Both public and regulatory scrutiny over investing through pooling vehicles organized in low tax jurisdictions, complex holding company structures (often having nothing to do with tax), government granted tax incentives and preferential rates, and the like may create additional complexities for investor stakeholders, investment committees, and shareholders. While managers may often be able to manage tax risk, there may still be reputational risk associated with even iron clad planning. Proper governance and procedures are considered best practices in minimizing tax risk.Ĥ. Well established and legally sound structures and transactions may still be susceptible to reputational risk. Changing market practices, strain on the business operations, administrative difficulties, inadequate procedures, or disconnects between the front office and tax function can create unanticipated exposure for investors.

Investors should make certain that managers have processes in place to monitor practices and ensure that they are aligned with the assumptions underpinning their tax advice. Practitioners will frequently cite an old adage that “the only thing worse than not having a tax policy is having one with which you don’t comply”. Thus, despite receiving advice of counsel, structures may be subjected to scrutiny from various tax authorities.ģ. Managers should have a developed infrastructure for effectively developing tax policies and monitoring compliance. Nevertheless, structuring is typically being conducted under “should” (70% or greater likelihood of success) or “more likely than not” (50+% or greater likelihood of success) levels of opinion, and in many cases, these opinion levels vary between advisors. While some managers may be more aggressive in their tax planning, many managers operate using well established structures, vetted by their tax and legal advisors. Institutional investors that find themselves disadvantaged by these potential conflicts might consider structures such as separate managed accounts and funds of one, or parallel structures where the investor base is more homogeneous.Ģ. Even well-established structures carry tax risk.

Depending on the strategy, these issues may become more prevalent. Qualification for potential treaty benefits and the diverse nature of bilateral treaties may add further complication. Domestic investors, foreign investors, tax exempts, sovereigns, and “super-tax exempt” investors all may have disparate tax considerations. Many fund structures combine a diverse group of investors with varied tax interests. 1. Managers often must balance the needs of a diverse investor base.

Hedge fund investing