Just how valuable can a tax-aware hedge fund be to a high earner in CA?

In addition to the diversifying return stream, there could be additional tax benefits.

Say you have $1m invested, annualizing at a net 10% return, and a 30% ordinary deduction each year.

Let’s assume you know what you’re doing and also have a mechanism in place to avoid taxes on any capital gains the fund realizes. (need additional capital to make this math work)

At the end of 10 years, the investment would be worth ~ $2.6m and you’d have ~$4.99M in cumulative tax.

Sounds crazy, but that’s just the math if you were able to reinvest the tax savings into the fund each year. The dollars in the fund are growing at closer to 25%, which results in larger and larger tax deductions.

But what about recapture?!?

• Just have some tax loss harvesting to offset gains on redemption
• Plan on keeping this investment in your estate for a step up
• Stop being a baby and pay LTCG upon redemption after having benefited from deferral and tax character arbitrage

This is why tax-advantaged investments in stocks, real estate, and hedge funds is so powerful for high earners.

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The figures above are hypothetical and for illustrative purposes only. They are not a projection, guarantee, or promise of future results. Actual returns, tax deductions, and tax savings will vary based on individual circumstances, fund structure, tax elections, and applicable law. This is not tax or investment advice — consult your tax advisor and investment professional before making any decisions.