&l;p&g;Steve Cohen&a;rsquo;s family office had about $11 billion under management at the start of 2017. His Point72 Asset Management&a;rsquo;s trading activities returned about 10% after costs and expenses during the year, and then the firm raised about $3 billion of outside capital around the start of 2018.
But Point72 still manages $12 billion, according to its recently updated website. Where did some $3 billion go? &l;a href=&q;https://www.bloomberg.com/news/articles/2018-04-20/hedge-fund-titans-pull-money-from-funds-to-pay-massive-tax-bills&q; target=&q;_blank&q;&g;Bloomberg News was the first to report&l;/a&g; that Cohen &a;ldquo;pulled out close to $3 billion from his Point72 Asset Management for taxes.&a;rdquo;
&l;img class=&q;dam-image bloomberg size-large wp-image-34290157&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/34290157/960×0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Steven Cohen. Photographer: Simon Dawson/Bloomberg
That took &l;em&g;Forbes&l;/em&g; by surprise. We have been working to account for the net worth of 36 American hedge fund billionaires as an old tax loophole on hedge fund earnings closed completely in recent weeks. &l;em&g;Forbes&l;/em&g; was expecting Cohen&a;rsquo;s net worth to take a hit, but the size of his tax bill was much bigger than expected.
Back in 2008 Congress stopped hedge fund managers from being able to defer paying taxes on offshore funds initially earned through fees. The government, however, gave hedge fund managers till 2018 to recognize the fee income that had already been deferred for tax purposes, allowing them to try to increase these pretax offshore funds through trading activities for nearly a decade.
In recent weeks, &l;em&g;Forbes&l;/em&g; has been accounting for big tax bills paid by hedge fund billionaires like David Einhorn and Dan Loeb. For example, &l;a href=&q;https://www.forbes.com/profile/steve-cohen/&q;&g;&l;em&g;Forbes&l;/em&g; has now adjusted&l;/a&g; its estimate of Steve Cohen&a;rsquo;s net worth down to $11 billion, which includes a valuable art collection and other assets outside Point72. It had previously been estimated as high as $14 billion. A spokesman for Cohen declined to comment.
Cohen&a;rsquo;s huge tax bill is the result of the monster fee income his old hedge fund firm, SAC Capital, made by charging management fees of 3% of assets and performance fees as high as 50% of profits. Cohen continued to make money in the years after Congress acted to stop the offshore deferral game.
John Paulson, who had just finished earning billions of dollars from shorting mortgages when the hedge fund loophole started to close, went on to lose huge amounts of money trading in the following years. That meant he could use those losses to offset previous gains and decrease the amount of taxes he owed on the deferred income from his subprime score in recent months.
&l;a href=&q;https://www.wsj.com/articles/worried-about-your-tax-bill-hedge-fund-star-john-paulson-owes-1-billion-1523458528&q; target=&q;_blank&q;&g;In an excellent &l;em&g;Wall Street Journal&l;/em&g; story about Paulson&a;rsquo;s $1.5 billion tax bill&l;/a&g;, a lawyer was quoted as saying, &a;ldquo;it is safe to say it is one of the largest tax bills on earned income in history.&a;rdquo; &l;a href=&q;https://www.forbes.com/profile/john-paulson/&q;&g;&l;em&g;Forbes&l;/em&g; estimates&l;/a&g; that Paulson&a;rsquo;s net worth is $6.2 billion today. It had been $7.9 billion a year ago and was estimated at $13.7 billion in 2013, meaning he has lost more than half his wealth in five years.
Cohen&a;rsquo;s recent tax bill was enormous. Nobody can definitively claim it&a;rsquo;s the biggest single-year individual income tax bill ever, since taxes are secret and are only sometimes revealed through litigation and nosy reporters.
The biggest tax bills are usually not paid by hedge fund managers but by people who run their businesses as S corporations and, as a result, are taxed individually on all pass-through income.
For example, litigation with the government revealed that Texas billionaire Andy Beal tried to accumulate $4 billion in losses to offset $1.2 billion of income he personally earned between 2002 and 2004 from his Beal Bank, which he owns as an S corp. To be fair, a lot of jealous hedge fund managers see Beal Bank as a quasi-hedge fund. Beal thinks this comparison is crazy. He has a point.
Point72 Asset Management is not an S corp. But it&a;rsquo;s now a business, which is helping Cohen mitigate the tax blow a little. Federal prosecutors and regulators conducted an insider trading investigation of Cohen and his old hedge fund firm, SAC Capital, for years. In the end, the feds got a settlement that called for Cohen to pay $1.8 billion in fines and penalties, less than his recent tax bill. As part of the settlement, the prosecutors indicted SAC Capital and shut it down. The regulators banned Cohen from managing outside investor capital for two years, until January 2018.
No doubt Cohen and his lawyers negotiated for the ban to be as short as possible. It turns out they got a ban that ended just as Cohen&a;rsquo;s big tax bill was coming due, allowing him to replace the capital he owed to the government with investor capital and keep the size of his trading operations about the same.
Still, the tax hit was painful for Cohen and the rest of the hedge fund crowd. Joe Edelman, the billionaire hedge fund manager who runs Perceptive Advisors, at least found a way to make light of it. Playing guitar with a band at his hedge fund firm&a;rsquo;s late December Christmas party, Edelman sang a cover of The Beatles&a;rsquo; &a;ldquo;Taxman.&a;rdquo;
&a;ldquo;Everybody in this room can relate to this song,&a;rdquo; Edelman said. &a;ldquo;This year it is particularly topical for me.&a;rdquo;&l;/p&g;