(Bloomberg Businessweek) -- The closing of a giant tax loophole has been looming over U.S. hedge funds. A 2008 law required money managers who earned fees offshore and parked them there to declare the money and pay the taxes, but gave them until the end of this year. Although tax attorneys hunted for ways around this, they mostly came away empty. For many big-time investors, giving the cash away and getting a tax deduction may be the most attractive option.
The Robin Hood Foundation is ready to help. The nonprofit, established by hedge fund billionaire Paul Tudor Jones to combat poverty in New York City, stands out for the strategic planning it’s done around the money managers’ tax reckoning. “It was not a discussion that was prevalent at most charitable organizations,” says Elizabeth Zeigler, chief executive officer of Graham-Pelton Consulting, which advises nonprofits on fundraising and management issues. “When you think of the million-plus nonprofits in the U.S., a healthy majority don’t have relationships with hedge fund managers. Robin Hood does.”
On the fundraising side, Robin Hood is known for an annual celebrity-packed gala that generates tens of millions of dollars in donations and a conference at which hedge fund managers share their favorite investment ideas. Ticket proceeds from the conference go to Robin Hood’s antipoverty efforts, which include schools, job-training programs, and food pantries. The foundation’s board of directors includes well-known hedge fund managers David Tepper and David Einhorn. Robin Hood consulted with experts including tax advisers, lawyers, and hedge fund managers and eventually worked with Fidelity Charitable and JPMorgan Chase & Co. to set up two so-called donor-advised funds, according to people familiar with the matter. They were designed with hedge fund managers in mind.
Donor-advised funds essentially hold money and assets earmarked for giving, from which the donor can then direct grants to charities. They allow someone to get a large deduction immediately—generally up to a limit of 50 percent of adjusted gross income—even before choosing which causes get the cash. The granter gives up ownership of the money, but it can stay invested in markets. In the Robin Hood program, up to 90 percent can be invested in hedge funds, meaning it can remain in the firm of the person who gave it away.
Robin Hood saw that this added flexibility could be valuable to money managers. They can keep power over big chunks of cash at a time when many clients are fleeing hedge funds because of poor returns. Even though they won’t earn fees or keep investment gains on the money, it remains part of their assets under management and potentially a way to flex market muscle. And they can remain involved in their giving instead of signing it away at once. The money can ultimately go to any charity, but Robin Hood encourages donors to make it one of their choices, according to those familiar with the matter.
There’s a question as to whether donor-advised funds in general are a good deal for the public, says Ray Madoff, a professor at Boston College Law School who focuses on philanthropy. The funds provide donors with a significant tax break without as many rules as private foundations, such as an annual payout rate. Money could stay in a fund for generations. “There’s clearly need for regulation to ensure that these funds are available for charitable use within a reasonable period of time,” she says. According to National Philanthropic Trust, in 2016 the funds as a group had $85.2 billion and gave away about 20 percent of assets annually.
How much offshore money will be brought back and subject to taxes? It could be $200 billion, based on what tax advisers say after conversations with clients, brokers, and fund service providers. Investor George Soros has moved about $18 billion into his Open Society Foundations in the past seven years, with much of that coming from billions that had been accruing offshore. It’s possible that Connecticut, which faces a projected $2.3 billion deficit, could receive a bump, thanks to a handful of its hedge fund residents. Kevin Sullivan, commissioner of the Department of Revenue Services, says he’ll know more after April 15. “It will be 2018 before we see if it’s real,” he says, “or a wonderful dream we once had.”
Updates third paragraph to specify Fidelity Charitable.
To contact the authors of this story: Katherine Burton in New York at kburton@bloomberg.net, Margaret Collins in New York at mcollins45@bloomberg.net.
To contact the editor responsible for this story: Pat Regnier at pregnier3@bloomberg.net, Anne Reifenberg
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