Renaissance Technologies is ending one of the hedge fund industry's most coveted benefits: the chance for its workers to invest their retirement nest egg in its famously profitable employee-only fund fee-free, after the practice caught the attention of the Internal Revenue Service.
The firm cashed out investments in its Medallion fund that employees had made through certain tax-advantaged retirement accounts and private foundations, according to a regulatory
Medallion, a quantitative fund, has generated average annual returns of about 40% from its inception more than three decades ago. The perk was substantial given Medallion's enormous levies, which include annual management fees that run as high as 4% of net assets and performance fees equaling as much as 44% of profits.
A representative for Renaissance, based in East Setauket, New York, declined to comment.
The move to scrap the benefit comes less than a year after Renaissance founder Jim Simons and other members of the firm agreed to pay
Medallion has been open only to Renaissance insiders since 2005, with assets capped at the start of each year at about $10 billion and profits returned biannually. The firm employs more than 100 people with doctorates in areas such as mathematics, statistics and astrophysics, and the chance to work on complicated problems at the heart of market forecasting while making a fortune has made Renaissance one of the most sought-after investing jobs in the industry.
Monster returns
Renaissance had obtained an exemption from the U.S. Department of Labor that allowed employees to hold Medallion through their Roth
The IRA arrangement substantively shifted millions of dollars in taxable compensation into tax-free accounts, said Steven Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center at the Urban Institute, a Washington-based think tank.
That, in turn, was a coup for Renaissance staffers. The fee waivers and tax break — especially important as Medallion primarily generates short-term profits that are subject to much higher taxes than long-term gains -- super-charged returns. Renaissance's IRA plan grew to $1.7 billion at the end of 2020, from about $100 million at the end of 2012, the year it started. The 2020 total would have been even higher if not for some $465 million in net redemptions at the retirement plan that year, according to filings with the Labor department.
IRS scrutiny
But the arrangement raised questions at the IRS concerning the tax treatment for such exemptions. After Simons and other members of the firm settled the options dispute last September, the IRS and Renaissance continued to wrangle over tax issues around letting employees and their foundations invest in Medallion fee-free.
The IRS has been arguing that these fee waivers could be considered taxable compensation to employees or as additional contributions to their IRA accounts — and therefore subject to either income or excise taxes. Renaissance disagreed with the agency, according to a filing last year.
It's murky territory, said Jason Kohout, the chair of the family offices team at Foley & Lardner.
"It's kind of common to say 'We are not going to take compensation to avoid any self dealing" issues, Kohout said. "IRS guidance in this area is pretty limited, especially when it comes to the ways investment managers are paid."
— With assistance from Katherine Burton
