Types of Hedge Fund Investors

However, the taxpayer can defer the withdrawal for years or even decades.
The deferral means that both the principal and taxes on the investment re-
turn can remain invested to earn additional return for the taxpayer.
If an investor made annual investments in a traditional IRA every year
and the IRA earned a high rate of return, the IRA balance could grow to a
size large enough to match a hedge fund minimum. For example, if an in-
vestor saved $1,500 in 1979, rising to $3,000 in 2003 (at the beginning of
each year) and the IRA earned the same return as the Standard & Poor's
500 index, the IRA would be worth about $250,000 at the beginning of
2004. This would constitute a small hedge fund investment, but many
hedge funds accept smaller IRA contributions from individuals.
Several other provisions conspire to limit the number of investors with
$250,000 in an IRA. First, the investor must have had taxable income in
each of the prior 25 years to be eligible to make contributions. Second, al-
though the IRA laws changed, in most years the hedge fund investor could
make no pretax contributions when taxable income exceeded a threshold
($110,000 in 2003 as noted earlier) or if the investor was eligible to partic-
ipate in a company pension plan. Finally, unless the IRA was invested in a
portfolio earning high returns, the IRA would remain small.
Rollover IRA
A rollover IRA is an IRA that has been funded by transfer
from another kind of retirement account. Most rollover IRA accounts are
created when an employee leaves a company with a 401(k) plan (discussed
shortly) and rolls the assets into this type of IRA. Other retirement plans,
such as the simplified employee pension (SEP-IRA), may also be rolled into
a rollover IRA. Contribution limits are considerably higher for these retire-
ment plans, so rollover IRAs may be substantially larger than traditional
IRA plans.
Keogh Plan
A Keogh plan is a self-directed retirement plan for employees
of small businesses. The plan closely resembles a traditional IRA. Contri-
bution limits are higher than the allowable contributions to an IRA (up to
25 percent of income with a dollar maximum of $30,000). Due to the
higher contribution limits and because Keogh plans have been permitted
for many years, investors are more likely to have sizable balances in Keogh
plans than in traditional IRAs.
Simplified Employee Pension (SEP-IRA)
A SEP-IRA is another self-directed
retirement plan primarily for self-employed workers. Like the Keogh plan,
investors can contribute up to 25 percent of income (including salary and
bonus) up to $40,000. However, to be eligible to make a contribution to a
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