The Morning Brief: Potential Tax Troubles for Renaissance

The Internal Revenue Service is challenging Renaissance Technologies’ tax strategy that has enabled founder James Simons and other investors in Renaissance’s $10 billion Medallion fund to avoid paying hundreds of millions of dollars in taxes. The IRS has reportedly called the technique “particularly aggressive,” since it converts gains from the hedge fund’s rapid trading strategy into long-term capital gains, which are taxed at a much lower rate than short-term gains. And don’t forget that Simons and others who trade rapidly also benefit from the carried interest rule, which allows the firm to pay the lower capital gains tax rate on its performance fee revenue.

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Oops! Several hedge funds appear to have unloaded big stakes in Pandora, the online radio company, just as its stock was set to take off. At the end of the first quarter, Tiger Global Management, which has racked up huge gains from Internet and tech stocks in the past few years, dumped its entire 8.45 million share stake; Contour Asset Management sold all of its 2.7 million shares. Andor Capital Management, headed by one-time hedge fund hotshot Dan Benton, sold all of his 1.4 million shares. Alas, the stock rose 3 percent Monday to close at $18.95. At one time during the day it was up more than 10 percent, after Morgan Stanley upgraded Pandora to Overweight from Equal Weight and set a target price of $24, calling the stock “the best pureplay exposure to the secular shift of radio dollars to online channels.” Pandora’s stock is up about 34 percent since the end of the March quarter alone. It won’t be known until mid-August or so whether any of these three firms got back into the stock in the second quarter.

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Several hedge funds enjoyed a little vindication Monday when shares of online game maker Zynga surged more than 10 percent to close at $3.07 after reports that Don Mattrick, the head of Microsoft’s Xbox division, was about to become the company’s new chief executive officer. In the first quarter, Barry Rosenstein’s Jana Partners took an initial stake of more than 25 million shares, while Tiger Consumer bought more than 13 million shares, boosting its stake to more than 17 million shares. Even so, the stock is still down 8.6 percent since the end of March and 22 percent since mid-March.

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UK-listed oil and gas companies are in the cross-hairs of activist investors. Potential targets include 3Legs Resources Plc, which is exploring for shale gas in Poland. It has drawn the attention of Boston-based investor Weiss Asset Management.

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Credit Suisse Monday told clients it is remaining overweight on the Japanese stock market and that its year-end target on the Nikkei 225 is 15,500. It closed Monday at 13,852.50. It asserted in a report that consensus earnings estimates are 20 percent to 25 percent too low: “We expect earnings to be upgraded, partly because of the yen and partly because current forecasts on sales growth are too pessimistic,” the investment bank added.

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