By Richard Rubin and Margaret Collins – June 16, 2015
It’s one of the sweetest employee perks in the hedge-fund world: a chance to invest in Medallion, the wildly profitable fund created by market legend James Simons.
Now, with deft legal maneuvers and a blessing from Washington, the firm Simons started is giving its employees an even richer opportunity — a tax-advantaged, fee-free ticket to one of the world’s top-performing hedge funds.
In a series of unusual moves, Renaissance Technologies abolished its 401(k) plan and won the government’s permission to put pieces of Medallion inside Roth IRAs. That means no taxes — ever — on the future earnings of a fund that averaged a 71.8 percent annual return, before fees, from 1994 through mid-2014.
The switch — the result of four years of legal work and two waivers from the U.S. Labor Department — could yield an extraordinary payoff for workers at Renaissance, a pioneer in quantitative trading. The loser will be the U.S. Treasury, which stands to miss out on many millions of tax dollars.
How this turns out depends on Medallion. From 2001 through 2013, the fund’s worst year was a 21 percent gain, after subtracting fees. Medallion reaped a 98.2 percent gain in 2008, the year the Standard & Poor’s 500 Index lost 38.5 percent.
If Medallion repeats that 13-year performance, a $300,000 taxable investment would turn into $4.7 million. A Roth IRA funded with $300,000 would be worth $26.3 million — and a no-fee version would be even bigger.
“The issue is tax fairness,” said Bill Parish, an investment adviser in Portland, Oregon, who has written on his blog about Renaissance. “To the extent that they’re eliminating taxes by stuffing deals in their retirement accounts, the rest of us end up paying more.”
Note: This story was based upon original research by Parish & Company, resulting in a GAO review of such plans.