This week, a reader sent us a letter about the tax rates paid by hedge fund managers.
In the FactCheck Mailbag, we feature some of the email we receive. Readers can send comments to email@example.com. Letters may be edited for length.
‘Carried Interest Argument Is Moot’
Recently you posted an article checking the facts on Bernie Sanders’ statements regarding effective tax rates for hedge fund managers versus firemen, truck drivers, etc. [“Hedge Fund Managers’ Tax Rates,” Sept. 8]. There have been numerous articles and headlines talking about carried interest and its use by hedge fund managers. However, you actually need to account for one more fact when looking at this, and that is a majority of hedge fund managers run funds that are actually not tax efficient; the majority do not have average holding periods anywhere near one year. They accumulate very little capital gains and therefore the whole carried interest argument is moot. The incentive fee they receive is largely taxed at an ordinary income level. Granted there are quite a few that might, and as rates get higher and higher I am sure there are more and more looking to extend their holding period. Nonetheless I would wager that for every 10 private equity managers taking advantage of carried interest you might have 1 hedge fund manager. Funny how everyone wants to bash hedge funds for the volatility on the markets created by their buying and selling (read not buy and hold) and at the same time say they are tax advantaged through using capital gains tax rates.
I am sorry to say I don’t have factual data just anecdotal after working for multiple hedge funds over a 24-year period and knowing our investment styles. Don’t get me wrong, when we can we do try to optimize the holding period but [we’re] always conscious of the risk reward in extending the holding period.
Kevin S. Gahwyler
New York, New York
FactCheck.org responds: Our reader makes a good point. Not all hedge fund managers are able to have most of their earnings taxed at capital gains rates. Those rates apply to investments held for more than a year. One of the experts we spoke with, Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, told us that it was “sloppy vocabulary” on the part of politicians to refer to hedge fund managers, when their criticisms apply more broadly to private equity funds. He preferred the term “investment management fund,” noting that this may be “more lawyerly semantics.” Our reader notes that he doesn’t have data, only anecdotes, and we also know of no data that would break down what percentage of hedge fund managers pay mainly capital gains rates.