If You’re Rich, You Have an Alternative

If you wish to invest $5 million or more and have liquid assets of $1 million or more or are an eleemosynary institution under IRC 501-(c)-3 you may also qualify to invest in “alternative investments”

“Alternative investments” run the gamut from funds investing in commodity based penny stocks traded on the Toronto Venture Exchange hedged by convertible warrants on the self same companies to long/short arbitrage, venture capital, and an assortment of global private equity investments.

If you do not meet the requirements of the Securities and Exchange Acts of 1940 you can’t invest. But if you’re a poor “not for profit charitable and educational” institution such as Harvard University you qualify.

According to recent 990 tax returns Harvard’s net worth is somewhere north of 200 billion dollars. For those of us not paying attention that’s almost A QUARTER OF A TRILLION DOLLARS.

The amount of riches amassed by this supposedly “not for profit” organization is a poke in the eye to the IRS code. Harvard’s hubris is so obscene in this respect that it routinely agrees to “payment in lieu of taxes” as far as property taxes to primarily the City of Cambridge and the City of Boston, where according to the “letter of the law” they are entitled by way of their tax exemption to hundreds of thousands to millions of dollars a year in municipal services such as road maintenance, policing, and fire and emergency services without paying for them.

In addition to this the other “rich” who manage Harvard’s investments (many of whom are Harvard graduates) charge Harvard management fees typically amounting to 2% on net assets managed in addition to incentive fees based on returns over an agreed upon hurdle rate. This means that if I manage $10 million of Harvard’s assets I am due $200,000 per annum before I deduct my expenses. So let’s say I make $150,000 in net management fees. Again there is another poke in the eye to the IRS code in that this is classified as “carried interest” and taxed at a FIFTEEN PERCENT TAX RATE. Some money managers are embarrassed to admit that their tax rate is LOWER THAN THE PERSON THAT CLEANS THEIR OFFICE:

Overall hedge fund returns declined 0.73 percent from April 1, 2008 to June 30, 2008 to 2.07 percent. The estimated inflation rate for this period of time was 7.08 percent or an astounding 5.0 percent annualized, which is more than twice as much as was common for the past decade. This means the “rich” LOST almost 3 percent real even with their advantage in what they can invest in over the average person. This is NOT good news for the rest of us.