Hedgeweek Comment: Hedge funds get breather in Washington tax ordeal

Proposed legislation that would strike at the very heart of the deferred compensation enjoyed by many hedge fund managers has been resurrected on Capitol Hill. Legislation that came close to passing the Senate on Tuesday sought to alter US tax policy so that hedge fund managers using offshore tax havens would no longer be able to defer taxes on their compensation, obliging them to pay taxes immediately on this income.

However the legislation, which analysts estimated would have raised USD24bn over 10 years had it been passed by the Senate on Tuesday, was blocked in the end - just.

The Managed Funds Association, a US-based hedge fund lobbying group that has vowed to fight the provision, said in a letter last month that without access to the offshore funds of US managers, foreign investors were likely to flock to funds and managers elsewhere, potentially denying their capital to US markets.

Had the proposed legislation been passed, it would have certainly have come at the wrong time. Most of the hedge fund industry would assert that an end to tax deferment would stifle investment and hurt the liquidity that hedge funds provide to the markets.

Attacking the hedge fund community, which has been one of the most reliable sources of market liquidity during the current credit crisis, could have precipitated an economic backlash.

Hedge fund managers are safe for now, but with US elections looming, the country's hedge fund community will be awaiting the outcome on the edge of their seats.

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