renaissance Technologies for six years over these structures.
“To say they have not moved swiftly is an understatement,” he said.
The basket options are also the subject of a dispute between Renaissance Technologies and the I.R.S., which has been investigating the firm for six years. The I.R.S. has taken action against the hedge fund for certain years during which it undertook these transactions, according staff members at the subcommittee.
Bloomberg News first reported on the transactions and the dispute last year.
Renee Calabro, a spokeswoman for Deutsche Bank, said the basket options it offered clients were “fully compliant with applicable laws, regulations and guidance,” adding that they were a “niche offering to a small number of clients over a discrete period of time which we completely ceased offering in 2010.”
Kerrie Cohen, a spokeswoman for Barclays, said the bank “has been fully compliant with the law, has cooperated with the committee and looks forward to continuing that cooperation at the hearing.“
George Weiss Associates could not be immediately reached for comment.
For much of the past two decades, SAC and Renaissance Technologies were among the most profitable hedge funds on Wall Street, posting double-digit annualized returns.
SAC was founded by Steven A. Cohen in 1992 with just $25 million but grew to be one of the biggest hedge funds in the industry.
A spokesman for SAC, now called Point72 Asset Management, declined to comment. As part of a guilty plea with the government on insider trading charges, SAC agreed to stop managing money for outside investors and change its name.
Renaissance Technologies, a $24.7 billion hedge fund founded in 1982 by Mr. Simons, a former code breaker and mathematics professor, also stands out in an industry known for its outsize fees, with some of its clients paying as much as a 5 percent annual management fee and 44 percent of net profits each year.
Renaissance’s Medallion fund, which is made up mostly of employee money, was the most prolific user of basket options and the focus on the subcommittee’s inquiry.
Speaking on Monday about the amount of money hedge funds like Renaissance Technology were able to save by not paying higher taxes, Mr. Levin said, “It’s a lot of money, even by Washington standards.”
http://dealbook.nytimes.com/2014/07/21/senate...s&_r=0
By ALEXANDRA STEVENSON
July 21, 2014 5:13 pm
WASHINGTON — A Senate investigation has found that hedge funds — including James H. Simons’ Renaissance Technologies and Steven A. Cohen’s SAC Capital Advisors — have claimed billions of dollars in tax savings through complex financial structures.
Between 1998 and 2013, more than a dozen hedge funds conducted hundreds of billions of dollars in trades using hundreds of structures, known as “basket options,” created by Barclays and Deutsche Bank, according to the Senate Permanent Subcommittee on Investigations.
“These banks and hedge funds involved in this case used dubious structured financial products in a giant game of ‘let’s pretend,’ costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation,” said Senator Carl Levin, the Michigan Democrat who is chairman of the Senate subcommittee.
The findings — based largely on an investigation into the two biggest users of the products, Renaissance and George Weiss Associates, , a multi-strategy hedge fund based in New York — will be the subject of a Senate panel hearing on Tuesday in Washington. Peter Brown, co-chief executive of Renaissance, and senior executives from Barclays and Deutsche Bank are scheduled to testify.
The basket options under scrutiny were structured as accounts that allowed hedge funds to bypass taxes on short-term trades. Barclays and Deutsche Bank used the options to build special accounts for their hedge fund clients in their own names and claimed they owned the assets when it was, in fact, the hedge fund clients that exercised full control of the assets, determining each trade and reaping all the profits, the Senate investigation found.
Hedge funds like Renaissance Technologies would wait just after a year to “exercise the options,” claiming the profits should be taxed at a lower income tax rate for long-term capital gains on assets.
Over the same one-year period, Renaissance Technologies would execute on average between 26 million and 39 million trades in stocks and bonds, many of those positions being held for just a few seconds, according to the subcommittee’s findings.
The basket options also allowed hedge funds to borrow greater amounts of money to trade, far exceeding the federal leverage limits for Wall Street firms that are broker-dealers that were first enacted in the 1930s. Hedge funds borrow money to help amplify their returns.
Under the average brokerage account, investors are only allowed to borrow $1 for every $2 in the account. Within these complicated financial structures, Renaissance Technologies was able to borrow as much as $17 for every $1 in the account.
The hedge fund says that the options in question provided leverage and protection against downside loss and should be taxed at long-term rates rather than short term rates because they were held for more than a year.
“We believe that the tax treatment for the option transactions being reviewed by the P.S.I. is appropriate under current law,” Jonathan Gasthalter, a spokesman for Renaissance Technologies, said in an emailed statement.
The Senate subcommittee, led by Mr. Levin and Senator John McCain, Republican of Arizona, has cast a wide net across Wall Street and corporate America, investigating individuals and businesses like Apple, Caterpillar and Credit Suisse on their use of tax avoidance strategies.
Tuesday’s hearing comes amid a raging debate in government and policy circles over tax policy reform, a subject that has been pushed to the fore after a recent wave of American companies have announced acquisitions overseas intended in large part to reduce their corporate tax bill by effectively giving up their American citizenship.
“Waiting for tax reform is like ‘Waiting for Godot,’ ” Mr. Levin said at a press briefing on Monday. He also took a dig at the Internal Revenue Service, which has been investigating Renaissance Technologies for six years over these structures.
“To say they have not moved swiftly is an understatement,” he said.
The basket options are also the subject of a dispute between Renaissance Technologies and the I.R.S., which has been investigating the firm for six years. The I.R.S. has taken action against the hedge fund for certain years during which it undertook these transactions, according staff members at the subcommittee.
Bloomberg News first reported on the transactions and the dispute last year.
Renee Calabro, a spokeswoman for Deutsche Bank, said the basket options it offered clients were “fully compliant with applicable laws, regulations and guidance,” adding that they were a “niche offering to a small number of clients over a discrete period of time which we completely ceased offering in 2010.”
Kerrie Cohen, a spokeswoman for Barclays, said the bank “has been fully compliant with the law, has cooperated with the committee and looks forward to continuing that cooperation at the hearing.“
George Weiss Associates could not be immediately reached for comment.
For much of the past two decades, SAC and Renaissance Technologies were among the most profitable hedge funds on Wall Street, posting double-digit annualized returns.
SAC was founded by Steven A. Cohen in 1992 with just $25 million but grew to be one of the biggest hedge funds in the industry.
A spokesman for SAC, now called Point72 Asset Management, declined to comment. As part of a guilty plea with the government on insider trading charges, SAC agreed to stop managing money for outside investors and change its name.
Renaissance Technologies, a $24.7 billion hedge fund founded in 1982 by Mr. Simons, a former code breaker and mathematics professor, also stands out in an industry known for its outsize fees, with some of its clients paying as much as a 5 percent annual management fee and 44 percent of net profits each year.
Renaissance’s Medallion fund, which is made up mostly of employee money, was the most prolific user of basket options and the focus on the subcommittee’s inquiry.
Speaking on Monday about the amount of money hedge funds like Renaissance Technology were able to save by not paying higher taxes, Mr. Levin said, “It’s a lot of money, even by Washington standards.”
http://dealbook.nytimes.com/2014/07/21/senate...s&_r=0
