Wyden, Whitehouse, King Lead Colleagues to Introduce Bill to Ensure Hedge Fund Managers Pay Fair Share in Taxes | The United States Senate Committee on Finance (2024)

FAQs

What is the carried interest loophole? ›

Carried interest, income flowing to the general partner of a private investment fund, often is treated as capital gains for the purposes of taxation. Some view this tax preference as an unfair, market-distorting loophole.

A hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers. These managers use a wide range of strategies, including leverage (borrowed money) and the trading of non-traditional assets, to earn above-average investment returns.

In most cases, carried interest is considered a return on investment and taxed as a capital gain rather than ordinary income, usually at a lower rate. Because carried interest is typically distributed after a period of years, it defers taxes in the manner of an unrealized capital gain.

Carry is generally structured as allocating to the Fund managers a share in the Fund's profits, usually, but not always, this is a 20% share of the Fund's profits, once investors have received back an amount equal to their original investment, plus an additional return on their investment (known as the hurdle).

The carried interest loophole allows investment managers to pay the lower 23.8 percent capital gains tax rate on income received as compensation, rather than the ordinary income tax rates of up to 40.8 percent that they would pay for the same amount of wage income.

Unlike normal mutual funds, hedge funds don't enjoy the pass-through status for taxation. The income from these funds is taxed at the fund level. This implies that the taxation is not passed to the individual investor. They fall under the taxation regulations for alternative investment funds (AIFs).

BlackRock, Inc. is an American multinational investment company. It is the world's largest asset manager, with $10 trillion in assets under management as of December 31, 2023. Headquartered in New York City, BlackRock has 78 offices in 38 countries, and clients in 100 countries.

Hedge funds seem to rake in billions of dollars a year for their professional investment acumen and portfolio management across a range of strategies. Hedge funds make money as part of a fee structure paid by fund investors based on assets under management (AUM).

Today Bridgewater is the largest hedge fund in the world and Dalio has a personal fortune of approximately $19 billion. The fund serves institutional clients such as pension funds, foreign governments and central banks, as well as charitable foundations, family offices and high net worth individuals.

Carried interest, or “carry” for short, is the percentage of a private fund's investment profits that a fund manager receives as compensation. Used primarily by private equity funds, including venture capital funds, carried interest is one of the primary ways fund managers are paid.

How much do people in private equity make? ›

What does Carried interest clawback mean? A clawback provision (usually seen where a fund uses a deal-by deal model) that ensures that the carried interest partner does not receive more than its agreed percentage of carried interest over the life of the fund.

The 120-age investment rule states that a healthy investing approach means subtracting your age from 120 and using the result as the percentage of your investment dollars in stocks and other equity investments.

The fee is typically 2% of a fund's net asset value (NAV) over a 12-month period. A performance fee: also known as an incentive fee, this second fee is viewed as a reward for positive returns. Performance fees are typically set at 20% of the fund's profits.

Asset allocation is how investors split up their portfolios among different kinds of assets. The three main asset classes are equities, fixed income, and cash and cash equivalents. Each asset class has different risks and return potential, so each will behave differently over time.

The carried interest tax loophole is an income tax avoidance scheme that allows private equity and hedge fund executives — some of the richest people in the world — to substantially lower the amount they pay in taxes.

To understand carried interest, it helps to look at an example. Say an LP invests $5k in a fund that charges 20% carried interest. The fund has a successful exit, and that LP's distribution is worth $100k. The GP will receive 20% of the amount the investor earned after their principal is paid back ($100k - $5k = $95k).

“Wealthy hedge fund managers and private equity executives exploit the carried interest loophole to skip out on paying their fair share. Financiers shouldn't be able to pay lower rates than hardworking middle-class Americans.

According to its opponents, the carried interest loophole is an unfair giveaway to already wealthy asset managers. It allows them to pay less in taxes at a much lower rate than most other workers and can lead to someone earning $400,000 per year in a lower tax bracket than someone earning $60,000.