#Shorts
Renaissance Technologies Medallion Fund, the top performing hedge fund run by James Simons just agreed to pay the largest tax settlement in US history to the IRS.
This is how they dodged the taxes. Short term capital gains are taxed at a higher rate than long term gains and almost all of their trades were short term.
Banks like Barclays and Deutsche Bank sold the fund basket options whose payoff is tied to the performance of a portfolio of stocks. They then allowed the fund to constantly change the portfolio of stocks in the basket.
After a year, the option was exercised, and because it was in existence for more than a year, it was a long-term gain.
These options also allowed the fund to use a lot of leverage (as much as 20X) and limit their losses to the premium paid plus collateral – The banks were left with a lot of the risk. Over ten years they saved around $6.8 billion dollars, and today’s news says they’ve settled agreeing to pay $7 billion dollars in back taxes to the IRS.
Video on The Story of James Simons – Renaissance Technologies & Medallion Fund https://youtu.be/xkbdZb0UPac
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