Private Equity and Real Estate Funds Benefit – Not Most Hedge Funds
There is not a “carried interest loophole” for hedge fund managers! Hedge fund managers pay the same tax rates on long-term capital gains as everybody else – 23.8%. Most people consider it a loophole because part of the earned fee is carved out from the funds’ long-term capital gains.
The problem is that most hedge funds do not have any long-term capital gains. They trade and trade and trade – holding stocks for a millisecond sometimes. Therefore, most hedge fund income is taxed at the ordinary rate of 43.4% (39.6% top rate plus 3.8% Obamacare net investment tax), the same rate that would apply if we considered the carried interest a fee.
Our ValueAligned hedge fund, however, is consciously one of the few hedge funds that generate mostly long-term capital gains. In fact, over the last seven years, we have only generated net long-term capital gains, if any, at the lower tax rate for the benefit of our partners and, when we earn enough to receive a performance fee, for the benefit of the general partner (us) as well.
Who does benefit from the “carried interest loophole”?
Private equity and real estate funds benefit because most of their income is long-term capital gains, and if they take a carve-out for their performance fee they will be taxed at a preferential long-term capital gains rate. So, if you’re looking for a villain, stop bashing hedge fund managers. Most don’t care about carried interest. Look at Stephen Schwarzman (pictured below) or any of the other congressmen that get most of their income from the private equity and the real estate industry.
Hedge fund managers aren’t worried about losing the tax advantage on carried interest, largely because they aren’t taxed that way to begin with.
The lower capital gains rate applies to profit on long-term investments, but hedge fund managers usually hold stakes for less than one year.