‘Runaway’ Tax-Slashing Strategy Honed by AQR Draws Senator’s Ire

(Bloomberg) — US Senator Ron Wyden called on senior Trump administration officials to halt the “exponential growth” of some tax-slashing investment strategies popularized by the world’s largest hedge fund, AQR Capital Management.

“I am alarmed,” the Oregon Democrat wrote in a letter to Treasury Secretary Scott Bessent and Internal Revenue Service chief Frank Bisignano. “Something must be done to protect the integrity of our federal income tax system and stop wealthy Americans from treating their tax bills as optional.”

AQR runs a spectrum of so-called tax-aware long-short equity strategies that, with varying degrees of risk, can help investors reduce taxes on capital gains. Increasingly potent techniques using leverage and derivatives have exploded in popularity. A growing number of money managers now offer their own variations, which by some estimates have attracted almost $200 billion within just a few years.

Representatives for AQR didn’t immediately respond to messages seeking comment on Wyden’s letter. The firm has previously said it adapts strategies “to operate within all relevant guidance and regulations.”

Tax-aware equity strategies typically involve placing long and short bets on stocks, then exiting trades that lose money to lock in losses. Those can be used to erase tax liabilities from gains on other holdings. Meanwhile, profitable stock bets continue running unrealized, putting off payments to the IRS, potentially indefinitely.

Last month, IRS officials publicly warned that they intend to implement guidance and take other steps to curb certain strategies, including some that aim to eliminate taxes on ordinary income.

Wyden, the ranking member of the Senate Finance Committee, said that warning doesn’t go far enough.

Selling a losing investment to get a tax break isn’t abusive when it’s part of taking true market risks, he noted.

But manufacturing losses while “escaping any serious risk of loss is a tax-motivated sham,” the senator wrote. “I am disappointed that you failed to question this activity, given that this abusive tax structuring has been widely reported and is certainly approaching runaway-train status.”

–With assistance from Katherine Burton and Sridhar Natarajan.

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