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.
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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.
Read the full article here by Sophie Alexander, Noah Buhayar, Advisor Perspectives.
