Hedge Fund-Backed Reinsurers A Tax Dodge?

Feb 20 2013 | 12:32pm ET

Reinsurance firms businesses have proven a popular way for hedge funds to raise permanent capital. They also can help hedge fund managers avoid paying U.S. taxes.

While the Internal Revenue Service penalizes companies who set up "passive foreign investment companies," it considers insurers to be active. And although it has said that insurers and reinsurers can't have a capital pool much greater than they need to back the insurance they sell, the IRS has never set thresholds, Bloomberg News reports.

Paulson & Co.'s PaCRE, for instance, sold reinsurance coverage amounting to just 1.6% of its initial $500 million in equity, $450 million of which came from Paulson executives. The average for a Bermuda-based reinsurer is 47%.

Other hedge fund-backed reinsurers, including those set up by SAC Capital Advisors and Third Point, aren't quite as penurious. The former has targeted sales equaling 30% of assets, and the latter 19%. Both also employ their own underwriters, while PaCRE outsources its underwriting, employs no one and uses another insurance's company's offices as its address.

Using a Bermudan reinsurer could save a hedge fund manager more than one-third in taxes, according to Bloomberg.


In Depth

Malik: The Science of Deal Sourcing 201

Aug 27 2015 | 5:35pm ET

Deal sourcing is understandably a hot topic among private equity firms because it...

Lifestyle

Rolling Art Advisors Marketing Collectible Car Fund As Uncorrelated Alternative

Aug 27 2015 | 6:47pm ET

A new fund is trying to provide investors with greater access to an emerging asset...

Guest Contributor

FATCA for Hedge Funds: Eight Common Pitfalls

Sep 1 2015 | 10:56am ET

FATCA is now a way of life for those in the financial industry and most professionals...

 

Editor's Note