Morgan Stanley Exploits Tax Loophole in New Hedge Fund

Stephen Harris

8 August 2006

Morgan Stanley has launched a second fund of hedge fund vehicle in the US, targeting the private client market and smaller institutions. The new Absolute Return Fund STS has a minimum investment of $100,000 and is aimed at tax-deferred and tax-exempt investors, such as funds and individuals holding 401-K and IRA accounts. Morgan Stanley’s first such vehicle was designed for taxable investors and was launched in April. The new fund will be managed by the bank's liquid markets team, headed by Mustafa Jama. The fund has "special tax status," which includes a Cayman Islands partnership that allows corporate pension funds to avoid "unrelated business taxable income" on gains in investments that use leverage. Avoidance of UBTI has fuelled the growth in offshore-domiciled funds in recent years from US pension funds and high net worth investors, according to tax experts.