The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site. Please see our Subscription Terms and Conditions.


All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.

Hedge funds: New regulation means change in fee structure

Internal Revenue Service regulations that become effective in January next year are forcing US hedge fund managers to re-evaluate how they defer fees.

The IRC Section 409A regulation will require hedge fund managers to pay tax on compensation deferred offshore to the extent that they do not comply, along with a 20% penalty and interest. For some funds, deferred fees will fall into this category.

"In the case of some hedge funds, performance fees and management fees are deferred and paid later into an offshore account – particularly in the case of illiquid investments, where fees cannot be charged up front, and instead will be charged when the investment is liquidated, as with side pockets," says David Simonetti, senior manager in Grant Thornton’s compensation and benefits group. "The management fees on side pockets are often accrued and paid upon the investment’s disposition and, under the new regulation, such a structure could potentially violate the new requirements."

Simonetti says managers are still unclear as to how to tackle the issue, and in some instances, might not even be aware of the regulation. "At the moment there are rough guidelines as to what will be considered deferred compensation and managers are supposed to be complying with these rules in good faith until the regulations become effective next year. Many smaller hedge funds are concerned about the impact, and don’t have the infrastructure to deal with the regulation."

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree