Institutional Investor's Alpha Magazine - May 2008 - (Page 16)

Critics of a recent proposal to raise carried-interest taxes on hedge funds in New York City say it would run fund managers out of town. Big Apple Bite A A proposal to raise taxes on New York City hedge funds is stirring debate over whether it may backﬁre by running hedge funds out of town. The idea, promoted as a tax fairness issue by the Fiscal Policy Institute, a liberal, Manhattan-based research group, is to levy a 4 percent tax on so-called carried interest — the untaxed 20 percent performance fee that man- agers typically collect on positive returns (on top of the usual 1 to 2 percent management fee). The proposal has the early backing of a handful of the New York City Council’s 51 members, who are in the midst of heated discussions over taxation in the city. New York implemented broad tax cuts in 1995, when times were relatively good. But now that the city faces a $5 billion budget deﬁcit, its overall tax policy is being aggressively revisited. Some critics of raising taxes on hedge funds say it would cause managers based in New York to pull up stakes for tax-friendlier locales. “It’s a real possibility that you would see funds move if you tax them on margins,” says Steven Kaplan, a ﬁnance professor at the University of Chicago Graduate School of Business. “They could relocate to London, Chicago or Connecticut.” “It could have a signiﬁcant impact on where ﬁrms will decide to locate,” agrees John Tavss, the partner who heads the hedge fund practice at New York–based law ﬁrm Seward & Kissel, which has a long association with hedge fund ﬁrms. (It helped A.W. Jones set up the ﬁ rst such partnership in 1949.) Philippe Benedict, a tax-law partner at hedge fund powerhouse Schulte Roth & Zabel in New York, calls the proposal a terrible idea and says the city would lose money because it would prompt funds to leave. The FPI estimates that ending the exemption could reap as much as $225 million annually for the city and “help pay for critical investments in schools, subways and health care.” According to the FPI, the 13 biggest New York hedge funds generated $20 billion in untaxed proﬁts in 2007. Five of the world’s ten biggest hedge funds are based in New York (see the Hedge Fund 100, page 49). — Scott Krady CLASS REVIEW Fixed-Income Pain fter the death of a sailfish, March stormed in like a lion and sank a bear. Following the February collapse of the $2 billion hedge fund Sailfish Capital Partners, based in Stamford, Connecticut, other members of the ﬁxed-income menagerie were also feeling the pain — even as the demise of Bear Stearns Cos. roiled the markets. Such was the grim backdrop to the dismal 2.12 percent loss in the hedge fund universe tracked by Chicago-based Hedge Fund Research. In the midst of the worst credit crisis in generations, a few managers who saw the coming storm managed to produce positive returns, kicking HFR’s asset-backed index 32 basis points into positive territory. Soon after the October 2006 launch of the London-based CQS ABS Fund, portfolio managers Steven Swallow and Alisdair Lumsden targeted the coming market deterioration through two different strategies. “We didn’t believe it would be conﬁned to just subprime factors,” says Swallow. CQS shorted selective ABS deals in both Europe and the U.S. and selectively bought triple-A-rated residential mortgagebacked securities. They also branched off from the main ABS theme by shorting stocks, including U.S. regional banks and small mortgage lenders. The foresight yielded a 4.47 percent return in March and a 55.25 annualized return since inception. At the end of March, the fund had $316 million in assets. The $742 million Smith Breeden Mortgage Partners Fund, based in Chapel Hill, North Carolina, was up 2.48 percent in March mainly because it was defensively positioned, with little leverage, coming into the month. “We observed the distress in the market and were concerned about the amount of deleveraging that would have to occur,” says Daniel Dektar, CIO of Smith Breeden Associates. — Frances Denmark Fixed Income, Asset-Backed Return (%) One year Three years through through March* March Three-year annualized standard deviation Benchmark March HFRI ﬁxed income–asset backed index HFRI fund weighted composite index Standard & Poor’s 500 index * Annualized. 0.32% –2.12 –0.43 –1.28% 3.48 –5.08 4.90% 9.20 5.84 2.05 5.35 8.67 Source: Hedge Fund Research. 16 • INSTITUTIONAL INVESTOR’S ALPHA • MAY 2008 Illustration by Joshua Gorchov for Alpha

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.