Monday, December 17, 2012

Hedge Fund Managers as Public Intellectuals

Today's WSJ has an opinion piece by a prominent University of Chicago graduate.  Cliff Asness argues that taxes affect investment behavior.  As Washington prepares to make large changes to the tax code, Cliff argues that we need to anticipate the consequences of these tax changes.  Many Keynesians implicitly assume that there is no behavioral response to changes in tax incentives and Dr. Asness disagrees.  Here is a quote:


"The bond market offers particularly compelling evidence that people focus on after-tax cash flows when making investments and that they will, contrary to Mr. Buffett's assertion, alter their investment behavior based on tax rates. The yield on tax-free municipal bonds is almost always considerably lower than the before-tax yield on taxable corporate bonds of similar risk. Despite his claim that taxes don't matter, we can be sure that Mr. Buffett would not hold corporate bonds in his taxable portfolio if, before taxes, they yielded only the rate on otherwise similar tax-free munis.

This sort of investment decision is just one example of how taxes affect our actions. Consider that George Lucas sold Lucasfilm Ltd., including the Star Wars franchise, toDisney DIS +1.00% this year at least partially to avoid a likely coming hike in the capital-gains tax. While Mr. Buffett is telling us taxes don't matter, here's proof that taxes are stronger than The Force."
Cliff may not remember but he took an econometrics class with me at the University of Chicago in the late 1980s.  I remember that he was a tough guy with a real cocky attitude.  I thought he was really smart.  His performance at AQR shows that I was right.   Cliff isn't the only hedge fund titan I know.  Eric Mindich and I used to hang out in a quiet town called Scarsdale.
Are Cliff's views "self serving"?  Yes --- of course but the shape of the equity/efficiency tradeoff frontier needs to be understood.