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

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You're listening to Bloomberg Businessweek with Carol Massar and Tim Stenovec on Bloomberg Radio.

**Carol Massar** (0:14)
Talking about Jefferies Financial, the group has been told that some of the invoices underpinning its financing to an iron ore trader called Sapphire Mini-Metals, or Min-Metals, excuse me, are not genuine. This is according to people familiar with the matter. It's been a story that Bloomberg's been reporting out over the last week or so. With more is Bloomberg News Chief Wall Street Correspondent Sri Natarajan covering the financial spaces here in studio.
For those who maybe haven't been following, there's been a lot going on. What do we need to know?

**Sri Natarajan** (0:43)
Look, this is the latest in a series of incidents which is shining more light on the risk around receivables finance. Typically ordinarily this should be safe. You are lending against invoices. It's secured by invoices. You expect your client to be ultimately paid and you expect to be paid back.
When it goes right, it is good money for the lenders, but there are occasions when it can go wrong and it can go horribly wrong. And that's sort of, we saw it last year with First Brands and the collapse around First Brands and all the allegations around fraud and scam that came out. Now over the last week, we've seen these instances first with Radiant World that Bloomberg reported last year. And now another company, Sapphire Minmetal, which seems to be somewhat tied to Radiant World, at least at some point, Radiant World and its owners were majority owners of Sapphire Minmetal. But the interesting bit for us is the connection of Point Bonita. Point Bonita is a trade finance fund, trade finance focused fund at the Asset Management Division of Jefferies.
So it's just another black eye for Jefferies at a time. You really don't want your investors to be asking you more questions about your investing missteps.

**Tim Stenovec** (1:55)
You mentioned some other examples of this, including last year. Is this part of a pattern of events or is this just the latest one-off?

**Sri Natarajan** (2:06)
To quote Jamie Dimon, it certainly feels like another cockroach out there. Now, your question is, is it an infestation? Not necessarily. Is it going to have material financial impact on Jefferies? Not necessarily. It has a 5.9 percent stake in Point Bonita.
But does it leave a bit of a sour impression for their investors and for analysts and for people wondering about banks and other investors and their tie-ups with other trade finance firms?

**Carol Massar** (2:31)
An oversight, right? Oversight, what is it?
Assessing risks and so on and so forth.

**Sri Natarajan** (2:37)
To some part, you have to resume some of the allegations that we're talking about as falsifying invoices. Again, to be clear, Radiant World denied those allegations last week. Sapphire Mint Metal in our story today is denying those allegations again. But when you're talking, if it is what the allegations are, that is outright fraud, you also have to wonder how easy is it for some of these firms to be doing all the diligence that's required? How do you completely ensure that you snuff that out? And that might not necessarily be possible, but your investors will expect higher standards and much better diligence going forward. And that will focus people to reassess their processes to be able to sniff out risk and to be able to avoid some of these landmines.

**Carol Massar** (3:18)
Just to reputation, right? Ultimately. And again, we should say there's still more to be known here.

**Sri Natarajan** (3:22)
So we're looking more to be known.

**Carol Massar** (3:23)
We're going to continue following it. We got to get to the big take.

**Tim Stenovec** (3:27)
Yeah, this is one of the most red stories on the Bloomberg Terminal. It's a tax strategy for the rich built the world's largest hedge fund. You and the team behind it, about behind one of the most red stories. This is about tax loss harvesting on steroids.

**Carol Massar** (3:41)
This part of me is like, oh, my God, but it's actually pretty cool.

**Tim Stenovec** (3:44)
It is cool. What is AQR figured out? What is AQR doing?

**Sri Natarajan** (3:48)
And again, well, on the one hand, Carol, I am slightly offended that this wants to make you snore.

**Carol Massar** (3:55)
I hear taxes, but I know this stuff is really interesting.

**Sri Natarajan** (3:58)
But that's correct.
We're used to these ideas of tax loss harvesting and finding ways and investments where with the growth of the technological tools available to us, with the sort of ETFs and commission free trading, you can do a lot more of these things. But what is happening when you bit a lot of mathematicians and PhDs in a room together and come up with strategies, you suddenly do what Tim rightly described as taking these strategies and applying steroids on them, that they become so much more potent. The advertising from firms like AQR is like, if you put money in with us, not only will we make sure that your money grows over time, but in term, we will also keep generating losses that you can use to write off your capital gains elsewhere.