How Recently Enacted and Proposed Tax Regulations Affect Hedge Fund Managers and Their Investors

Abstract

The author first observes that, in recent years, hedge funds have enjoyed a significant increase in capital investment. This fact, along with the considerable media attention paid to certain high-profile transactions involving hedge funds and the perception that the compensation paid to hedge fund managers enjoys particularly favorable tax treatment, has led Congress to address many issues that affect hedge funds. The purpose of this article is to highlight some of these issues with an emphasis on how recent and proposed tax changes will affect U.S. individual investors as well as hedge fund managers. In particular, it discusses pending legislation that will increase the tax burden of hedge funds organized as publicly traded partnerships and examine how new Internal Revenue Code sections and proposed legislation will increase the tax burden imposed on hedge fund manager compensation and investor profits.