Institutional Investor's Alpha Magazine - October 2007 - (Page 12)

founded by Storm Boswick, a former trader with Sigma Capital, a subsidiary of SAC Capital. “Having Scott come and look at your fund is like an instant upgrade,” says Scaramucci. Meanwhile, the firm’s relationship with New York–based MSD Capital — the money management firm founded to invest the fortune of computermanufacturing billionaire Michael Dell and his family — is changing. An early investor in SkyBridge’s business, MSD Capital has helped it with funding and advisory support. But MSD is now scaling back the latter. Scaramucci says the two firms will continue working together, just on a more formal basis. “We are still very close with MSD,” he says, adding that discussions are under way for a joint investment in a new hedge fund. — Imogen Rose-Smith Tax Benefits C ongress is currently considering a handful of bills targeting taxation of hedge funds and their investors. Most proposals aim to raise taxes, but there is one bill that would enable tax-exempt investors to keep their status when investing in onshore hedge funds for the ﬁrst time. Under current law, U.S. tax-exempt investors that want to enjoy that status when investing in hedge funds must turn to offshore funds. Investments in onshore hedge funds incur Unrelated Business Income Taxes (UBIT) — taxation rules enacted in 1950 to prevent taxexempt organizations from exploiting their status by profiting from businesses or investments unrelated to their exemptions. Though UBIT rules exclude passive income such as dividends, interest and capital gains, a modification made in 1969 deemed that any income accrued through debt-financed assets is considered taxable — a change that encompasses hedge funds because of the leverage that managers typically use. U.S. hedge funds’ partnership structure passes the tax through to their investors, whether tax-exempt or not. To bypass UBIT, tax-exempt investors and the hedge funds that solicit their investments have turned to offshore hedge fund structures in such low-tax jurisdictions as the Cayman Islands. By investing through what are known as blocker corporations, which classify investment returns as dividends rather than partnership shares, investors can access hedge funds without being subject to UBIT. Aware that an increasing amount of investor money has been ﬂowing into offshore hedge funds, Congress recently took a closer look at the UBIT issue, and both the House Ways and Means and the Senate Finance committees conducted hearings on the topic. At the House hearing, the congressmen listened to several industry experts, including Janne Gallagher, vice president and general counsel for the Council on Foundations — a Washington, D.C., membership organization that supports more than 2,000 grant-making foundations and giving programs worldwide. She encouraged Congress to rethink the current UBIT laws, stressing that diversiﬁed portfolios boost a foundation’s ability to serve the common good. In early September, Michigan Democratic Representative Sander Levin introduced a bill that would alter the UBIT rules so that the tax would not be triggered by debt that a partnership incurs through investing in securities or commodities. This change would eliminate tax-exempt investors’ need to invest in offshore funds to avoid taxation. “There is no reason to force tax-exempt entities off- Scoreboard Hedge fund returns by strategy, sorted by investment process, asset class and geographic focus, through August 31, 2007. August return Composite, equally weighted Composite, asset-weighted Process group Directional trading Systematic trading Discretionary trading Relative value Arbitrage Convertible arbitrage Fixed-income arbitrage Mortgage-backed arbitrage Merger arbitrage Statistical arbitrage Multiprocess Security selection Long bias No bias Variable bias Short bias Specialist credit Distressed securities Long-short credit Multiprocess group Multiprocess Event-driven Asset class indexes Equity Fixed income Diversiﬁed Currencies Geographic area Developed markets Europe North America Japan Developed markets, diversiﬁed Emerging markets Combined Asia-Paciﬁc Global markets * Annualized. –1.57% –1.47 –2.46 –3.89 –0.74 –0.60 –0.38 –1.22 –0.51 0.10 0.29 –1.77 –0.21 –1.61 –1.95 –0.69 –1.53 –1.17 –1.30 –0.86 –1.39 –1.29 –1.08 –1.77 –1.35 –0.83 –2.37 –2.66 –1.58 –1.91 –0.77 –3.13 –2.58 –2.67 –2.02 –0.95 YTD return 5.85% 5.95 1.61 –1.41 4.96 4.13 4.52 2.56 4.53 6.30 3.96 2.34 6.39 8.18 9.18 6.35 7.09 –1.64 5.39 8.29 2.75 7.75 8.73 5.32 7.94 4.58 2.94 –0.45 4.12 4.06 5.24 0.69 2.03 10.46 12.09 12.94 3-mo. return –0.29% –0.76 –1.31 –3.34 1.16 –0.12 0.15 –1.78 0.58 2.07 –1.87 –0.56 1.11 0.36 0.16 0.91 0.23 1.15 –1.31 –0.14 –2.24 –0.58 0.62 –3.55 0.49 –0.70 –1.41 –2.75 –1.30 –2.56 –0.97 –1.06 –1.74 2.07 3.28 3.67 12-mo. return 11.21% 11.62 5.68 2.21 9.71 7.12 7.61 6.48 7.47 9.30 8.03 4.23 10.43 15.22 17.71 10.41 13.90 –8.28 10.41 14.71 6.68 12.98 13.53 11.63 14.14 8.44 7.48 3.66 8.68 10.44 9.89 0.81 5.99 19.28 19.43 21.57 3-yr. return* 10.52% 10.34 7.64 6.19 9.05 5.96 5.20 4.36 6.14 7.02 7.69 5.87 8.40 13.42 15.63 9.66 12.60 –2.97 10.76 15.30 7.32 11.63 11.41 11.88 12.45 8.59 8.77 4.85 9.13 11.16 9.72 5.94 7.19 17.00 14.18 16.09 3-yr. std. dev.* 3.96% 3.77 5.07 7.27 3.50 1.68 1.89 3.44 1.17 1.15 2.83 2.19 1.92 5.29 6.58 3.14 5.08 7.74 2.72 3.63 2.34 3.78 3.50 4.93 4.62 1.87 4.59 4.74 3.78 4.24 3.82 6.48 4.41 6.15 5.29 5.36 Source: MSCI. 12 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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