AQR Shows Richest 1% How to Slash Their Taxes to Zero

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1:02Carol Massar:Bloomberg Audio Studios, podcasts, radio, news. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. Talking about Jeffries Financial, the group has been told that some of the invoices underpinning its financing to an iron ore trader called Sapphire Mini Metals or Min Metals, excuse me, are not genuine. and this is according to people familiar with the matter. This has been a story that Bloomberg's been reporting out over the last week or so. With more is Bloomberg News Chief Wall Street Correspondent Srinatharajan covering the financial space. He's here in studio.

1:38Carol Massar:For those who maybe haven't been following, there's been a lot going on. What do we need to know? Look, this is the latest in a series of incidents which is shining another light, shining more light on the risk around receivables finance. Typically, ordinarily, this should be safe. You are lending against invoices. It's secured by invoices. You expect your client to be ultimately paid and you expect to be paid back. When it goes right, it is good money for the lenders. But there are occasions when it can go wrong and it can go horribly wrong. And that's sort of, we saw it last year with first brands and the collapse around first brands and all the allegations around fraud and scam that came out.

2:17Now, over the last week, we've seen these instances first with Radiant World that Bloomberg reported last year. And now another company, Sapphire Minmetal, which seems to be somewhat tied to Radiant World, at least at some point. Radiant World and its owners were majority owners of Sapphire Minmetal. But the interesting bit for us is the connection of Point Bonita. Point Bonita is a trade finance fund, trade finance focused fund at the asset management division of Jefferies. So it's just another black eye for Jefferies at a time you really don't want your investors to be asking you more questions about your investing missteps.

2:55Carol Massar:You mentioned some other examples of this, including last year. Is this part of a pattern of events, or is this just the latest one-off? To quote Jamie Dimon, it certainly feels like another cockroach out there. Now, your question is, is it an infestation? Not necessarily. Is it going to have material financial impact on Jeffries? Not necessarily. It has a 5.9 % stake in Point Bonita. But does it leave a bit of a sour impression for their investors and for analysts and for people wondering about banks and other investors and their tie ups with other trade finance firms? And oversight, right? Like oversight.

3:33Carol Massar:Like what is it? Like, you know, assessing risks and so on and so forth. And to some part, you have to assume like some of the allegations that we're talking about is falsifying invoices. And again, to be clear, Radiant World denied those allegations last week. Sapphire and Minmetal, in our story today, is denying those allegations again. But when you're talking, if it is what the allegations are, that is outright fraud, you also have to wonder how easy is it for some of these firms to be doing all the diligence that's required? How do you completely ensure that you snuff that out? And that might not necessarily be possible, but your investors will expect higher standards and much better diligence going forward.

4:10And that will focus people to reassess their processes to be able to sniff out risk and to be able to avoid some of these landmines.

4:18Carol Massar:Best of reputation, right? Ultimately. And again, we should say there's still more to be known here. A lot more to be known. We're going to continue following it. We got to get to the big take. Yeah, this is one of the most read stories on the Bloomberg Terminal. It's a tax strategy for the rich, built the world's largest hedge fund. You and the team behind it, behind one of the most read stories, This is about tax loss harvesting on steroids. There's part of me that's like, oh my God, but it's actually pretty cool. It is cool. What has AQR figured out and what is AQR doing? And again, well, on the one hand, Carol, I am slightly offended that this wants to make you snore.

4:54Carol Massar:I hear taxes, but I know this stuff is really interesting. But that's correct. Like we're used to these ideas of tax law harvesting and finding ways in investments where with the growth of the technological tools available to us with the sort of ETFs and commission free trading, you can do a lot more of these things. But what is happening when you pit a lot of mathematicians and PhDs in a room together and come up with strategies, you suddenly do what Tim rightly described as taking these strategies and applying steroids on them, that they become so much more potent. The advertising from firms like AQR is like, if you put money in with us, not only will we make sure that your money grows over time, but the interim, we will also keep generating losses that you can use to write off your capital gains elsewhere.

5:43Carol Massar:I don't get it. How can you put$100 million into an account? It then triples over the next few years, but then you also have hundreds of millions of dollars in losses to use against other gains. Aha. And with that, we shall explain what tax alpha is and exactly how this process works. So we're very specifically talking about these tax-aware long-shot strategies. Assume you have$100 million. You were an early NVIDIA employee. Your stock has gone up quite a bit. You suddenly have$100 million. But if you wanted to realize those gains, you also have a hefty tax bill coming against that. So you go to an AQR.

6:17Maybe you set up a separate fund with them where you put in that$100 million. Against that$100 million, AQR can go and borrow some money. say they borrow$80 million against it. They can put$40 million of long bets. They can put$40 million of short bets. Broadly tracking some of the biggest companies out there and some of the biggest name in the indexes, but with the hope that your longs always go up and your shorts are always going down so that your fund is performing well. But that's not always guaranteed. On a day-by-day basis, that's not going to happen. Some days your bets will go wrong, even if over the long term you were right.

6:51But on the days it goes wrong, Say if the market goes down, you can sell some of the longs because they have now, you've not realized losses against them, replace them with a surrogate. On the days that the market's in this bull mode, your shorts are not performing well. You close out those positions and replace them with a surrogate. So what you're doing is in the interim, you're harvesting these little losses that start to pile up. And in the long term, you make money. So eventually, what does the money look like? AQR says, and an example for one of their flex products is you put$100 million with them.

7:24Over 10 years, they say your money can triple. Very good returns. At the same time, they will also generate$587 million in capital losses over that 10-year period. That is a lot of money to be able to write off capital gains in other parts of your portfolio. You can see the allure for the richer. You can see the allure for so many people wanting to go into a strategy like this. Yeah. Legal, for the most part, seems to be. No one's really said it's illegal. We have had noises from the Trump Treasury, from the Trump administration, saying some of these trade and some of these more aggressive tactics seem to be potentially abusive.

8:04But nothing that anyone has really offered out there that closes these loopholes or has outright banned them. But at the same time, they are quite effective. And as our own Matt Levine once said, it's very hard to beat the market, much easier to beat the IRS. With that pitch, you can attract a lot of money. And that in part has propelled AQR to become the world's largest hedge fund. Because in the last few years, these strategies have soaked in, soaked up a lot of investments.

8:34Carol Massar:Not easy for everyone to beat the IRS. No. And I will say. Which is another part of the story. A great part of the story, too, is just Cliff Asenus' view about taxes and what he said about them. It's just fascinating, a profile of him as well. Check it out. It is the most read story on the Bloomberg. Shree, I'm not bored anymore. No snoring, I promise. He is our chief Wall Street correspondent.

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