Hedge Fund Reader : Another Thorn in Hedge Funds’ Sides

December 29, 2006

Another Thorn in Hedge Funds’ Sides

-- By Pushpa Sathish, Staff Writer

Times, they sure are a-changing, especially in the hedge fund industry. It’s not enough that the U.S. Securities and Exchange Commission (SEC) is raising the financial bar for those wishing to invest in hedge funds and also searching high and low for ways to regulate the $1.3 trillion dollar industry - the taxman is also now closing in on hedge funds.

If a new IRS proposal goes through, funds may be deprived of the trader status tax breaks they are entitled to right now. Firms that engage in a large amount of short-term trading are allowed to deduct some fund expenses like management fees from their taxes. With hedge funds showing a marked interest in private equities that are generally long-term holdings, the relevance of this tax break has come under a cloud.

Private investments in public equities are considered less liquid than other stocks and commodities used in short-term trade strategies. Hedge funds that buy private equities as a buy-to-hold investment will have to take another look at trader status, according to Gina Biondo, a partner at PricewaterhouseCoopers.

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December 29, 2006 in Regulation | Permalink