Hedge fund titans are facing new problem and struggling to keep investors

Hedge-fund billionaires were already struggling to keep investors from heading out the door. Then along came another problem: big tax bills.

David Einhorn, John Paulson, Steve Cohen and other high-profile managers cumulatively owed billions of dollars to federal, state and local governments for taxes, thanks to a 2008 rule change tied to offshore holdings that gave them a decade to comply. To make the payments, they had to pull some of their own money from their funds.

For some, the bill came at a time assets were already shrinking. Einhorn took out between $200 million and $300 million from his Greenlight Capital for taxes, according to a person with knowledge of the firm.

Clients have withdrawn almost $3 billion from his funds in the last two years.

Paulson, who has lost most of his clients at Paulson & Co. since the financial crisis, also had to dip into one of his biggest hedge funds to pay the roughly $1.5 billion he owed.

Under the 2008 rule change, lawmakers decided that money managers who earned fees offshore and parked them there had to declare the money and pay taxes on it. Congress gave them until their 2017 tax bill came due to do so.

Some hedge fund titans complied over the last decade, but others waited as long as possible, benefiting from the magic of tax-deferred compounding –- and hoping that someone would figure out a clever way for them to lower their tax obligations in the meantime. That didn’t happen.

The waiting trimmed some bills unintentionally. Both Paulson and Einhorn owed less than they might have because both of their firms have suffered losses that offset previous gains.

Paulson paid $500 million in taxes at the end of last year, and another $1 billion this year, the Wall Street Journal reported. Paulson recently closed some smaller funds at his firm, and pulled money from his Credit Opportunities Fund to pay the bill.

In 2011, Paulson managed $38 billion, about half of which was his own fortune, thanks in part to a fortuitous wager on subprime mortgages. Since then, wrong-way bets on gold, U.S. banks and pharmaceutical shares have sent assets tumbling and customers fleeing. Paulson now manages around $9 billion, most of it is his own money.

Source: Bloomberg Pro Terminal

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