Washington’s hedge fund tax

Precise details on the nature of the Volcker rule - or Dodd-Frank Act, as it is now known – are still thin on the ground.

Some hedge funds have reason to be thankful for the 3 per cent concession contained in the latest draft (meaning banks will be allowed to invest an amount equivalent to 3 per cent of their tier-1 capital in alternative investments, as opposed to none of it). But today’s release also gives grounds to be downbeat.

Chief among them is the fact that America’s biggest hedge funds are also, apparently, going to be on the hook to cough up for the failings of the America’s biggest banks.

QED: Any fund with more than $10bn in assets under management will be subject to a risk-adjusted tax designed to raise up to $19bn (whether over five or 10 years, it is not yet clear). Mutual funds will also be caught, but will be pay less on the basis that their positions are – supposedly – lower octane.

Though estimates vary, there are around 25 hedge funds with more than $10bn under management who may be eligible to be caught by the tax.

Here’s a sampling, from March, from Pensions & Investments (some of the numbers are by now a little out, but you get the gist. We’ve highlighted those domiciled in the US):

• J.P. Morgan $53.5bn
• Bridgewater Associates $43.6bn
• Paulson & Co. $32.0bn
• Brevan Howard $27.0bn
• Soros Fund Mgmt. $27.0bn
• Man Group $25.3bn
• Och-Ziff Capital Mgmt. Group $23.1bn
• D.E. Shaw Group $23.0bn
• BlackRock (BGI) $21.0bn
• Farallon Capital Mgmt. $20.7bn
• Baupost Group $20.0bn
• Goldman Sachs Asset Mgmt. $17.8bn
• BlueCrest Capital Mgmt. $17.3bn
• Canyon Partners $17.0bn
• Lansdowne Partners $15.0bn
• Renaissance Technologies $15.0bn
• Fortress Investment Group $13.8bn
• Moore Capital Mgmt. $12.4bn
• Viking Global Investors $12.4bn
• Citadel Investment Group $12.2bn
• SAC Capital Partners $12.0 bn
• GLG Partners $11.5bn
• Tudor Investment Corp $10.0bn

Unlike banks, hedge funds – or at least, their management companies - tend to be quite slimly capitalised and tightly-run, as businesses go. Which means that a) a tax will hit them hard, and b) redomiciling – at least in a technical sense - could be fairly easy.

Of course, the tax could always be levied directly on the funds – but invariably, those are domiciled offshore. And even if a levy on them could be effected, it would be investors, and inter alia the global competitiveness of the US hedge funds, that suffer.

Related links:
Emotional finish to Wall St reform marathon – FT
War on banks unsettles hedge funds – FT
www.ft.com/hedgefunds