Senate Attacks Hedge Fund Tax Loopholes

This week, the US Senate considers a job and small business bill this week that may be funded by closing a tax loophole that allows hedge fund and private equity managers to pay capital gains rates on performance fees instead of ordinary income tax. By some estimats, closing this loophole could double the tax revenue generated by these hedge fund managers.

But of course, there are conflicting points of view. Len Burman, a professor at Syracuse University, describes the current taxation scheme as "a huge windfall to some of the best-off people in society." Meanwhile, those target by the bill claim they are being unfairly attacked. Because almsot a quarter of all investment partnerships involve real estate, these managerse could be hardest hit says, Jeffrey DeBoer of the Real Estate Roundtable. He adds, "What we're trying to do is make people understand this is very much a Main Street tax increase, not a Wall Street tax increase."

The bill, which likely has significant constituent support, will be voted on by the Senate this week.

European Union Imposes Hedge Fund Regulations

EU Imposes New Hedge Fund Regulations
The European Union is proposing new rules extending oversight for the European hedge fund industry which has close to $1 trillion in assets by some estimates. The European Commission Wednesday proposed new disclosure requirements for hedge funds and private equity firms managing more than EUR100 million in assets. Many had expected, upon release of an early draft, that the AUM cutoff for firms would be as high as EUR250 million. This cutoff means only 3% of funds (accounting for 10% of assets), will be regulated under the proposal.

Germany and France in recent years have railed against hedge funds while the U.K., home to Europe's largest financial center has taken the opposite position. Germany and France, for example, believe certain derivatives and other aspects of financial markets have evolved to become beyond regulators' understanding and oversight. The U.K. for their part, believes stricter regulations will only push hedge funds and other alternative managers to locales with less stringent requirements.

Under the plan, firms exceeding the cutoff will have to register with regulators and provide information on their holdings, fees and the amount of money they borrow to boost their potential returns.

The commission's proposal still needs approval from E.U. governments and the European Parliament. Officials expect continued argument about how to manage the sector.

EU Official Seeks Greater Hedge Fund Transparency

The top EU financial official, Charlie McCreevey, is seeking greater transparency from European hedge funds, amid pressure from politicians and citizens. This comes amid increased calls for hedge fund transparency in the US. McCreevey said noted "undesirable levels of leverage in hedge funds, or excessive lending to private equity managed companies."

He also acknowledged the role of leverage in today's markets with redemptions forcing many funds to sell positions, "Much of the present difficulty encountered by hedge funds and private equity portfolio companies stems from the sudden tightening in cash and securities lending,"

"Those who do not like activist investors should not have a fixation with hedge funds," McCreevy said. "Any policy responses that seek to tackle wider problems by targeting hedge funds and private equity will fail."

European nations will likely discuss this with the U.S., China, India and Brazil when the G-20 group of nations meet in April to chart out ways to fix the financial system.

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