Hedge funds and Private Equity - PES

The international financial authorities are not offering clear answers.
Anyhow, for the sake of clarity we must distinguish between taxation of the fund and taxation of
the fund manager. The broad majority of funds are located outside the EU – chiefly for the reason
of tax minimisation – with the consequence of tax losses for the EU region. This loss of income
cannot be avoided by ensuring that managers pay the correct amount of tax for their on-shore
activities.
It is a complex challenge to try to enhance efforts to protect tax revenues for Europe’s welfare
societies given the international character of hedge funds and private equity funds. It is not
impossible – there can be a case for coordinated actions among member states. But a condition
of a more efficient approach will be higher transparency and disclosure.
1.10 The return to investors – better than others?
The staggering growth of the hedge fund industry raises the obvious question: why are
investors interested in hedge funds? The prevailing answer to this question is “financial performance”.
The “strong selling point” of both hedge funds and private equity funds is that they appear
to offer the opportunity of superior investment returns (when compared to ‘conventional’ asset
classes) plus reduced volatility. The data presented in the table below could be seen as a confirmation
of this point. In the last thirteen years hedge funds have produced a 4.4% excess of return
compared to US government bonds, the most popular low risk asset class among investors. This
is marginally higher than the excess return of indexed investment in S&P 500 stocks and almost
2% more than indexed investments in NASDAQ stocks. Furthermore, this financial result has
been achieved assuming a relative risk (tracking error) limited to 8.6% per year, versus a 15.6%
and 27.4% in the case of a long-only investment in the stock market. Finally, the Information Ratio
tells us that on average hedge funds’ power to ameliorate investors’ risk return profile has been
double that granted by an equity investment and more than five times that of tech stocks.
CSFB / Tremont indices, S&P and NASDAQ vs JP Morgan US bond
(December 1993- September 2006)
Investment objective Excess of Return Tracking Error Information Ratio
Convertible Arbitrage 2,8% 6,5% 0,42%
Dedicated Short Bias -7,3% 17,1% -0,43%
Emerging Markets 2,5% 17,3% 0,15%
Equity Market Neutral 3,8% 5,3% 0,71%
Event Driven 5,2% 7,7% 0,67%
Fixed Income Arbitrage 0,3% 5,8% 0,06%
Global Macro 7,0% 10,9% 0,64%
Managed Futures -0,1% 11,3% 0,00%
Long Short Equity 5,4% 11,1% 0,49%
Multi-Strategy 3,1% 6,9% 0,44%
Hedge Fund 4,4% 8,6% 0,51%
S&P 500 4,3% 15,6% 0,28%
NASDAQ 2,6% 27,4% 0,09%
Part I – Hedge funds and private equity funds – how they work
51