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

0:00:02.520 --> 0:00:07.000
<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

0:00:08.160 --> 0:00:11.879
<v Speaker 2>You're listening to Bloomberg Business Week with Carol Masser and

0:00:11.960 --> 0:00:14.760
<v Speaker 2>Tim Stenebeck on Bloomberg Radio.

0:00:14.920 --> 0:00:18.000
<v Speaker 3>Talking about Jeffrey's financial The group has been told that

0:00:18.120 --> 0:00:20.920
<v Speaker 3>some of the invoices underpinning its financing to an iron

0:00:20.960 --> 0:00:25.439
<v Speaker 3>Ore trader called Sapphire Mini Medals or min Metals excuse me,

0:00:25.720 --> 0:00:27.640
<v Speaker 3>are not genuine. This is according to people familiar with

0:00:27.640 --> 0:00:29.720
<v Speaker 3>the matter. This's been a story that Bloomberg's been reporting

0:00:29.720 --> 0:00:32.839
<v Speaker 3>out over the last week or so with Morris Bloomberg

0:00:32.880 --> 0:00:35.800
<v Speaker 3>News Chief Wall Street correspondent Shrina A. Rajan covering the

0:00:35.840 --> 0:00:39.640
<v Speaker 3>financial spaces here in studio. For those who maybe haven't

0:00:39.640 --> 0:00:42.879
<v Speaker 3>been following, there's been a lot going on. What do

0:00:42.880 --> 0:00:43.360
<v Speaker 3>we need to know?

0:00:43.800 --> 0:00:45.640
<v Speaker 2>Look, this is the latest in a series of incidents.

0:00:45.680 --> 0:00:48.479
<v Speaker 2>We're just shining another light, shining more light on the

0:00:48.560 --> 0:00:53.240
<v Speaker 2>risk around receivables finance. So typically, ordinarily this should be safe.

0:00:53.320 --> 0:00:57.720
<v Speaker 2>You are lending against invoices, it's secured by invoices. You

0:00:57.800 --> 0:01:01.080
<v Speaker 2>expect your client to be ultimately paid, and you expect

0:01:01.160 --> 0:01:04.600
<v Speaker 2>to be paid back when it goes right. It is

0:01:04.720 --> 0:01:07.360
<v Speaker 2>good money for the lenders, but there are occasions when

0:01:07.400 --> 0:01:09.360
<v Speaker 2>it can go wrong, and it can go horribly wrong,

0:01:09.400 --> 0:01:11.840
<v Speaker 2>and that's sort of we saw it last year with

0:01:12.040 --> 0:01:14.560
<v Speaker 2>First Brands and the collapse around First Brands and all

0:01:14.600 --> 0:01:17.680
<v Speaker 2>the allegations around fraud and scam that came out. Now

0:01:17.720 --> 0:01:20.760
<v Speaker 2>over the last week we've seen these instances, first with

0:01:20.920 --> 0:01:24.360
<v Speaker 2>Radiant World that Bloomberg reported last year, and now another company,

0:01:24.400 --> 0:01:28.160
<v Speaker 2>Sapphire Men Metal, which seems to be somewhat tied to

0:01:28.440 --> 0:01:30.720
<v Speaker 2>Radiant World at least at some point Radiant World and

0:01:30.760 --> 0:01:34.080
<v Speaker 2>its owners were majority owners of Sapphire Men Metal. But

0:01:34.120 --> 0:01:37.480
<v Speaker 2>the interesting bit for us is the connection of Point Bonita.

0:01:37.520 --> 0:01:41.479
<v Speaker 2>Point Bonita is a trade finance fund trade Finance focus

0:01:41.560 --> 0:01:45.800
<v Speaker 2>fund at the asset management division of Jeffries. So it's

0:01:45.840 --> 0:01:48.040
<v Speaker 2>just another black eye for Jeffreys at a time you

0:01:48.120 --> 0:01:51.520
<v Speaker 2>really don't want your investors to be asking you more

0:01:51.640 --> 0:01:54.120
<v Speaker 2>questions about your investing missteps.

0:01:54.600 --> 0:01:57.000
<v Speaker 1>Is this a you mentioned some other examples of this,

0:01:57.600 --> 0:02:01.960
<v Speaker 1>including last year. Is this part of the pattern of

0:02:01.960 --> 0:02:04.720
<v Speaker 1>events or is this just a the latest one off?

0:02:06.280 --> 0:02:09.160
<v Speaker 2>To quote Jamie Diamond, it certainly feels like another cock

0:02:09.160 --> 0:02:12.200
<v Speaker 2>croach out there now. Your question is is it an infestation?

0:02:12.800 --> 0:02:16.200
<v Speaker 2>Not necessarily is it going to have material financial impact

0:02:16.280 --> 0:02:18.560
<v Speaker 2>on Jeffrey's not necessarily it has a five point nine

0:02:18.560 --> 0:02:21.960
<v Speaker 2>percent stake in Point Bonita, but does it leave a

0:02:22.080 --> 0:02:25.280
<v Speaker 2>bit of a sour impression for their investors and for

0:02:25.360 --> 0:02:29.520
<v Speaker 2>analysts and for people wondering about banks and other investors

0:02:29.560 --> 0:02:31.720
<v Speaker 2>and their tie ups with other trade fin.

0:02:31.840 --> 0:02:35.080
<v Speaker 3>Oversite right like oversight, like what is it like, you know,

0:02:35.200 --> 0:02:37.160
<v Speaker 3>assessing risks and so on and so forth.

0:02:37.320 --> 0:02:39.160
<v Speaker 2>And to some part you have to assume, like some

0:02:39.240 --> 0:02:41.880
<v Speaker 2>of the allegations that we're talking about is falsifying invoices.

0:02:42.120 --> 0:02:45.520
<v Speaker 2>And again, to be clear, Radiant World denied those allegations

0:02:45.600 --> 0:02:48.320
<v Speaker 2>last week. Sapphire Men Metal in our story today is

0:02:48.400 --> 0:02:51.720
<v Speaker 2>denying those allegations again. But when your talk, if it

0:02:51.800 --> 0:02:54.920
<v Speaker 2>is what the allegations are that is outright fraud, you

0:02:55.000 --> 0:02:57.600
<v Speaker 2>also have to wonder how easy is it for some

0:02:57.680 --> 0:03:01.320
<v Speaker 2>of these firms to be doing all the diligions that's required.

0:03:01.320 --> 0:03:03.600
<v Speaker 2>How do you completely ensure that you snuff that out?

0:03:03.639 --> 0:03:07.280
<v Speaker 2>And that might not necessarily possible, but your investors will

0:03:07.360 --> 0:03:10.640
<v Speaker 2>expect higher standards and much better dilisions going forward, and

0:03:10.680 --> 0:03:14.560
<v Speaker 2>that will focus people to reassess their processes to be

0:03:14.680 --> 0:03:16.960
<v Speaker 2>able to sniff out risk and to be able to

0:03:17.000 --> 0:03:18.200
<v Speaker 2>avoid some of these landmines.

0:03:18.360 --> 0:03:20.799
<v Speaker 3>Just a reputation, right ultimately, and again we should say

0:03:20.840 --> 0:03:22.760
<v Speaker 3>there's still more to be known here, so.

0:03:22.639 --> 0:03:24.240
<v Speaker 2>We're looking more to be known. We're going to.

0:03:24.240 --> 0:03:25.720
<v Speaker 3>Continue following it. We got to get to that.

0:03:25.880 --> 0:03:27.480
<v Speaker 1>I want to get to the big take. Yeah, this

0:03:27.520 --> 0:03:29.360
<v Speaker 1>is one of the most red stories on the Bloomberg terminal.

0:03:29.360 --> 0:03:31.880
<v Speaker 1>It's a tax strategy for the rich, built the world's

0:03:32.000 --> 0:03:36.480
<v Speaker 1>largest hedge fund. You and the team behind it about

0:03:36.520 --> 0:03:38.480
<v Speaker 1>behind one of the most red stories. This is about

0:03:39.000 --> 0:03:41.000
<v Speaker 1>tax loss harvesting on steroids.

0:03:41.440 --> 0:03:43.680
<v Speaker 3>This part of me is like, oh my god, but

0:03:43.760 --> 0:03:44.720
<v Speaker 3>it's actually pretty cool.

0:03:44.800 --> 0:03:47.040
<v Speaker 1>It is cool what is AQR figured out and what

0:03:47.120 --> 0:03:48.000
<v Speaker 1>is AQR doing?

0:03:48.360 --> 0:03:51.360
<v Speaker 2>And again, well, on the one hand, Carol, I am

0:03:51.560 --> 0:03:57.240
<v Speaker 2>slightly offended that this wants to make you snorre what.

0:03:55.560 --> 0:03:58.760
<v Speaker 3>I hear taxes, but I know this stuff is really interesting.

0:03:59.000 --> 0:04:01.840
<v Speaker 2>But that's correct. We're used to these ideas of tax

0:04:01.880 --> 0:04:05.080
<v Speaker 2>loss harvesting and finding ways in investments, where with the

0:04:05.080 --> 0:04:09.200
<v Speaker 2>growth of the technological tools available to us, with the

0:04:09.240 --> 0:04:12.680
<v Speaker 2>sort of ETFs and commission free trading, you can do

0:04:12.720 --> 0:04:15.520
<v Speaker 2>a lot more of these things. But what is happening

0:04:15.600 --> 0:04:18.520
<v Speaker 2>When you pit a lot of mathematicians and PhDs in

0:04:18.520 --> 0:04:21.080
<v Speaker 2>a room together and come up with strategies, you suddenly

0:04:21.120 --> 0:04:24.200
<v Speaker 2>do what Tim rightly described as taking these strategies and

0:04:24.240 --> 0:04:27.200
<v Speaker 2>applying steroids on them that they become so much more

0:04:27.360 --> 0:04:30.800
<v Speaker 2>potent that advertising from firms like AQR is like, if

0:04:30.800 --> 0:04:33.560
<v Speaker 2>you put money in with us, not only will we

0:04:33.640 --> 0:04:37.039
<v Speaker 2>make sure that your money grows over time, but in terium,

0:04:37.120 --> 0:04:41.000
<v Speaker 2>we will also keep generating losses that you've been used

0:04:41.040 --> 0:04:43.320
<v Speaker 2>to write off your capital gains elsewhere.

0:04:43.360 --> 0:04:45.000
<v Speaker 1>I don't get it. How can you put one hundred

0:04:45.040 --> 0:04:48.159
<v Speaker 1>million dollars into an account it then triples over the

0:04:48.160 --> 0:04:50.200
<v Speaker 1>next few years, but then you also have hundreds of

0:04:50.200 --> 0:04:52.839
<v Speaker 1>millions of dollars and losses to use against other gains.

0:04:52.960 --> 0:04:53.239
<v Speaker 3>Aha.

0:04:53.440 --> 0:04:55.520
<v Speaker 2>And with that we shall explain what tax alpha is

0:04:55.520 --> 0:04:59.000
<v Speaker 2>and exactly how this process works. So we're very specifically

0:04:59.120 --> 0:05:03.400
<v Speaker 2>talking about these tax aware long shot strategies. Assume you

0:05:03.400 --> 0:05:05.279
<v Speaker 2>have one hundred million dollars. You were in an early

0:05:06.160 --> 0:05:09.320
<v Speaker 2>Nvidia employee. Your stock has gone up quite a bit.

0:05:09.520 --> 0:05:11.480
<v Speaker 2>You suddenly have one hundred million dollars, But if you

0:05:11.560 --> 0:05:14.000
<v Speaker 2>wanted to realize those games, you also have a hefty

0:05:14.080 --> 0:05:17.080
<v Speaker 2>tax bill coming against that. So you go to an AQR,

0:05:17.160 --> 0:05:19.200
<v Speaker 2>maybe you set up a separate fund with them where

0:05:19.200 --> 0:05:21.760
<v Speaker 2>you put in that hundred million dollars against that one

0:05:21.800 --> 0:05:24.600
<v Speaker 2>hundred million dollars. The AQR can go and borrow some money,

0:05:24.960 --> 0:05:27.320
<v Speaker 2>say they borrow eighty million dollars against it. They can

0:05:27.320 --> 0:05:29.640
<v Speaker 2>put forty million dollars of long bets. They can put

0:05:29.640 --> 0:05:33.200
<v Speaker 2>forty million dollars of short bets broadly tracking some of

0:05:33.240 --> 0:05:35.680
<v Speaker 2>the biggest companies out there and some of the biggest

0:05:35.720 --> 0:05:38.480
<v Speaker 2>name in the indexes. But with the hope that your

0:05:38.520 --> 0:05:41.279
<v Speaker 2>lungs always go up and your shots are always going down,

0:05:41.360 --> 0:05:43.760
<v Speaker 2>so that your fund is performing well. But that's not

0:05:43.800 --> 0:05:46.520
<v Speaker 2>always guaranteed. On a day by day basis, that's not

0:05:46.560 --> 0:05:49.039
<v Speaker 2>going to happen. Some days your bets will go wrong,

0:05:49.200 --> 0:05:51.640
<v Speaker 2>even if over the long term you were right. But

0:05:51.800 --> 0:05:54.119
<v Speaker 2>on the days it goes wrong, save if the market

0:05:54.200 --> 0:05:56.200
<v Speaker 2>goes down, you can sell some of the lungs because

0:05:56.200 --> 0:05:58.960
<v Speaker 2>they have now you've not realized losses against them, replace

0:05:59.000 --> 0:06:01.600
<v Speaker 2>them with the surrogate. On the days that the market's

0:06:01.640 --> 0:06:04.279
<v Speaker 2>in this bull mode, your shots are not performing well,

0:06:04.600 --> 0:06:07.440
<v Speaker 2>you close out those positions and replace them with the surrogate.

0:06:07.760 --> 0:06:10.360
<v Speaker 2>So what you're doing is in the interim you're harvesting

0:06:10.400 --> 0:06:13.520
<v Speaker 2>these little losses that start to pile up, and in

0:06:13.560 --> 0:06:16.400
<v Speaker 2>the long term you make money. So eventually, what does

0:06:16.440 --> 0:06:19.359
<v Speaker 2>the money look like? AQR says, And an example for

0:06:19.520 --> 0:06:23.320
<v Speaker 2>one of their flex products is you put one hundred

0:06:23.360 --> 0:06:26.080
<v Speaker 2>million dollars with them over ten years, they say your

0:06:26.080 --> 0:06:30.119
<v Speaker 2>money can triple very good returns. At the same time,

0:06:30.320 --> 0:06:33.920
<v Speaker 2>they will also generate five hundred and eighty seven million

0:06:33.960 --> 0:06:36.520
<v Speaker 2>dollars in capital losses over that ten year period. That

0:06:36.680 --> 0:06:38.760
<v Speaker 2>is a lot of money to be able to write

0:06:38.760 --> 0:06:41.840
<v Speaker 2>off capital gains and other parts of your portfolio. You

0:06:41.880 --> 0:06:44.360
<v Speaker 2>can see their lure for the richer. You can see

0:06:44.400 --> 0:06:47.680
<v Speaker 2>the lure for so many people wanting to go into

0:06:47.720 --> 0:06:51.839
<v Speaker 2>a strategy like this. Yeah, legal, for the most part,

0:06:51.960 --> 0:06:54.479
<v Speaker 2>seems to be. No one's really said it's illegal. We

0:06:54.640 --> 0:06:58.120
<v Speaker 2>have had noises from the Trump Treasury, from the Trump

0:06:58.160 --> 0:07:01.279
<v Speaker 2>administration saying some of these trade and some of these

0:07:01.320 --> 0:07:05.320
<v Speaker 2>more aggressive tactics seem to be potentially abusive, but nothing

0:07:05.360 --> 0:07:08.240
<v Speaker 2>that anyone has really offered out there that closes these

0:07:08.279 --> 0:07:11.840
<v Speaker 2>loopholes or has outried banned them. But at the same time,

0:07:11.880 --> 0:07:14.120
<v Speaker 2>they are quite effective and as our own Matt Levine

0:07:14.120 --> 0:07:18.720
<v Speaker 2>once said, it's very hard to beat the market, much

0:07:18.720 --> 0:07:21.520
<v Speaker 2>easier to beat the irs. With that pitch, you can

0:07:21.560 --> 0:07:23.720
<v Speaker 2>attract a lot of money, and that in part has

0:07:23.840 --> 0:07:27.680
<v Speaker 2>propelled EQR to become the world's largest hetch fund because

0:07:27.720 --> 0:07:30.680
<v Speaker 2>in the last few years these strategies have soaked in,

0:07:31.160 --> 0:07:33.040
<v Speaker 2>soaked up a lot of investments.

0:07:34.520 --> 0:07:37.880
<v Speaker 3>Not easy for everyone to beat the irs. No, And

0:07:37.920 --> 0:07:40.760
<v Speaker 3>I will say another part of the story, great part of.

0:07:40.760 --> 0:07:43.760
<v Speaker 1>The story too, is just Cliff Astnas's view about taxes

0:07:43.840 --> 0:07:46.040
<v Speaker 1>and what he said about them. It's just fascinating. A

0:07:46.120 --> 0:07:47.240
<v Speaker 1>profile of him as well.

0:07:47.360 --> 0:07:49.240
<v Speaker 3>Check it out. It is the most read story in

0:07:49.240 --> 0:07:51.880
<v Speaker 3>the Bloomberg. I'm sure I'm not bored anymore, no story,

0:07:51.960 --> 0:07:55.000
<v Speaker 3>I promise. He is our chief Wall Street correspondent.