I have been surprised at just how many companies are now owned, under the radar screen, by hedge funds. Just locally in my Evansville, IN area, two of the largest companies.....Berry Plastics and Springleaf (the former American General Finance) are both now owned by hedge funds. I bet more than 95% of the people in the Evansville area are not aware of this. And I am pretty sure it is like this all over the country.
A common hedge fund and private equity manager compensation arrangement includes two parts, that could be something like this:
*The manager receives a fee of 2% of the value of the fund and this is taxed at ordinary rates.
*The manager also receives 20% of the annual profits of the fund and this is taxed at a very attractive capital gain tax rate.
Clearly, the part that is a tax loophole is that all fund manager compensation should be taxed at ordinary rates, particularly for the larger hedge funds. Frankly, it is just crazy to allow hedge fund managers a much lower tax rate than what working stiffs must pay.
I can see the advantage to the economy, and to job creation, of letting the manager of a smaller private equity fund get part of her compensation income taxed at capital gain tax rates.
My recommendation is to tax all fund manager compensation for managing a hedge fund, above a certain size, to be taxed to the manager as ordinary income. The feds can decide what the size cut off should be.
