As early as the 1920′s, the League of Nations recognized the potential adverse consequences of disparate domestic tax structures on global growth and prosperity, the most significant of which is double taxation. The dizzying pace of globalization has forced the Organization for Economic Cooperation and Development (OECD) to finally come to grips with this issue.

Unrestrained transfers of capital, shifts in production from high-cost to low-cost labor markets, reductions in trade barriers, technological advancements, increased emphasis on risk management, and the escalating need to develop, protect and exploit intellectual property also exert pressures on cross-border economic activity.

A Question of Sustainability

The benefits of globalization are indisputable. Globalization has dramatically increased trade and foreign investment which, in turn, fosters growth, creates employment opportunities and lifts millions from the depths of poverty.

For these benefits to continue, the OECD has adopted the position that international tax rules must be based on a doctrine that comprehends the ever-increasing global nature of economic development. To that end, the OECD launched an ambitious 15-point action plan to fight Base Erosion and Profit Shifting (BEPS) which will rewrite international tax policy.

While on its face, the plan’s targets are multinational enterprises; its potential reach may wash over hedge funds, both on and off-shore.

Defining Taxable Events

The current tax policy for most countries focuses on whether or not an enterprise has a physical presence. Although such a presence may include an office or resident agent, many countries exclude these as taxable events. This means that in many instances, the presence of a warehouse, a server or a major customer base is often ignored as a taxable event by many countries.

However, many of the proposals emanating from the BEPS project are redefining the concept of what constitutes a taxable event to cover a broader range of scenarios, including virtual establishments, such as a server, or contracts digitally executed with agents physically in a given country. There is also a proposal that would create a taxable event based solely on an enterprise having a significant digital presence in the country.

Impact on Hedge Funds

It isn’t difficult to read the tea leaves. Hedge funds will need to have a thorough understanding of these proposals and adjust their digital infrastructure accordingly. For example, a fund using high frequency trading, especially co-location, could be defined as taxable by the country in which its server is domiciled.

Profit allocation is undoubtedly the most arduous task BEPS faces and this is potentially the greatest source of friction between sovereign nations. As a result, this segment will take the longest to put into action.

The Future

While this project is far from concluded, hedge funds would be well-served by closely following the direction these proposals take and preparing for the tax consequences they may engender. Clearly, the OECD’s BEPS proposals do not have the force of law but, they will shape the direction of international and domestic tax legislation. Hedge fund firms prepared for these possible future scenarios will enjoy a competitive advantage.

 

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Hedge funds have been understandably resistant to social media, suffering from a form of post traumatic stress, as a direct result of the eight decade gag forced on them by the general solicitation ban.

Hedge funds have a reputation for many things but, social media interaction is certainly not one of them. That is slowly changing with an estimated ten percent of hedge funds now having a Twitter presence. Additionally, some 188 hedge fund firms host pages on LinkedIn. One thing is certain; the days when hedge funds only thought of social media as a stock investment are rapidly fading.

The Internet is not virgin territory for hedge funds. Fully 91 percent of hedge funds have a website although more than one-half of those are very simplistic; often offering little more than a logo and contact information.

How Hedge Funds Use Social Media

According to Bridgewater CEO Greg Jensen, his firm is using Twitter and “everything that is available” online to monitor real time economic activity—the ultimate goal being “to track the economy on a day-to-day basis.”

One can only imagine a world in which the monthly release of macro data on car sales, housing starts, and employment will no longer elicit a market response but merely serve to confirm the validity of actions the market has already taken.

LinkedIn is useful to hedge funds in ways different from Twitter. Learning about potential investors seems to be the dominate theme for hedge funds using LinkedIn. This social media platform is geared to professionals and provides employment histories, job descriptions, board memberships and other useful data. Now that the solicitation ban is no longer the barrier it once was, hedge funds can use this data to great effect.

Linked in also provides a wealth of information on organizations. LinkedIn reveals details regarding who works at the organization and what they do. This can be a valuable resource for hedge funds as a tool to expand its network and influence with key organizations.

Creating opportunities to meet with potential investors is critical if hedge funds are to grow AUM. In meeting that goal, LinkedIn is perhaps the premier social media platform available.

The Power of Social Media

The influence of social media was memorably demonstrated in April, 2013 with a fake tweet, attributed to the Associated Press, that alerted followers to an explosion at the White House. This news sent the markets into a tailspin. Within minutes the S&P 500 and the Dow lost billions in value. Of course they rebounded just as quickly when the tweet was revealed as a hoax. However, the lesson was learned and the financial industry began to appreciate the power of social media.

Social media has rapidly developed into an integral constituent of modern life, both personal and professional. As social media gains traction in the hedge fund arena, great caution must be exercised with regard to compliance, effective market integration and, of course, social media etiquette.

Social media is forcing the marketing map to be redrawn, not only for hedge funds, but the financial industry as a whole. Sadly, hedge funds are not the point of the spear. If they do not embrace the opportunities in social media, they might be left with only the shaft.

 

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