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Successful Hedge Fund Faces "Painful" Tax Bill - Report

Tom Burroughes

19 December 2019

One of the most successful hedge fund performers faces an “unusually painful tax headache”, according to the Wall Street Journal. 

Renaissance Technologies, the business of Jim Simons, last week warned current and ex-staff that the Internal Revenue Service could force them to pay back taxes and penalties. That payment may be necessary because these people invested in Renaissance’s hedge funds through the firm’s 401 plan and individual retirement accounts, or IRAs, without paying fees.

The warning could affect other investment firms with similar plans, the WSJ said. 

The saga centers around a strategy starting in 2012 that enabled employees to invest in Renaissance’s hedge funds - including its market-beating Medallion fund - through their retirement accounts in a tax-advantaged, fee-free fashion. 

The WSJ, which saw the letter, said Renaissance now believes that the IRS could determine that the forgone fees should be counted as taxable income and as contributions beyond the annual limits to retirement plans. The report said the IRS does not usually comment on disputes with particular businesses or individuals.

The story has broken out at a time when the tax conduct of people in the investment business is unlikely to be popular in the current political climate, with attacks on the “one per cent” and concerns over wealth inequality. See, for example, controversy about a practice surrounding "carried interest" in private equity and the conduct of family offices. 

The WSJ said that the Renaissance Technologies Medallion fund, for example, has racked up average annual returns of about 66 per cent before fees since 1988, a performance unmatched by other sizable funds. Renaissance, which has about 320 staffers, recruits top mathematicians and scientists. Simons, 81, is considered by many to be the most successful moneymaker in the history of modern finance. Since 1988, Medallion has racked up trading gains of more than $100 billion, the report added.