Hedge funds' best investment: Republicans

Facing a higher tax rate in Obama's jobs bill, hedge fund managers are contributing more to GOP candidates. The move might be their most profitable bet this year.

By TheStreet Staff Sep 13, 2011 11:17AM

Image: Politics (© Jim Zook/Images.com/Corbis)By Robert Holmes, TheStreetTheStreet

 

In a year of disappointing stock returns, it turns out that hedge funds' best investment may be in Republican presidential candidates.

 

The details of President Barack Obama's $447 billion jobs bill emerged Monday, and it was revealed that investment managers' gains would be taxed at the income tax level. The tax rate on carried interest income -- the profits investment managers are paid as compensation -- is currently 15%, below the income rate of 35%.

 

Obama's decision to take aim at the carried interest tax break is a direct hit at hedge funds and echoes calls made by billionaire investor Warren Buffett in his New York Times op-ed asking regulators to stop coddling the superrich. In the commentary, Buffett noted that he paid only 17% of his taxable income, a lower rate than even his secretary pays.

 

There is little doubt that hedge fund managers are already on the phone trying to kill this bill, and they could very well succeed. But in a year in which the average hedge fund is down 1.8%, according to data provided by hedge fund adviser Hennessee Group, the managers' smartest bet may be the swing from Democrat to Republican.

 

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In April, The Wall Street Journal reported that hedge funds, which supported Obama during his presidential run in 2008, have turned their back on him. For example, Third Point manager Daniel Loeb, who donated $200,000 to Obama in 2008, gave more than $460,000 to Republican candidates since Obama's inauguration, the Journal reports.

 

Last month, TheStreet's Dan Freed reported on donations to political action committee Restore Our Future by investment managers such as John Paulson of Paulson & Co. and Louis Bacon of Moore Capital.

 

Paulson, who is reportedly down 35% in his flagship Advantage Plus hedge fund this year, has donated exclusively to Republicans since April 2010, according to OpenSecrets.org. Paulson donated to both Republican and Democratic candidates in 2009 and early 2010, according to the political site.

So while Buffett may be eager to add a few more zeros in the checks he makes out each year to the IRS, it seems the hedge fund crowd would rather fill Republican coffers. Facing a tax rate of 35%, that might be the smartest investment they'll make all year.

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