More Federal Spending Means Higher Taxes, Says Leon Cooperman

Tax breaks like those on capital gains will end, hedge fund hotshot predicts, if either Trump or Biden wins.

Taxes are on the way up, post-crisis, regardless of who wins in November, according to hedge fund potentate Leon Cooperman. The reason: a leftward shift in the country, no matter who wins the presidency in November.

The founder of heavyweight hedge fund firm Omega Advisors, which he converted to a family office in 2018, Cooperman said the tax revamp “likely” will change capitalism forever.

“When the government is called upon to protect you on the downside, they have every right to regulate you on the upside,” Cooperman told CNBC. “So capitalism is changed.”

Not a lot of prognosticators have turned to the question of how the added federal debt will be handled in years to come. Congress passed a $2.2 trillion rescue package last month to counter the economic devastation wrought by shutting down the economy in an effort to curb the coronavirus. Much more federal spending is on the way.

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As a result, Cooperman, a staunch Republican, predicted that taxes must rise no matter which party wins the White House. And that will affect some of Wall Street’s favorite goodies. The only difference will be how quickly tax rates go up, he indicated.

“Quickly if Biden wins, slowly if Trump wins, but taxes have to go up,” he said. “So things like carried interest, capital gains taxes, the ability to roll over real estate sales tax-free, all that stuff is going to have to be eliminated. For the good, by the way.”

Previously, in 2017, Cooperman was in favor of President Donald Trump’s tax cuts, which lowered individual rates for wealthier Americans and dropped the corporate tax to 21% from 35%. He indicated these reductions would help the economy.

The tax breaks Cooperman mentioned as in the crosshairs, however, have been around for a while. Capital gains rates, 15% and 20%, are considerably below the levels that well-heeled people are subject to for ordinary income taxes.

Carried interest, the management fee that general partners of private equity and hedge funds charge (typically 2% of assets under management, although some go for less), is only taxed as a capital gain. Commercial real estate owners benefit from a break that allows them to sell a property, and if they put the return into another building, escape taxation.

Billionaire Cooperman (Forbes puts his net worth at $3.2 billion) has previously said that he supported higher tax rates, yet he has his limits. He drew the line at a proposal by Sen. Elizabeth Warren of Massachusetts, during the Democratic presidential primary contest, to institute a “wealth tax.” 

Never one to tamp down his rhetoric, Cooperman lambasted the notion, saying it would lead to “unnatural acts, be near impossible to police, and is probably unconstitutional.”

Warren, who quit the race and now supports presumptive Democratic nominee Joe Biden, wanted to impose a 2% levy on household wealth above $50 million and slap on an extra 1% tax on fortunes over $1 billion. In 2011, Cooperman accused then-President Barack Obama of waging “class warfare” for what he saw as disparagement of the wealthy.

Cooperman expressed optimism that sections of the economy could start to reopen in May, although he cautioned that a nationwide recovery would be slow. “If you think of a sporting event or a concert, I can’t imagine they’ll come back until we have a vaccination,” he said. 

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World’s Largest Pension Fund Ups Scrutiny of Index Investments

Japan’s $1.5 trillion retirement program wants to improve its passive management strategy. 

The world’s largest pension fund is boosting its oversight of index providers. 

The Government Pension Investment Fund (GPIF) in Japan launched its own cloud-based data and analytics portal to track and select indexes and support its own passive strategies, the pension fund said Thursday. 

Called Index Data Entry and Analysis System (IDEAS), the data platform will aggregate environmental, social, and governance (ESG), financial, and non-financial data poured into the system, which collects information from index providers. GPIF hired data provider FactSet to power information in the system. 

“GPIF is taking an extremely advanced approach to improving index selection that will drive results for asset owners,” Yumi Tanaka, regional director of FactSet Japan, said in a statement.

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It’s a highly unusual move from the government pension fund, as asset owners typically do not interact directly with index providers, let alone build their own proprietary data centers. 

But the Japan GPIF, which relies heavily on passive strategies, has said for some time that it’s looking for returns in a highly saturated market. Valued at $1.5 trillion, the pension plan is mostly forbidden from managing assets in-house, considering it too costly. 

Instead, it’s searching for better opportunities within passive management, according to a working paper earlier this year from Kenji Shiomura, senior director of ESG strategy at the fund. Shiomura argued the fund should contract directly with index providers and choose benchmarks likely to generate greater returns for its managers. 

“Asset owners are the ones whose performance and appraisals are impacted the most by proper benchmark selection and quality improvement,” the report read. 

Paying license fees directly to index providers would also help GPIF better ascertain performance and gauge fees for its fund managers, the report said. 

“This leads to greater passive manager revenue transparency and is a step toward establishing a more logical fee structure in which managers are rewarded according to their actual contribution,” the report read. 

Passive managers who are typically focused on reducing index tracking errors and lowering costs could concentrate instead on spotting opportunities around index rebalancing, the report said. Accounting for climate change and ESG-related risk should also be part of a fund manager’s repertoire, Shiomura said. 

The retirement system also hired CTC to house its data center. SAS Institute will provide the analytics software and Amazon Web Services was hired to power the cloud computing system.

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Japan, European Development Bank Launch Social Bond Initiative

 

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