Apparently working for an ultra-successful hedge fund comes with a few perks. Like, for example, access to the superstar Medallion hedge fund as a tax-free investment in your Roth IRA, a perk only available to employees of Jim Simons’ Renaissance Technologies. Of note, Medallion has averaged a 71.8% return over the last 20 years, which most be among the best returns in history.
New retirement plan for Renaissance employees
Richard Rubin and Margaret Collins of Bloomberg explain how Renaissance Technologies cancelled its 401(k) plan, and after a four-year effort, won the government’s approval to put Medallion inside Roth IRAs for company employees.
As Rubin and Collins explain, “that means no taxes — ever — on the future earnings of a fund that averaged a 71.8 percent annual return, before fees, from 1994 through mid-2014.
Setting up the new retirement accounts required two separate waivers from the U.S. Labor Department, but could result in a huge payoff for Renaissance employees. Of course, the loser will be the U.S. Treasury, which stands to miss out on many millions of tax dollars, and the rest of the American taxpayers who have to pay more taxes.
Obviously, the final result for Renaissance employees depends on how Medallion performs. Keep in mind that in a 12-year stretch from 2001 through 2013, the fund’s poorest annual performance was a 21% return, after fees. Medallion made a mind boggling 98% gain in 2008 when the S&P 500 Index was off 38.5%.
“It’s quite amazing,” commented Steve Rosenthal, a senior fellow at the Tax Policy Center in Washington. “They’re very tax-savvy.”
A spokesman for Renaissance declined to comment on this story when contacted by Bloomberg.
James Simons, the chairman of Renaissance, is no longer the day-to-day manager. Simons in worth around $15.5 billion, according to media sources. Of note, Medallion is owned almost totally by Renaissance’s employees, former employees and family members.
Statement from Senator Ron Wyden
“There shouldn’t be two sets of rules – one for sophisticated organizations leveraging a complex tax system to their benefit and another for middle-class Americans trying to save for retirement,” Senator Ron Wyden of Oregon, a Democrat who has been probing large retirement accounts, commented recently. “This is an issue of fairness, and taxpayers end up paying the price.”
Renaissance acted when laws changed
Renaissance’s timing on moving ahead with their plan to create this special Roth 401k for its employees was no coincidence. In 2010, the government lifted the ban on those earning more than $100,000 a year from converting standard IRAs into Roth IRAs by paying taxes. (Keep in mind that with standard IRAs, you invest pretax dollars and withdrawals are taxed as ordinary income. Roth IRAs, by contrast, are funded with after-tax dollars and investment gains are tax-free.)
After cancelling its 401k, Renaissance asked the Labor Department for an exemption from rules banning employees from investing retirement money in Medallion.
Renaissance’s legal team (led by Gary Howell of Katten Muchin Rosenman LLP) argued that Medallion was clearly outperforming the everyday mutual funds available under its old 401(k) administered by Fidelity.
“The sole and exclusive reason why Renaissance has gone through the effort and expense to seek this exemption,” Howell noted in a letter to the Labor Department back in 2011, “is to provide a benefit to its employees that other firms do not.”