Word is out among hedge fund managers on how to get tax breaks for giving to charity — without actually handing over their money just yet. They can even keep it in their funds.
Step 1: Donate to your own charitable foundation.
Step 2: Have the foundation invest in your hedge fund.
Step 3: When the foundation must give some money away, send it to a donor-advised fund, or DAF. That counts as a charity, but lets you hold the earmarked cash there as long as you wish and give — or not give — in secrecy.
Take Stephen Mandel’s $999,999,999 Zoom Foundation — that’s how the Tiger Cub has valued his organization’s assets in annual regulatory filings since 2017. It invests the money back into his Lone Pine Capital hedge fund and makes one gift a year to a DAF. Traces of where his donations ultimately land are scattered across charities’ websites, including tens of millions of dollars to Teach for America and Blue Meridian Partners, which works to solve youth poverty. But it’s far from a complete picture of what happened to the $336 million that Mandel funneled to his DAF over a six-year period.
Lone Pine’s chief operating officer, Kerry Tyler, has a similar setup with her Azcat Foundation. Some Renaissance Technologies executives have employed the strategy, for years pouring their foundations’ cash into the astonishingly lucrative Medallion Fund. And an anonymously funded foundation in New York that invests in Israel Englander’s Millennium Management also only makes one gift a year to a DAF. Spokespeople for all three hedge funds declined to comment.
This month, Bloomberg News published a deep look at how wealthy Americans are parking large sums of money in foundations and then gradually moving it to DAFs. It turns out hedge fund managers are particularly fond of the setup.
For tax experts — Bloomberg interviewed seven of them for this story — it’s an intriguing love affair. A foundation costs more to set up, requires transparency and mandates that 5% of assets be used for charitable purposes annually. Ultimately giving through a foundation can yield a smaller tax break than donating directly to charity. So why do it?
Part of it could stem from the boom-and-bust nature of hedge funds. A money manager on a hot streak might end the year with significant tax liabilities, a vague interest in giving to charity in the future, but no immediate plans.
“You want to optimize your tax treatment in the meantime,” said John Arnold, a billionaire hedge fund manager who retired in 2012 to devote himself to philanthropy.
Daniel Hemel, a professor at New York University, agrees. “You want to be making your charitable contributions during those high-income years,” he said. “The time that I have to focus on contributions is once I retire from my hedge fund — but I don’t want to be making the contributions then.”
It takes a special type of confidence to run a hedge fund. Mandel, for his part, left Julian Robertson’s Tiger Management in 1997 to open his own shop, which went on to post one of the best long-term track records in the industry over the following two decades.
And that strikes at the heart of why hedge fund managers are inclined to park money at a foundation first. A disadvantage of giving directly to a DAF is that the sponsors — the largest of which was set up by Fidelity — typically won’t let them invest that cash back into the donor’s hedge fund. A foundation allows for that.
“Hedge fund managers believe they are better investment managers than the rest of the world,” said Warren Racusin, a lawyer at Lowenstein Sandler.
There are also benefits for the hedge fund, including maintaining its assets under management. Renaissance Technologies has long allowed insiders to invest in its ultra-profitable Medallion Fund fee-free. Filings show Lone Pine also doesn’t charge for managing money from their executives’ foundations.
Granting from foundations to DAFs is legal but controversial.
“Basically you’re transferring it first to a middleman, getting a deduction and then transferring it to another middleman,” said Phil Hackney, a University of Pittsburgh law professor who previously worked for the Internal Revenue Service. “The primary purpose seems to be investing it for some future giving, which shouldn’t in my mind get a charitable contribution deduction up front.”
DAFs also provide anonymity — something coveted by secretive hedge fund managers and is evident when looking at their tax forms. The 136 Fund, a foundation contributing millions of dollars each year to a DAF at Fidelity, has a hallmark of vehicles affiliated with a hedge fund: Its only investment is with Millennium. But other information is scarce.
The foundation receives its money via a limited liability company called the 136 Fund LLC, filings show. The founding trustee of the foundation, tax lawyer Kim Baptiste, declined to comment on who’s behind it. Current trustee Joseph Shenker, also a lawyer, didn’t respond to calls and emails. Baptiste noted that investment control is typically the reason hedge fund managers would keep a foundation even if it only gives to a DAF.
Searching for Renaissance executive vice president Mark Silber’s foundation poses its own unique challenges. In every year’s filings since 2012, in multiple places, the organization has listed its benefactor as “M Silver” — that is to say, misspelling Silber’s name with a “v.”
His accountant, Paul Moeller, took the blame: “I guess I never noticed it,” he told Bloomberg in an email.
Renaissance Chief Executive Officer Peter Brown and a former senior researcher at the firm also have foundations that have invested in its Medallion Fund, only give to DAFs and use Moeller as an accountant, filings show.
William Fournier, a tax lawyer at Caplin & Drysdale, said it’s not the kind of maneuver he’d recommend to clients, but it seems there’s a network effect at play.
“Word of mouth spreads,” Fournier said.
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