Types of Hedge Fund Investors

offering tax deferral and, in many cases, the chance to avoid tax on in-
vestment returns. Like the Roth IRA, these plans would significantly im-
prove the return hedge fund investors keep by deferring and hopefully
avoiding the tax on ordinary income that dominates hedge fund returns.
Unfortunately, phaseout provisions limit the ability of high-net-worth in-
vestors to fund these plans. Perhaps as the hedge fund marketplace be-
comes more efficient in investing smaller amounts from the semiaffluent
population, investors will begin to invest educational savings accounts in
hedge funds.
Retirement Savings Plans (RSPs)
Canadian employees have a self-
directed retirement plan much like the traditional IRA in the United
States. Two provisions have slowed the movement into hedge funds.
First, no more than 20 percent of a fund may be invested in foreign as-
sets. Unfortunately, Canadians have access to more U.S. or offshore
hedge funds than Canadian hedge funds. Second, RSPs are severely re-
stricted in their ability to invest in private (unregistered) investments.
Although this would appear to make hedge fund investing impossible in
RSP accounts, hedge funds are beginning to take money from RSP ac-
counts. First a Canadian vehicle is created (for example, a fund of funds)
to make the investments in Canadian and offshore funds. Second, the
fund sponsors register the fund.
Restrictions on Retirement Fund Investing
First, as mentioned earlier, the owner of the IRA must be eligible to invest
in the hedge fund. Second, the owner of the retirement assets must find a
way to effect the investment. For example, an IRA investor must find a
trustee willing to let the owner make a hedge fund investment and must
have the balance in a self-directed account. A 401(k) investor must work
for a company that is willing to add one or more hedge funds to the list of
eligible assets.
Third, the investor must cope with a hedge fund industry that is hesi-
tant about taking retirement money into their funds. IRA accounts, Keogh
funds, and other self-directed retirement plans are all considered benefit
plan investors under the Employee Retirement Income Security Act of
1974 (ERISA; see Chapter 8). Hedge funds almost universally limit plan
assets to less than 25 percent of the fund to avoid being regulated as a
pension fund. Some funds of funds have recently started turning down in-
vestments from retirement accounts, including the self-directed plans de-
scribed here.
44
HEDGE FUND COURSE
ccc_mccrary_ch03_35-58.qxd 10/6/04 1:41 PM Page 44