How the rich make money by losing money

Loukia Gyftopoulou (0:01)

NPR.

Adrian Ma (0:06)

Decades ago, the richest Americans paid taxes as high as 40% on their investments. That means if they sold a bunch of stock or their company got acquired, a good chunk of that payday would go to the government.

Wailin Wong (0:18)

But right now, some millionaires and billionaires are plowing their money through a tax loophole so big, it could allow them to slash their taxes to zero. This is The Indicator from Planet Money. I'm Wayland Wong.

Adrian Ma (0:33)

And I'm Adrian Ma. Today on the show, we'll be joined by Bloomberg reporter Loukia Gyftopoulou.

She covers investing and the wealth management industry. And recently, she and her colleagues did a series of stories on what they call this generation's great American tax dodge.

Wailin Wong (0:48)

After the break, she explains how it works and tells us about the man behind it. A hot-tempered, computer-screen-punching financial whiz who runs the world's biggest hedge fund right here in the US.

Adrian Ma (1:04)

The story of this era's great American tax dodge starts with a man named Cliff Asness, 59 years old, with a bald head and gray beard, and a Captain America tattoo on his arm. Cliff worked at Goldman Sachs in the 90s, and around that time, also got a PhD in finance.

Loukia Gyftopoulou (1:20)

Cliff Asness is a very big, bigger than life personality.

Wailin Wong (1:26)

That's Bloomberg reporter Loukia Gyftopoulou.

Loukia Gyftopoulou (1:29)

He's, let's say, a mad genius in a way, who's now found this way to help rich people slash their tax bills potentially to the extreme.

Wailin Wong (1:42)

Another mad genius. There's very few geniuses that are described as stable or... Yes.

Loukia Gyftopoulou (1:49)

people who have spent a lot of time with him, credit him as one of the smartest people they've ever met.

At the same time, he's got a massively short fuse. He shouts at people. He's admitted that during the financial crisis, he was punching through computer screens maybe afterwards as well. I don't know.

Adrian Ma (2:07)

Cliff Asness also loves to throw verbal punches. He's known for publicly insulting fellow finance bros like billionaire Bill Ackman.

And he's written a lot of Wall Street Journal op-eds, including one where he defended what he called the working rich.

Wailin Wong (2:22)

I think Ebenezer Scrooge was a member of the working rich class.

Adrian Ma (2:26)

I think that would count.

Wailin Wong (2:27)

After his stint at Goldman, Cliff struck out on his own. He set up a hedge fund called AQR Capital Management. And for years, AQR was a pretty typical hedge fund, taking money from wealthy individuals or pension funds, investing it, and trying to turn it into even more money. But then a few years ago, Loukia says they made a pivot. They shifted towards something called tax-aware investing, which means what exactly?

Loukia Gyftopoulou (2:54)

We help reach people slash their tax bills. That's what tax-aware investing means.

Adrian Ma (3:00)

Well, traditional investing is focused purely on growing a pool of money. Tax-aware investing is focused on reducing how much an investor owes to Uncle Sam.

One classic strategy for doing that is something called tax loss harvesting.

That's when you sell off losing stocks and write off those losses to reduce your tax bill.

Wailin Wong (3:18)

Cliff and his team at AQR Capital took this basic strategy and complexified the hell out of it. They developed what's called a tax-aware long short strategy, which sounds like total word salad. Basically, it means that they create complicated investment portfolios purposely engineered to generate losses.

Loukia Gyftopoulou (3:39)

They have thousands and thousands of positions, many long, many short. They borrow money and they create losses. Long term, these strategies are supposed to also make you money, but they've engineered a product that can create losses, that can then offset any tax you have to pay.

Adrian Ma (4:00)

To make that concrete, here's an example from Loukia's reporting. In a presentation AQR Capital gave to potential investors, they explained how their souped up version of tax loss harvesting works.

They said, if you invest 100 million dollars with us over the next 10 years, it'll grow to 300 million dollars, which is a pretty good return. But here's the icing on the cake. They said over that same period, the fund could incur 600 million dollars in losses. Losses which you can use to erase your tax liability on your winning investments.

Wailin Wong (4:33)

Grow your money and slash your tax bill. That is what AQR is promising. Who doesn't want to do that? Right? I mean, sign me up. Oh, wait, I don't have anywhere near the amount I would need to buy it.