Academic

A Hidden Gem

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

The recently passed "rescue" legislation contains a new Section 457A to the Internal Revenue Code. The effect of this new section appears to be to eliminate the ability for hedge fund managers to defer income tax on their performance and management fees. This ability to defer taxes is part of what Tom Brennan and I called a "tax subsidy" for private fund managers. Looks like the new law will apply only prospectively. So given the recent performance of most hedge funds, it isn't such a big deal that they now have to pay taxes on their earnings. That's a "rich man's problem," as they say. Nor is the tax change likely to be the reason we see large liquidations of hedge fund portfolio's. That will be driven by redemptions by disappointed investors and margin calls in a declining market.

It will be interesting to see how this change affects the market for human capital. Assuming we have any chance of separating all the potential causes, this may be one more reason the best and the brightest explore callings other than that of adding liquidity and price discovery to support an efficient asset market. Sexy as that sounds.

But before they all start thinking about law school, I urge them to ponder the NPV of a JD.

Thanks GLOM for letting me spout off. It was fun.

Full post as published by Conglomerate on October 04, 2008 (boomark / email).