It seems nothing and no one is beyond Donald Trump’s ability to bombastically insult or single out for scorn. Last month it was immigrants, last week it was women, and this week its hedge fund managers. Trump says that he is ready to reform the tax code to get the managers to pay up their fair share.
Looking for some descriptions with just the right flavor, Trump chose to call hedge fund managers “paper pushers,” who can ease the tax burden of the middle class by just paying their taxes in a fair way.
“The hedge fund guys are getting away with murder. They’re making a tremendous amount of money. They have to pay taxes. I want to lower the rates for the middle class. The middle class is the one, they’re getting absolutely destroyed. This country doesn’t have—won’t have a middle class very soon,” Trump told CBS News.
Trump was even able to back up his comments with a real-life example of a loophole he is ready to fill if he gets elected president. Known as the “carried interest loophole,” this is a provision allowed by the tax code which lets private equity and hedge fund managers pay their taxes at the same rate as capital gains instead of at the rate of ordinary income. The difference is almost double: capital gains tax rate is only 20 percent, while the bracket many, if not most hedge fund managers would find themselves in is most like hovering around 39.6 percent.
On this subject Trump sounds more like a Democrat than a Republican contender. Hillary Clinton expressed a similar sentiment without the insults saying last May that, “something is wrong when CEOs earn more than 300 times than what the typical American worker earns and when hedge fund managers pay a lower tax rate than truck drivers or nurses.” Bernie Sanders has made tax inequality a cornerstone of his campaign rhetoric.
The chief investment officer, Michael Garrow, of the HS Group, a Hong Kong-based investment management firm, announced that Mohan Rajasooria will be launching a new hedge fund, Zaaba Capital.
Rajasooria left Morgan Sze’s Azentus Capital Management earlier this year, and hopes to open is new fund with a minimum of $250 million from institutional clients, founding partners of Zaaba, in addition to the HS Group.
Zaaba will also be based in Hong Kong, and plans to invest in equities, convertible bonds and corporate credit in the Asian marketplace. Garrow added that the hedge fund will be free to take large amounts of capital outside the usual Asian hedge fund key countries such as Japan, Korea and China.
“A lot of the pan-Asia funds are de facto northeast Asian funds,” said Garrow. “It’s pretty slim pickings in terms of funds that really address Asia outside northeast Asia. The intention is really to capture the major opportunity sets around the region.”
Citigroup Inc. agreed to a settlement of $13.5 million to end the class-action suit against its “Corporate Special Opportunities” (“CSO”) hedge fund. The preliminary settlement was filed in a Manhattan federal court and will still be subjected to court approval and a fairness hearing.
The plaintiffs in the lawsuit claimed that Citigroup and its wholly-owned subsidiary Citigroup Alternative Investments, LLC, had purposefully misrepresented the true risks involved in investing in the CSO hedge fund. They also accused the defendants of lying to investors in order to keep them invested in the fund in 2007. This deceit and persuasion led to great investor losses when the fund was forced to close in 2008.
Claims by the plaintiffs stated that investors were lied to about the quality of the fund’s portfolio, specifically in a letter from the company published in December 2007. Six weeks after stating that the CSO fund was “fundamentally sound” the company no longer permitted withdrawals from the fund to prevent further losses. Despite this action the fund had to be liquidated, resulting in huge losses of millions of dollars to investors.
In wake of huge losses for its Vermillion Asset Management LLC Viridian commodity fund, the private equity firm Carlyle Group LP split with the founders of its flagship hedge fund.
The fund shrank by about 75 percent from its peak of $2 billion down to only $50 million in assets.
The fund, which traded in oil, metals and agricultural markets, lost 23 percent in 2014. More recent investor bailouts began this past spring, causing the fund to plummet to its recent low point.
Christopher Nygaard and Drew Gilbert co-founded Vermillion in 2005. In 2012 they sold a majority equity stake to Carlyle. This past June the partners left the fund. The firm is now in retreat, reducing its investments in oil, natural gas, coal, iron ore and agriculture, and the traders and strategists involved in those investments are also leaving.
In a statement, Carlyle said it is “repositioning our commodities business, particularly in commodities finance, to capture an enormous global opportunity.”
Here is a quick run-down of some of the world’s hedge funds that barely kept their heads above the flood of bad news coming from China and Greece this past year. US monetary policy doubts did not help the already bad situation for many managers.
The third worst performing fund in 2015 was Crispin Odey’s Odey European fund. Valued at €2.7 billion, the fund was down 14.8 percent in mid-July, according to an investigation of 500 funds by HSBC’s Alternative Investment Group.
Another poor performer, ranked among HSBC’s 20 worst funds, was New York-based Fortress Investment. Fortress’s $1.2 billion Macro fund lost 10.6 percent as of June 30.
Neither hedge fund manager offered a comment on the performance, although Mr. Odey did write in a letter to investors about the poor performance: “Nobody likes looking foolish. Nobody likes losing money,” he admitted.
The winner of the biggest loser award for hedge funds in 2015 is the Amsterdam-based manager HiQ Invest Market Neutral fund. At the end of May the fund had already lost 17.62 percent, losing almost half of its value since January. The fund is valued at $45 million.
“It will be difficult for them to recover,” Alper Ince, managing director at Paamco, a California-based fund of heged funds, said.
Former head of China investments at Och-Ziff Capital Management Group opened a health-care hedge fund based in Asia.
Frank Yu’s Ally Bridge LB Healthcare Fund will invest in opportunities created by Chinese reforms which began to go into effect in 2007. Li Bin, a former Merck & Company scientist, will lead the fund. Li Bin joined the fund in May after a stint as Morgan Stanley’s head of Greater China health-care research.
Managers that have their focus on global health-care have been growing as China continues to improve and expand its health-care system. The goals of the improvements are to increase coverage and make health-care more affordable. In order to accomplish this the Chinese government, which commands the second largest economy in the world, is projected to increase spending in this sector by close to 12 percent each year. By 2018 it is predicted that China will be spending close to $892 billion on health-care.
“It’s becoming an irreversible trend,” said Hong Kong-based Yu. “Chinese patients, doctors, companies, government and hospitals are in search of the most effective, safest and most affordable devices and drugs.”
Even the most sophisticated security systems can go awry. Case in point: In 2013 Thomas Meston, the chief of finance at London based Fortelus Capital Management received a phone call late one Friday afternoon. The caller said he represented the hedge fund’s bank, Coutts, and that there might have been some illegal activity on the fund’s account. Just in case, the caller said, he needed the CFO to use the bank’s smart card security system to generate the codes the caller needed to cancel 15 suspicious payments. Reluctantly Meston did what the caller said.
When Monday morning rolled around Meston was shocked to see that $1.2 million was gone from the fund’s account. There was no record of that Friday call at Coutts, a division of Royal Bank of Scotland. Meston had been hoodwinked.
Fortelus fired Meston, and is now suing him saying that the CFO breached his contract by not protecting the company’s assets. Meston insists he was not acting negligently, and his mistake was an honest one that anyone could have made.
“People are always the weakest link,” said Jason Ferdinand, a director at Coventry University who runs the U.K.’s first cyber security MBA course. Ferdinand added that employees “often assume that they do not have to think about security because a machine or software is doing it for them.”
The race for president in 2016 is getting underway, and some of the country’s most famous names in finance and the arts are putting their money where their beliefs are. Interestingly, support for Hillary Clinton’s candidacy seems to attract a wide variety of star material, uniting them in their belief that Clinton is the best woman for the job.
In the past three months the super PAC known as Priorities USA Action will have raised $15.6 million for Clinton. The information is made public when the PAC files its quarterly fundraising report with the Federal Election Commission. According to law, super PACs are allowed to accept donations of any size. The biggest donation to Clinton’s campaign during the last quarter was from the owner of the Spanish language Univision Network, Haim Saban, for $2 million.
Hedge fund heavy George Soros is also supporting Clinton. Other big names include film makers Steven Spielberg and Jeffrey Katzenberg, investor Donald Sussman and Boston-based political activist Barbara Lee.
The Priorities PAC was first established to raise money for the Obama re-election campaign in 2011. But the PAC was doing nothing until a former Clinton campaign aid, Guy Cecil, came along to revive it last May. The last four weeks saw about 80 percent of its contributions so far.
Former chairman of the Senate Finance Committee Ron Wyden introduced a proposal to put an end to Hedge Fund tax evasion through what he says is the illegitimate use of a loophole in the tax code. Apparently some hedge funds have been able to avoid paying taxes on their profits for several years utilizing a loophole exempting reinsurance firms from paying taxes. The Democratic Senator from Oregon claims that hedge funds have cost the US government millions, if not billions of dollars in uncollected taxes by placing their earnings in offshore re-insurers that they themselves set up for this purpose.
Hedge fund giants such as David Einhorn and Dan Loeb, to name only two of many, route their investments through reinsurers in locations like Bermuda in order to minimize, or indefinitely delay tax payments. The fund managers say that these are perfectly legitimate businesses that really do take on risks from primary insurers, and are not tax scams.
“For over 10 years now this loophole has allowed some hedge fund investors to avoid paying hundreds of millions of tax dollars,” Wyden said in a statement last Thursday. “It’s time we shut it down for good.”
to be his senior economic advisor. Spitznagel is known as a “libertarian” hedge fund manager.
Universa is a fund that is designed to protect its investors from sharp market crashes, or Black Swan events, with about $6 billion AUM.
“I am very grateful to have Mark Spitznagel serve as senior economic advisor to my campaign,” Kentucky Senator Paul said in a statement. “As I travel across the country, the top concern of the American people is our failing economy. I believe we can revitalize our economy by encouraging opportunity and entrepreneurship with lower taxes, a balanced budget, less Federal Reserve interventionism, and limited government spending.”
“I look forward to working alongside Mark to solve our nation’s economic problem and to restore the American Dream,” he added.
Spitznagel wrote a book on investing called, “The Dao of Capital,” and has an organic goat farm which he runs in Michigan, Idyll Farms. He moved Universa’s headquarters last March from Santa Monica, California, to Coconut Grove Florida because of the “more hospitable business and tax environment.”