A Hedge Fund Tax Tragedy To Ponder

 This is part of a regular series of thought-leadership pieces from some of the more influential ETF asset management in the money management industry. Today’s article is by Hafeez Esmail, San Francisco-based Main Management’s director of marketing. Hafeez Esmail for ETF Trends writes: Let’s hope the smart money is slowly beginning to recognize the folly of most hedge fund investing.

While there are handful of managers with strong track records—most of whom are either closed or inaccessible to affluent investors—the vast majority of hedge funds are becoming known for underperformance and self-enrichment.

In addition to anemic returns, there’s another aspect of hedge fund returns that warrants scrutiny— taxation. While hedge funds tend to be varied in their approaches, a large number of them have heavy turnover in the quest for returns. This is a reason they are loved by prime brokers, because lots of transactions and heavy volumes result in lots of trading commissions.

Short-Term Gains = Extra Tax Pain

So, in the event you’re fortunate enough to have positive returns, those returns are likely to be predominantly short-term in nature.

With tax rates going nowhere but higher, and top-earner tax rates in a state like California exceeding 50 percent (federal and state combined), it’s clear that closer examination is needed not just of after-fee returns, but of returns after taxes as well.

Let’s combine the 2 percent expense and 20 percent incentive structure typical of hedge funds with the preponderance of short-term gains—in the context of arguably rare gains—that result from significant turnover. Because Main Management is based in San Francisco, I’ll also take the liberty of assuming the client lives in California and thus has an approximate combined 50 percent federal and state tax burden.

With these assumptions, here’s how the numbers work out: To get a 5 percent net after-fee, after-tax return for a hedge fund, you need a gross return around 14 percent. Yes, 14 percent. Let that sink in—a 14 percent gross return turns into a take-home return for the client of 5 percent.

Using a back-of-the-envelope calculation, if you take away the 2 percent and 20 percent, you’re down to 9.6 percent net after fees. After federal and state taxes in California, you’re right around 5 percent, or perhaps a bit lower. For a more scientific approach, albeit with very similar conclusions, see this analysis in the New York Times.

Ultimately, my question is this: If financial advisors are fiduciaries who are obligated to act in their clients’ best interest, how can in good conscience continue to recommend such instruments?

ETFs Vs. Hedge Funds

By contrast, let’s look at an ETF-based, option-writing approach like Main Management’s “Buy Write/Hedged Equity Strategy.”

I use this example for a few reasons.

First, the overall idea with this strategy is to achieve superior risk-adjusted returns using covered calls in a portfolio of U.S. and International equities allocated based on fundamental analysis. It is designed to deliver two-thirds of the upside and half the downside of a pure equity strategy.

In fact, over time, it has the return profile of a 65 percent equity-35 percent fixed-income allocation without any fixed-income duration risk, as ETF.com’s Olly Ludwig wrote in ETF Report recently.

Also, unlike the typical hedge fund, the strategy is also tax aware, keeping turnover under control.

This happens because monthly call writing generally creates sizable options returns when the underlying portfolio of ETFs plunges, while options typically generate losses when markets (and underlying ETFs) are surging higher. Having these two inherently inversely correlated components frequently allows Main to tax-loss-harvest or even carry losses forward.

Within a low fee structure—say 50 basis points ($50 for each $10,000 invested)—one might only require 6 to 7 percent gross returns for a net after-tax and after-fee return of 5 percent. Again, a high-turnover hedge fund, in this scenario, may need double the return to give the client the same amount of net capital. That’s the 14 percent I spoke about above.

Focus On What You Can Control

And, to return to the problem at hand for investors seeking a silver bullet with hedge funds, do you think hedge funds are really up to the task? The average hedge fund, year-to-date through Sept. 5, is up just 2 percent before fees, according to industry tracker HFR. That compares with about a 10 percent return, including dividends, for the S&P 500 over the same time frame.

Clearly hedge funds are a remarkable vehicle for hedge-fund manager enrichment and for transferring your hard-earned capital to the hedge fund manager and to the tax man. By the way, if you haven’t read Larry Swedroe’s two recent articles on ETF.com about hedge funds, they’re certainly worth a look, especially the one titled “Even Stars Knock Hedge Funds.”

In any case, I believe it’s fair to assume most advisors would prefer not to pledge significant sums of their clients’ assets to taxation and compensation to hedge fund managers.

With all this in mind, it’s clearly time to make the after-fee and after-tax discussion a centerpiece of the conversation with clients.

You can visit the author @ his website here.

Float looking for GBP 500,000 ($807.660.00 USD) of funding : Float is an online cash management and forecasting tool that syncs with Xero & FreeAgent

Float brings simple cashflow forecasting and budgeting to the cloud. Float is an online cash management and forecasting tool that helps you manage your business and keep on top of your cash flow. By projecting your future cash in the bank it’s easier to make the right decisions for your business.  Float syncs with Xero & FreeAgent.

(Scotland on Sunday Via Acquire Media NewsEdge) ACCOUNTING software outfit Float has kicked off a fundraising drive that could see its headcount almost double, less than a year after launching its flagship product.The company, based at Edinburgh's CodeBase tech incubator, created a cashflow forecasting tool that integrates with Xero, the accounting package aimed at small and medium-sized firms, and last month was named "emerging add- on partner of the year" at Xero's conference in Sydney.Float released its product for Xero in September last year, and the software was relaunched in January following tweaks to meet the needs of larger clients.Chief executive Colin Hewitt said the firm was seeking up to GBP500,000 to ramp up development and marketing in a move that could see it add four more staff to its five-strong team.He added: "We're now speaking to individual angels to get a funding round together and the feedback has been very positive."

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Anoop for Float writes on the Xero Conference and says, "First Impressions" 

What they say about assumptions.  The dust has now settled on Xerocon 2014 in Sydney and having recovered from the jet lag, I thought now would be a good time to reflect on and share my first impressions and experience of an accountancy conference.

Read all about our experience at Xerocon 2014 in Sydney and how Float won the award for Emerging Add-On Partner of the Year

It was a conference unlike any conference I’ve ever been to and in this post, I want to reflect on what it meant to go to Xerocon as an outsider (I am a lawyer turned developer here at Float) and especially on how Xero has turned my (admittedly) stereotypical view of accountancy on its head!

The accountancy conference scene is new to me. Like most people, if you’d asked me to describe what I thought an accountancy conference would be like, i’d have pictured a stuffy, waistcoat-y, curmudgeonly affair. The thought of attending involving mentally preparing for a painful grilling on the finer points of accrual accounting, exhibition stands awash with incomprehensible spreadsheets and the stale smell of antiquity in the air. If you’d asked me a year ago what I’d be doing at an accountancy conference, I’d have quickly replied, ‘looking for the nearest exit…!’

The misconceptions I’ve held for so long about accountancy conferences made a dramatic u-turn last week. I doubt anyone would believe me if I spoke about fairground rides, skateboards, ice-cream and live rock music in the same breath as an accountancy conference...Cue Xero and Xerocon Sydney 2014.

Xero set to cash in on big new features

David Swan for ITWire writes: New Zealand-based cloud accounting firm Xero, which recently hit a monthly aggregate payroll of $1 billion for the first time, has announced a number of new features that should make its disruptive offering even more compelling.

The headline feature, first announced at Xerocon in Sydney last month, is batch deposits.

"For those of you dealing with customers paying by check/cheque or paying multiple invoices at once, this feature will be a huge time saver," wrote Andrew Tokeley, Xero Product Manager.

"Batch deposit is the accounts receivable equivalent to batch payments. From the Sales dashboard, simply select the invoices to be paid and press the ‘Deposit’ button.

"Once you’ve confirmed the batch, payments (or part payments, if you’ve adjusted the amounts) will be created for the selected invoices – no more need to drill into each individual invoice (yes!)."

Xero also today added a feature allowing for deposit slips, meaning if your batch deposit was created from a number of checks/cheques you can choose to print a simple deposit slip to take to the bank.

A third feature was Receipts (invoice payments), which now allows Xero users to send receipts to customers for their invoice payments. Xero said these can be initiated from a batch deposit, where a separate email for each unique customer will be created, or from any single payment record.

"Xero will attach a copy of the receipt to each receipt email. Receipt documents can have their layout edited – so you can easily apply your branding. You can also customise the standard text used for the email body from the email settings," the blog post reads.

"Note that we don’t yet support sending receipts on cash (Receive Money) transactions – this is something we’re considering for a future release."

Other new features include faster spend/receive transactions, new inventory item fields, CSV invoice exporting and the authorize.Net eCheck support.

The company said back in July it is likely to list in the US early in 2015 on the back of strong growth in the cloud market and its announcement that annual revenues have now reached over US100 million.

For more information on the new features check out the blog post on Xero's website. 

Digital First: Xero Launches “Version 8.0” with Batch Deposits, New Reports

Sholto MacPherson for Digital First writes: Online accounting software Xero has released a major update to its accounting platform with new features such as batch deposits, an upgraded reporting engine and a number of productivity improvements.

Several features were previewed at Xero’s annual partner conference in Australia last month, while others have been developed to win over customers in the US.

Allocate Funds with Batch Deposits

Batch deposit, the accounts receivable equivalent tobatch payments, lets Xero users pay multiple invoices at once using offline methods such as cheques.

From the Sales dashboard, simply select the invoices to be paid and press the “Deposit” button. Payments will be created for selected invoices instead of needing to allocate an amount to each invoice.

If the batch deposit was created from a number of cheques, you can print a simple deposit slip to take to the bank. It’s also possible to export the batch deposit to CSV.

Send Receipts for Invoices Paid

The update also added the ability to sendreceipts to customers for invoice payments. These can be initiated from a batch deposit, where a separate email for each unique customer will be created, or from any single payment record.

Users can edit the receipt template and add the company logo, and edit the text in the receipt email. Xero attaches a copy of the receipt to each receipt email.

Receipts can only be sent for batch deposits or bank-feed transactions. Receipts for cash transactions may be added to a future release.

New Reports

Xero recently added new versions of the Aged, Depreciation and Account Transactions reports. The overhaul of the reporting engine continues with a customisable profit and loss report with editable formulae.

Xero added an account transactions report that can create a single report for multiple accounts. This only works for the base currency in the Xero file; the company said it is working on multi-currency support.

Also new to reports is a disposal schedule that details fixed assets sold or written off within a period.

Faster Transactions

Xero added a couple of productivity improvements here. You can switch between a number of bank accounts from within the Account Transaction screen. No more clicking back into the Bank Account menu.

A new button on the Account Transactions screen called “New Transaction” can quickly create new spend/receive transactions on the fly. This helps you understand your cash position or enter the details of cheques, rather than waiting for them to clear through your bank account.

Inventory Slowly Takes Shape

At Xerocon CEO Rod Drury signalled that it would start expanding beyond core accounting modules. A proper inventory module inched one step closer with new item fields that can define item code, item name, sales description and purchase description (eg. for recording supplier part codes).

Time Savers

Xero added a couple of small fixes to make it easier to use. You can now export sales invoices and bills in CSV format so you can see the detail of what you’re buying and selling.

And an improved search for contacts in invoices displays the primary person’s name as well as the company contact.

For full details of the update check out the release notes.

Digital First was formerly named BoxFreeIT.com.au from its launch in June 2011 until 28 July, 2014.  Sholto is a journalist, presenter and public speaker with 14 years’ experience writing about IT for enterprise and consumer audiences. 

Are home-staging costs tax deductible?

Claudia Jacobs for the Times-Herald-Record writes:  years I have been telling clients, Realtors and attendees of my staging classes that staging is tax deductible. No one really could explain how, but there is an IRS Publication #523 on staging. This column will explain what it all means, thanks to Rob Unger, CPA, CFE of Judelson, Giordano & Siegel, CPA, P.C.

According to Unger, "Home sellers can benefit from home staging, as the fees for staging services can be considered as advertising costs according to IRS guidelines. Since a home stager prepares your house for potential homebuyers, the IRS considers the service as an advertising expense, as long as the home stager has been hired for the sole purpose of selling your home. The costs of staging are subtracted from the proceeds of the sale of the home and decrease the total realized profit. In summary, the IRS' position is that staging costs are a legitimate selling expense for both primary and secondary homes and are therefore tax deductible. However, it is important to note that if a house is staged and then taken off the market, the staging expenses are not tax deductible."

Questions from the stager (That's me!)

Since the word "staging" confuses people, I asked if the following is tax deductible: fresh white towels, new shower curtain, home repairs, paint, new carpeting, furniture or furnishings rental or purchases. Staging clients usually buy and sometimes I rent items to them.

If the home goes off the market for a few months then goes back on, are they still allowed to claim it as a tax deduction? For instance: Sellers did not want to put in new carpeting, no offers, the home goes off the market for the winter, new carpeting goes in, home goes back on the market and sells.

The CPA's clarification

From CPA Rob Unger: "With regard to the timeline, the costs of staging are only deductible if the home is for sale and actively on the market. If the home is on the market then taken off without a sale, the cost of staging is not deductible.

"The IRS does not allow you to deduct expenses for repairs, maintenance and upkeep on your main home, so these expenses cannot be subtracted from the sale of your home. Fresh paint, new carpet, furniture and home decorations are not tax-deductible expenses, even if a home stager recommends them.

"In your example of the home being on the market, coming off, then going back on and selling, they are considered separate transactions. If there are staging costs associated with the first time it is on the market and then comes off with no sale, no deductions are allowed for the staging costs. Any staging costs associated with the property going back on the market and selling are deductible as it relates to that transaction.

"Staging is typically what happens after the homeowner has cleaned, painted and made minor repairs. It's the cost of the stager's services in dressing up the home to get it ready for sale.

"In your example, where the homeowner is buying the fresh white towels and furnishings, these are not tax deductible, as after the sale is completed, the homeowner is most likely going to take these items with them. If these are part of your services and you rent these items to them, and it is included in your invoice for your services, and they are retained by you after the home staging is completed, then they will be tax deductible as staging expenses.

Bottom line

"I think a literal explanation is that the tax-deductible part is what is on your invoice as the stager. Items that the homeowner buys and intends to keep that are used in the staging process are not deductible, as they are being used for staging and then also for personal use after the staging making them non-deductible. Items they rent for the staging process and then return after the home sells are deductible as part of the staging, as they do not use them for any personal use, they are used strictly for the staging process."

So, to sum it up: Stage the home properly from the beginning. Price it right. Get it sold.