Hedge Fund Tax Rate

You're thinking of private equity and carried interest, not hedge funds.

quote:

---

Hedge Funds too. They are under the same loophole umbrella that PE principals use as well whereas large amounts of their compensation are treated as capital gains and not ordinary income. It's a joke.

---

I agree that the principle itself is "unfair". But they'd be idiots not to take advantage of the opportunity. PE firms especially have the excuse because what they're doing has around 5 year time horizon anyway and should be considered LT capital gains. I didn't realize that this was the case for hedge funds though

I guess its possible with hedge funds that have long time horizons, but would you not agree that it is significantly more prevalent in private equity than it is in hedge funds? eta: I appreciate you pointing it out, I guess I forgot there's such thing as hedge funds that actually hold long positions in anything. We do carried interest valuations for private equity all the time, have never done one for a hedge fund though (although we do other valuation work for them all the time).

You have to remember these entites are taxed as partnerships. So they can allocate income and losses in very creative ways as long as the allocations have substantial economic effect. It's possible to allocate short-term captial gains to the investors first and the long-term cpital gains to the fund manager first for example.

Many years ago, before dsitributions in kind of shares of stock were treated as distributions of cash, I performed many complex calculations pertaining to disproportionate distributions of shares of stock in specific companies to specific investors in venture capital funds. Those distributions were allowed if at the end of the day the total distributions to all partners were made in accordance with the terms of the partnership agreement, and they had substantial economic effect.

Just to clarify, typically the allocation to a manager (i.e., GP in an lp) of a hedge is also characterized as carried interest, just like in a PE fund. The structures are the same, so the allocation mechanisms are the same (although timing of the allocations differs). It's just that hedge funds usually do not have long term investments, so the carried interest does not get ltcg treatment.

I think the confusion comes from the all knowing media, which can't be bothered with specifics. It's easier to just say hedge funds. Oh, and those private jets, don't forget about those private jets.

So if the hedge fund doesn't only have long term gains the "carried interest" or compensation to the hedge fund manager is still taxed at a short term gain rates? Am I reading that right? Thanks for all the help.