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Hedge funds targeted for taxes

Published May 12, 2007


WASHINGTON - With Congress always looking for new ways to boost tax receipts and protect individual investors, it's natural for hedge fund managers to worry that they have a bull's-eye on their chests - especially now that word is out that some of them made more than $1-billion apiece last year.

Politicians of both parties have long criticized the lack of regulation of hedge funds, vast pools of capital that operate secretively, without having to make the disclosures other investment firms such as mutual funds do.

Adding to their explosive growth and unbridled operations, the jaw-dropping compensation of their executives has made hedge funds even more tempting targets to lawmakers.

That helps explain a recent surge in the hiring of lobbyists and stepped-up contributions to political action committees by managers in the trillion-dollar hedge fund industry and top officials of private-equity groups that have piled up billions in profits in recent years.

Hedge fund executives gave at least $2.3-million in campaign donations during the 2004 election, compared with $576, 000 four years earlier, according to federal election data compiled by the nonpartisan Center for Responsive Politics. In 2006, that jumped to about $6-million.

One question on the table at a closed-door meeting committee aides held this week with tax practitioners and academic experts: Is it fair for the managers' portion of the funds' anticipated future profits to be taxed at 15 percent, the rate for capital gains, rather than at income tax rates of up to 35 percent?

Depending on the answer, that could mean tens of millions of dollars in higher tax bills for executives like James Simons, a math whiz and former professor and Pentagon code breaker who founded hedge fund Renaissance Technologies Corp.

Simons pulled in $1.7-billion last year, topping the hedge fund executive pay list compiled by Alpha magazine.

He was followed by Kenneth Griffin of Citadel Investment Group, $1.4-billion; and Sears Holding Corp. chairman Edward Lampert, whose returns from his ESL Investments was $1.3-billion.

Fast Facts:

About hedge funds

Some features of U.S. hedge funds:

- Total assets: About $1-trillion, but estimates vary.

- Number of hedge funds: About 9, 000.

- Fraud cases brought by the Securities and Exchange Commission since 2001: More than 100.

- Minimum requisites for solo investor: $1-million in net worth or $200, 000 annual income. An SEC proposal also would require at least $2.5-million in investments, excluding a personal residence.

Sources: Securities and Exchange Commission, Institutional Investor, Managed Funds Association

[Last modified May 12, 2007, 01:01:52]

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