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Why does it matter if you withdraw funds from your model account? As long
as you know how to correctly calculate the internal rate of return you can
add or withdraw funds whenever you like. What leads you to think potential
investors will be turned off if you withdraw funds to pay taxes? Real hedge
funds regularly have capital contributions and withdrawals.
----- Original Message -----
From: <janitor@xxxxxxxxxxxx>
To: <omega-list@xxxxxxxxxx>
Sent: Monday, March 03, 2003 1:43 PM
Subject: Paying taxes on hedge fund "Model Account"
> Suppose you have a hedge fund and suppose you open a
> "model account" with something like $1000.00, just to provide
> an actual "real money" track record showing precisely what an
> investor's account has done over the life of the fund.
>
> If your hedge fund is wildly successful, the model account will
> grow to a tremendous equity and the taxes on those profits would
> be immense (it is feverishly hoped).
>
> How do you pay the taxes on the model account? You certainly
> don't want to withdraw funds from the model account to pay its
> taxes; that'd ruin the very purpose of the model account.
>
> I explored a wacky scheme that I will call Big Brother / Little Brother.
> Perhaps some omega-list readers may enjoy seeing its operation.
> If not, I apologize for boring you.
>
> The idea is this: you open TWO accounts. The Little Brother
> account is the Model Account and is opened for $1000.00. You
> never withdraw funds from this account, never ever ever, so it
> shows the exact real-money track record that investors received.
> The Big Brother account is opened for 100X more initial money
> (i.e. $100K). It pays taxes for BOTH itself AND for its little brother.
>
> Naturally, Little Brother's equity will grow faster than Big Brother's:
> BB is paying taxes and LB isn't. So, eventually, LB will catch up
> to BB and overtake BB. But if that happens a long loooong time
> after the fund begins, giving you a loooong unbroken track record
> in the Model Account, it is probably good enough. If it gives you
> a (plug in your favorite number here) 25 year track record, you
> are probably happy.
>
> So I fired up the LINUX box and ran the program AWK to see
> where these "overtake" points might occur.
>
> Not surprisingly, they are *strongly* dependent upon the taxation
> rate, and the hedge fund's Compound Annual Growth Rate ("CAGR")
> after deducting fees and performance bonuses.
>
> Just as your intuition would predict, the computer results said:
> * The lower the taxes, the longer it takes LB to overtake BB.
> * The higher the profits (CAGR), the less time it takes LB to overtake.
>
> Here is some of the output. In every case, BB was funded with
> $100k and LB was funded with $1k. Taxation rates and compound
> annual growth rates were varied.
>
> Conculsion? 100X seems like a good ratio between BB and LB,
> giving you at least a 15 year track record before LB overtakes BB.
> UNLESS you hit very large (after fees) profit percentages, in which
> case you might want to use 1000X.
>
> tax 30% cagr 35% overtake in 50 yrs $ 2434191022
> tax 35% cagr 35% overtake in 43 yrs $ 297864178
> tax 40% cagr 35% overtake in 37 yrs $ 49205728
> tax 45% cagr 35% overtake in 33 yrs $ 14814281
> tax 50% cagr 35% overtake in 30 yrs $ 6021148
> tax 55% cagr 35% overtake in 27 yrs $ 2447248
> tax 60% cagr 35% overtake in 25 yrs $ 1342797
> tax 65% cagr 35% overtake in 23 yrs $ 736789
> tax 30% cagr 40% overtake in 45 yrs $ 2689264815
> tax 35% cagr 40% overtake in 39 yrs $ 357162090
> tax 40% cagr 40% overtake in 34 yrs $ 66408730
> tax 45% cagr 40% overtake in 30 yrs $ 17286737
> tax 50% cagr 40% overtake in 27 yrs $ 6299831
> tax 55% cagr 40% overtake in 24 yrs $ 2295857
> tax 60% cagr 40% overtake in 22 yrs $ 1171356
> tax 65% cagr 40% overtake in 21 yrs $ 836683
> tax 30% cagr 45% overtake in 42 yrs $ 4131312924
> tax 35% cagr 45% overtake in 36 yrs $ 444508508
> tax 40% cagr 45% overtake in 31 yrs $ 69348978
> tax 45% cagr 45% overtake in 28 yrs $ 22747625
> tax 50% cagr 45% overtake in 25 yrs $ 7461602
> tax 55% cagr 45% overtake in 22 yrs $ 2447530
> tax 60% cagr 45% overtake in 21 yrs $ 1687952
> tax 65% cagr 45% overtake in 19 yrs $ 802831
> tax 30% cagr 50% overtake in 39 yrs $ 4914369920
> tax 35% cagr 50% overtake in 33 yrs $ 431439883
> tax 40% cagr 50% overtake in 29 yrs $ 85222693
> tax 45% cagr 50% overtake in 26 yrs $ 25251168
> tax 50% cagr 50% overtake in 23 yrs $ 7481828
> tax 55% cagr 50% overtake in 21 yrs $ 3325257
> tax 60% cagr 50% overtake in 19 yrs $ 1477892
> tax 65% cagr 50% overtake in 18 yrs $ 985261
> tax 30% cagr 55% overtake in 36 yrs $ 4587852385
> tax 35% cagr 55% overtake in 31 yrs $ 512803458
> tax 40% cagr 55% overtake in 27 yrs $ 88843192
> tax 45% cagr 55% overtake in 24 yrs $ 23857727
> tax 50% cagr 55% overtake in 22 yrs $ 9930375
> tax 55% cagr 55% overtake in 20 yrs $ 4133351
> tax 60% cagr 55% overtake in 18 yrs $ 1720437
> tax 65% cagr 55% overtake in 16 yrs $ 716103
> tax 30% cagr 60% overtake in 34 yrs $ 5444517871
> tax 35% cagr 60% overtake in 29 yrs $ 519229686
> tax 40% cagr 60% overtake in 26 yrs $ 126765060
> tax 45% cagr 60% overtake in 23 yrs $ 30948501
> tax 50% cagr 60% overtake in 20 yrs $ 7555786
> tax 55% cagr 60% overtake in 18 yrs $ 2951479
> tax 60% cagr 60% overtake in 17 yrs $ 1844674
> tax 65% cagr 60% overtake in 16 yrs $ 1152922
> tax 30% cagr 65% overtake in 33 yrs $ 9109325374
> tax 35% cagr 65% overtake in 28 yrs $ 744846007
> tax 40% cagr 65% overtake in 24 yrs $ 100491821
> tax 45% cagr 65% overtake in 22 yrs $ 36911596
> tax 50% cagr 65% overtake in 19 yrs $ 8216957
> tax 55% cagr 65% overtake in 18 yrs $ 4979974
> tax 60% cagr 65% overtake in 16 yrs $ 1829191
> tax 65% cagr 65% overtake in 15 yrs $ 1108601
> tax 30% cagr 70% overtake in 31 yrs $ 8193465726
> tax 35% cagr 70% overtake in 27 yrs $ 981006660
> tax 40% cagr 70% overtake in 23 yrs $ 117456288
> tax 45% cagr 70% overtake in 21 yrs $ 40642314
> tax 50% cagr 70% overtake in 19 yrs $ 14063084
> tax 55% cagr 70% overtake in 17 yrs $ 4866119
> tax 60% cagr 70% overtake in 15 yrs $ 1683778
> tax 65% cagr 70% overtake in 14 yrs $ 990458
> tax 30% cagr 75% overtake in 30 yrs $ 11171292210
> tax 35% cagr 75% overtake in 26 yrs $ 1191108207
> tax 40% cagr 75% overtake in 22 yrs $ 126998626
> tax 45% cagr 75% overtake in 20 yrs $ 41468939
> tax 50% cagr 75% overtake in 18 yrs $ 13540878
> tax 55% cagr 75% overtake in 16 yrs $ 4421511
> tax 60% cagr 75% overtake in 15 yrs $ 2526578
> tax 65% cagr 75% overtake in 14 yrs $ 1443759
> tax 30% cagr 80% overtake in 29 yrs $ 14048506052
> tax 35% cagr 80% overtake in 25 yrs $ 1338258845
> tax 40% cagr 80% overtake in 22 yrs $ 229468252
> tax 45% cagr 80% overtake in 19 yrs $ 39346408
> tax 50% cagr 80% overtake in 17 yrs $ 12143953
> tax 55% cagr 80% overtake in 15 yrs $ 3748134
> tax 60% cagr 80% overtake in 14 yrs $ 2082296
> tax 65% cagr 80% overtake in 13 yrs $ 1156831
> tax 30% cagr 85% overtake in 28 yrs $ 16354477245
> tax 35% cagr 85% overtake in 24 yrs $ 1396206814
> tax 40% cagr 85% overtake in 21 yrs $ 220513188
> tax 45% cagr 85% overtake in 18 yrs $ 34827266
> tax 50% cagr 85% overtake in 17 yrs $ 18825549
> tax 55% cagr 85% overtake in 15 yrs $ 5500526
> tax 60% cagr 85% overtake in 14 yrs $ 2973257
> tax 65% cagr 85% overtake in 13 yrs $ 1607166
> tax 30% cagr 90% overtake in 27 yrs $ 17684534181
> tax 35% cagr 90% overtake in 23 yrs $ 1356998042
> tax 40% cagr 90% overtake in 20 yrs $ 197841966
> tax 45% cagr 90% overtake in 18 yrs $ 54803869
> tax 50% cagr 90% overtake in 16 yrs $ 15181127
> tax 55% cagr 90% overtake in 14 yrs $ 4205298
> tax 60% cagr 90% overtake in 13 yrs $ 2213315
> tax 65% cagr 90% overtake in 12 yrs $ 1164903
> tax 30% cagr 95% overtake in 26 yrs $ 17818259684
> tax 35% cagr 95% overtake in 22 yrs $ 1232329482
> tax 40% cagr 95% overtake in 20 yrs $ 324084019
> tax 45% cagr 95% overtake in 17 yrs $ 43707280
> tax 50% cagr 95% overtake in 16 yrs $ 22413990
> tax 55% cagr 95% overtake in 14 yrs $ 5894540
> tax 60% cagr 95% overtake in 13 yrs $ 3022841
> tax 65% cagr 95% overtake in 12 yrs $ 1550175
> tax 30% cagr 100% overtake in 26 yrs $ 33554432000
> tax 35% cagr 100% overtake in 22 yrs $ 2097152000
> tax 40% cagr 100% overtake in 19 yrs $ 262144000
> tax 45% cagr 100% overtake in 17 yrs $ 65536000
> tax 50% cagr 100% overtake in 15 yrs $ 16384000
> tax 55% cagr 100% overtake in 14 yrs $ 8192000
> tax 60% cagr 100% overtake in 12 yrs $ 2048000
> tax 65% cagr 100% overtake in 11 yrs $ 1024000
>
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