Robert N. Gordon

Is Your Hedge Fund a Trader or an Investor

The author first observes that it is a well-accepted fact that most hedge funds are often somewhat tax-inefficient, though there are ways for hedge fund managers to make their trading more tax-efficient. In this article, he turns to a somewhat different question, highlighting a problem that most hedge fund investors will face even when their hedge funds employ such tax-friendly trading tools. Indeed, the answer to the apparently innocuous question of whether a hedge fund manager is classified as a trader or an investor could well be the burning issue for individuals investing in hedge funds. For most individuals, the “wrong” answer can cause taxes to be paid on “phantom” profits, and the IRS definition of “trader” may surprise many. The author discusses a variety of possible solutions, ranging from the characterization of fees, to wrap-vehicles and derivative contracts, but offers the important caveat that no solution is absolutely bulletproof, though most address one or another of the aspects of the problem.

Estate Tax Complexity Illustrated by the 2010 “Voluntary” Estate Tax

Executors of 2010 estates had an unusual choice: either to file an estate tax return and possibly pay a 35% estate tax on amounts above

The 21st Century Solutions to Hedging Low-Basis Stock

5 million or instead to choose to have assets pass without an estate tax but with a carryover in basis. The data are now in, and we can see that on average, executors of 2010 estates made the right decision. Thousands did choose to voluntarily file an estate tax return, but they wound up paying little or no estate tax.

Making Hedge Funds More Tax-Efficient

Confusion among practitioners on just what can and can’t be done to hedge and monetize a low-cost-basis stock without triggering a taxable sale is widespread. Investors can still hedge and monetize without concern for triggering a sale, although the task is more difficult than it needs to be. Hedging was fairly straightforward until 1997 when the constructive sale rules (IRC Section 1259) were enacted. The constructive sale rules force owners of low-basis shares to retain some upside or downside when hedging. Before these rules a perfect hedge was permissible, before 1997 we recommended a short-against-the-box, others advocated equity swaps, and others, deep-in-the money calls (all would now trigger a gain under IRC Section 1259). Although it seems daunting, hedging and monetization can still be safely executed without negative tax concerns if investors are careful to avoid the traps that are possible in such an endeavor.