Integration of Hedge Funds and Wealth Transfer Structures

Abstract

This article examines the issue of where hedge funds should be “located” (a location being defined as a holding structure within an investor's wealth) in order to maximize the effectiveness of these strategies, which can reduce portfolio volatility, increase “risk-adjusted” return and provide these benefits without correlation to major market indices. The author notes that, not surprisingly, owners or employees in smaller, entrepreneurial firms argue that these virtues persist and will repeat for a variety of organizational reasons, not the least of which is an environment which encourages independent decision making. He then turns to three questions. First, how might we reduce the income tax cost of hedge fund ownership? Second, where might hedge funds be owned to maximize after-tax generational wealth accumulation? Third, given the low volatility characteristics of many hedge funds, where do they seem to fit best from an investment perspective? He begins with an overview on tax-efficient investing, and then discusses hedge funds in the context of specific wealth transfer strategies. (Note: The article was drafted before the Bush tax bill and does not consider the impact of these provisions upon hedge funds.)