More FET Reform Proposals

In mid-July, 2008, two more bills were introduced into Congress proposing to reform the federal estate, gift, & generation-skipping transfer tax system.

• House Bill 6499 was introduced on July 15, 2008, in the House by Rep. Jim McDermott (D-WA).

• Senate Bill 3284 was introduced on July 17, 2008, in the Senate by Senators Tom Carper (D-DE), Patrick Leahy (D-VT) and George Voinovich (R-OH).

The two bills were described in an article originally posted by the Association for Advanced Life Underwriting, as reposted on the North Carolina Estate Planning Blog, under the heading "Two Federal Estate Tax Bills Introduced" (07/25/08). See also: "Bipartisan Senate Bill Would Fix Estate Tax at 2009 Level" (08/01/08) posted by Elder Law Answers.

House Bill 6499 is described as "The Sensible Estate Tax Act of 2008" that would "reform the estate and gift tax." However, the sponsor's own Congressional website does not carry a press release about it, and does not even list federal estate tax as a key political issue. There was almost no mention in the media as to the introduction of this bill in the House.

Senate Bill 3284, on the other hand, was explained and promoted by its sponsors in a Press Release issued July 17, 2008, entitled "Sens. Carper & Voinovich Introduce Bill to Fix Estate Tax" describing the bipartisan legislation as "More Fair to Taxpayers and More Fiscally Responsible."

The legislation introduced today would freeze the estate tax at its projected 2009 levels so any estate valued at more than $3.5 million per individual or $7 million per couple will be taxed at a 45 percent rate. That level will remain constant, while being adjusted upward with inflation.

In recent years, several legislators have introduced bills that would permanently repeal the estate tax. However, these proposals have been rejected by many senators, including Sens. Carper and Voinovich, who have said a complete repeal of the federal estate tax is too expensive given our severe budget deficit. Instead, Sens. Carper and Voinovich have urged leaders to find a middle-ground on the issue.

“I believe our bipartisan approach to fixing the estate tax problem is a fair way of handling the issue and would cost roughly three-fifths as much as legislation making the repeal permanent,” Sen. Carper said. “Rather than giving up on finding a solution to the estate tax dilemma, I hope other senators will see our proposal as an acceptable middle ground.”

Under the Carper-Voinovich legislation, only two estates out of every 1,000 would be subject to the estate tax. That amounts to just 11,000 estates by 2012, compared to a much larger 50,000 estates that were being taxed back in 2001 when the tax started being phased out. * * *

On The Estate Planner's Listserv, operated by the American Bar Association, reactions to these newest bills were cautious, and, in some cases, dismissive, because of the "rough draft" format of the bills, the highly political nature of the issues, the unknown fiscal impact of such tax reform, and the uncertain constituency of a new Congress to convene in January, 2009.

These bills offer more of a framework with points for discussion than a definitive plan with details; and thereby add to the ongoing discussion. For background about that debate, see EE&F Law Blog postings:

• Fundamentals of Taxation, before Reform (04/18/08)
• FET Reform: Senate Hearings, Round 3 (04/07/08)
• US Senate Fin Cte to Hear FET Alternatives (03/11/08)
• CRS Summarizes Seven FET Proposals (03/03/08)
• Joint Tax Cte's Report & Hearing on Federal Estate Tax (11/14/07)
• Fed Est Tax Reform Bill Introduced (08/16/07)
• Fuzzy Future of the Federal Estate Tax (05/24/07)
• FET Reform/Repeal: Update (09/26/06)
  

Most commentators agree, however: 2009 will be the year of federal estate tax reform.

Websites on Estate & Financial Planning

Forbes magazine offered a "Best of the Web Directory" in 2005 that included a section on "Estate Planning" websites; and those listings remain useful for consumers seeking orientation on basic estate and financial planning concepts.

The listings by Forbes were comprehensive as to consumer topics:

[Y]ou can find more than 3,000 sites reviewed by Forbes.com Best of The Web, each selected according to five criteria: Content, Design, Speed, Navigation and Customization.

In prefacing the "Estate Planning" list of websites, Forbes representative Leigh Gallagher explained why consumers might benefit from reviewing them:

It's never too early to start planning for your legacy. But if you haven't started yet, the Web offers more resources than ever to learn the basics and to keep up with ever changing estate planning laws.

We all have to go someday -- but being prepared can make a world of difference for those you leave behind.

These are the estate planning websites recommended by Forbes:

• Nolo.com
• EstatePlanningLinks.com
• Lawyers.com
• Prudential: Estate Planning
• SmartMoney.com
• Transamerica
• E.F. Moody Jr.
• MSN Money
• National Association of Financial and Estate Planners

Another Forbes representative, Nikhil Hutheesing, produced a separate, slightly longer, distinct list of websites on the related topic of "Financial Planning" described as follows:

There is a giant bulge of Boomers now beginning to realize that they are closer to retirement age than they would like to be.

Many are turning to financial planners, but the first thing these Web savvy workaholics typically do is see if they can help themselves by going online.

The sites below all cater to self-directed investors wanting to take control of their financial health. Some of the sites also offer referrals to advisers or have made their best services available only through advisers.

There are a few holdouts that provide a wide range of tools and assessment -- for a fee in most cases -- but most financial planning sites just provide articles, conveniences like bill payment programs, and simple calculators.

That list of fifteen websites providing information about financial planning can be found here.

Both these topical listings were cataloged under a broader heading of "Personal Finance & Careers" that contained other interesting topics, such as 401(k) Advice, Financial Calculators, Legal Advice, Life Insurance, Mortgages, and Tax Planning. And then there was my favorite: Time Management.

Keeping in mind the passage of time since the selections, and the self-interest or promotional messages interwoven by some of the vendors into their posted materials, nevertheless the vendor and association websites selected by Forbes still offer considerable resources for consumers today.

PA "Assisted Living Residence" Regs Proposed

Proposed Assisted Living Residence Regulations for Pennsylvania have been submitted to the PA Bulletin for publication on August 9, 2008, according to a representative of the Pennsylvania Assisted Living Consumer Alliance.

The regulations were already submitted to the Pennsylvania Independent Regulatory Review Committee consistent with the regulatory review process in Pennsylvania.

Thus, although not yet published, the form of the proposed regulations regarding "Assisted Living Residences", along with ten pages of analysis required for the submission for review, can be viewed online or saved as a document here (PDF, 116 pages).

PALCA notes that "[i]nterested persons need not wait until publication in the PA Bulletin as the regs can be immediately downloaded for review from the IRRC website at this link."

Public comments on the proposed regulations will be due one month after publication, that is, by September 8, 2008.

According to the submission to the PA IRRC by the PA Department of Public Welfare, "the proposed Assisted Living Residence regulation establishes the minimum standards for building, equipment, operation, care, program and services, training, staffing and for the issuance of licenses for assisted living residences operated in Pennsylvania." The authority for issuance is the Public Welfare Code, Act of June 13, 1967, P.L. 31 No. 21 (62 P.S. §§211, 213 and 1001-1087).

PA DPW notes that "In enacting Act 56, the General Assembly found that it is in the best interests of all Pennsylvanians that a system of licensure and regulation be established for assisted living residences in order to ensure accountability and a balance of availability between institutional and home-based and community-based long-term care for adults who need such care."

In explaining "the compelling public interest that justifies the regulation," PA DPW states:

Currently, there is no regulation of assisted living residences in Pennsylvania.

However, assisted living residences are a significant long-term care alternative which combines housing and supportive services. They are designed to allow people to age in place, maintain their independence and exercise decisionmaking and personal choice.

This regulation establishes the minimum standards for licensure of assisted living residences to allow individuals to age in place.

The regulation protects consumers' health and safety, privacy and autonomy while at the same time balancing providers' concerns related to liability and individual choice.

The proposed regulations were developed with input from at least thirty-five "stakeholders", noted the submission:

The Department developed the proposed regulations in consultation with the Assisted Living Residence Regulation Workgroup that was comprised of industry stakeholders, consumers and other interested parties.

The Department held meetings with the workgroup on October 17, 2007, November 6, 2007, November 27, 2007, December 11, 2007, January 8, 2008, January 29, 2008, February 11, 2008, February 26, 2008 and April 1, 2008.

Over thirty-five stakeholders were invited to participate in the workgroup, which included disability advocates, advocates for older adults, consumers, union representatives, an elder law attorney, public housing agencies, trade associations for profit and nonprofit long-term care nursing facilities and many other interested parties.

Over the course of the meetings the Department provided the workgroup with several draft versions of the proposed regulations and solicited their comments and recommendations.

The proposed regulation was also discussed at the Long-Term Care Subcommittee of the Medical Assistance Advisory Committee (MAAC) on June 13, 2007, August 8, 2007 and April 9, 2008.

The Assisted Living Residence proposed regulation were also discussed at the Medical Assistance Advisory Committee (MAAC) on June 28, 2007 and at the Consumer Subcommittee of the MAAC on March 23, 2007.

The Assisted Living Residence regulation was also discussed at the Stakeholder Planning Team on April 9, 2007.

Nevertheless, PALCA intends for its member agencies to submit comments consistent with its mission to protect residents of assisted living facilities, and promises that such comments will be available on its website. For background about PALCA, See: PA EE&F Law posting New PALCA for Assisted Living Standards (07/22/08).

Many present facilities would be affected by new regulations; and many more new facilities would consult such regulations in their start up.

It is anticipated that 100 assisted living residences will be licensed in FY 2009-2010; 150 assisted living residences in FY 2010-2011; 200 assisted living residences in FY 2011-2012; and 250 assisted living residences in FY 2012-2013.

Other persons or organizations involved in this growing aspect of the long-term care industry, and affected by the proposed regulations, can submit comments until the deadline, September 8, 2008.

"Restricted Management Account" Discount Ignored

On July 21, 2008, in its Internal Revenue Bulletin 2008-29, the IRS issued Revenue Ruling 2008-35, which addressed "whether an interest in a restricted management account (RMA) will be valued for transfer tax purposes without any reduction or discount for the restrictions imposed by the RMA agreement."

The IRS answer: Yes -- that is, no discount.

On July 28, 2008, fellow practitioner Robert Wolf, Esq., of Pittsburgh, PA, drew this Ruling to the attention of the readers of his emailed P & T Hot Tips. He gave me permission to post his comments, which I have edited somewhat.

Bob puts Revenue Ruling 2008-35 into context, and speculates about its effects:

Over the years we have heard many ideas suggested by esteemed estate planners that seem a little too good to be true, such as the Family Limited Partnership, where the donor could keep control of the family business but effectively transfer most of the value out of her estate, and many others.

One of these is the restricted management account that locks the client's funds away for a number of years, partly to give the investment manager the freedom to invest long term with no worries about investor bailouts, but also to make the assets subject to a substantial discount for federal gift and estate and generation-skipping transfer tax purposes.

Well, we know what the IRS thinks of the Family Limited Partnership deals. The cases brought by the IRS and decided in its favor have made planning with them more difficult and less advantageous.

Nevertheless, esteemed estate planners such as Roy Adams and a number of others have suggested that restricted management accounts ought to work. The argument is that restrictions on liquidity and transfer make their fair market value less than the fair market value of the underlying assets.

Well the IRS doesn't think so, and has issued Revenue Ruling 2008-35 that says so. The IRS ruled that no discount is allowable to such transfers, loosely analogizing the accounts to an IRA account, and also citing Internal Revenue Code Sections 2036 and 2703 for reasons to disregard the restrictions.

The underlying tax policy is that a taxpayer should not be able to create restrictions to his or her own property, and then cite those restrictions as to why the property is less valuable for transfer tax purposes, where a motivating reason for the restrictions is to reduce the transfer tax value of the property.

I have not noticed any cases on this topic, but I guess if you are using an RMA and expect to get a discount on a transfer or for estate or GSTT tax, you will have to get the Tax Court to overturn this Revenue Ruling. You won't get any discount from the IRS without it.

Bob commented accurately about the past promotion of restricted management accounts as a device proposed to obtain a valuation discount on a federal tax return. For example, see "The Restricted Management Account – An FLP Alternative" by Andrew T. Wolfe, CPA, JD, LLM; and "Restrictive Management Accounts" by Nathaniel E. Clement, which includes examples posed by noted estate planning attorney Roy Adams, of Chicago.

Read the sections of Revenue Ruling 2008-35, per its Table of Contents, to see how the IRS dissected, then declined, the arguments claiming a valuation discount on the Form 706 (Federal Estate Tax Return) for a decedent's assets previously placed into an RMA:

• ISSUE
• FACTS
• LAW
• ANALYSIS
• HOLDINGS
• DRAFTING INFORMATION

This is the Ruling's holding:

The fair market value of an interest in an RMA for gift and estate tax purposes is determined based on the fair market value of the assets held in the RMA without any reduction or discount to reflect restrictions imposed by the RMA agreement on the transfer of any part or all of the RMA or on the use of the assets held in the RMA.

Accordingly [in the example provide in the Ruling], A’s gift to B in Year 2 is valued at $10X, the full fair market value of the assets transferred into B’s separate RMA. Similarly, the amount to be included in A’s gross estate for estate tax purposes with respect to the RMA is $55X, the full fair market value of the assets in the RMA at A’s death.

Revenue Ruling 2008-35 was the subject of an article posted online by the law firm McGuireWoods, entitled "IRS to Disallow Valuation Discounts for Restricted Management Accounts" (July 21, 2008).

Whether one agrees or disagrees with [the] Service, this Revenue Ruling makes the use of RMAs as a substitute for family limited partnerships or limited liability companies far less attractive to customers and clients because of the Service’s repudiation of RMAs as a technique to obtain valuation discounts.

Individuals who have been considering RMAs will now want to consider family limited partnerships and limited liability companies. Despite the attacks made by the Service on family limited partnerships and limited liability companies in the last several years, many family limited partnerships and limited liability companies have withstood attacks by the Service. Thus, family limited partnerships and limited liability companies continue to be viable techniques for obtaining valuation discounts if they are established and managed appropriately.

Individuals currently holding RMAs will now want to pursue other techniques. Of course, if the term of the RMA cannot be shortened, using the assets in the RMA in other techniques may be impossible before the end of the term.* * *

For a graphic display of the immediate effect of Revenue Ruling 2008-35, see "Restricted Management Account (RMA)", where the text explaining the pros and cons of this proposed wealth saving device now is greyed-out, under a heading now annotated in bold letters: "TECHNIQUE ON HOLD" [Source of graphic above].

"I knew I was going to take the wrong train, so I left early."

-- Yogi Berra, per Wikiquote

"Filial Support" in PA? Really?!?

On July 22, 2008, the Summer 2008 issue of Adventures in Law and Aging (PDF, 3 pages) -- the Newsletter of the Elder and Consumer Protection Clinic, of Penn State - Dickinson School of Law -- was posted online.

Published in that Newsletter was an important sidebar authored by the Director of the Clinic, Professor Katherine C. Pearson, about filial support obligations of adult children towards their destitute parents.

With express permission from Katherine, I reproduce her comments, published in the Newsletter, about this controversial issue:

“SO, WHAT IS THIS ‘FILIAL SUPPORT’ THING?”

In 2008, that’s the most frequent question I get from curious members of the public — and from attorneys who are handling cases where a claim is made under the Domestic Relations Code, 23 Pa.C.S.A. § 4603.

Since the 2005 “codification” of the Commonwealth’s musty old indigent support law, Pennsylvania has become the most active state in the country for lawsuits asserting that adult children should pay for the care of their parents, i.e., claims for “filial support.” The viability of each filial support claim turns on key facts and the statute deserves a careful reading.

In response to questions about filial support suits, I’ve written a 2008 supplement “Filial Support Obligation in Pennsylvania: Adult Children, Parents, and Spouses,” for Jeffrey Marshall’s treatise, Elder Law in Pennsylvania, available from PBI in July.

Also, copies of past short articles I have written about this law are available on my personal Web page, along with the text of the statute itself and a table of similar laws in other states.

Katherine provides resources online about "filial responsibility" at her Professorial Webpage under the heading Recent Articles and Materials on Filial Responsibility and Support Laws:

• Invited article: A Midnight Tale of Filial Support [PDF, 2 pages], from the Pennsylvania Family Lawyer, Volume 26, Issue No. 4, December 2007 at pages 146-7.
• Invited Essay: Finances, Families and Filial Laws, From the NCFR Report, December 2006, Volume 51:4, Copyright 2006; National Council on Family Relations. Used by permission.
• Re-Thinking Filial Support Laws in a Time of Medicaid Cutbacks — Effect of Pennsylvania's Recodification of Colonial-Era Poor Laws, 76 Pa. Bar Q. 162 (No. 4, 2005)
• Pennsylvania's Filial Support Law, Adopted by Pennsylvania Legislature in July 2005
• Filial Responsibility and Support Statutes and Cases in the U.S. (with hyperlinks to statutes)
• Over, Under or Inconclusive? Using Filial and Family Support Laws to Combat Elder Exploitation — Presentation at the 32nd Annual Gerontology Conference hosted by Oregon State University on April 3-4, 2008.
  

What is the public policy behind this Commonwealth's law that requires adult children, who reside in Pennsylvania, to support their indigent parents if they also reside in Pennsylvania? Furthermore, is such an obligation expected, and is it fair?

In her thoughtful December 2007 article, Katherine speculated about a reason for the renewed filial support law in Pennsylvania, but also identified its broader effects.

The state fears drowning in red ink as well, and the state sees filial support laws as a means of requiring the care-facility to go after a child who has manipulated a parent or a parent's finances to benefit personally. That's the message of the most recent published appellate decision, Presbyterian Medical Center v. Budd [PDF, 19 pages], 832 A. 2d 1066 (Pa. Super. 2003).

However, Pennsylvania's law is not limited to claims against such "bad" children, who may have breached fiduciary duties under a power of attorney or committed outright fraud. * * *

The queries posed at the conclusion of her article remain pertinent, since there has been little debate, and no progress, in resolving the effects of the broad legislation readopted by the Pennsylvania Legislature hastily in 2005 and signed by the Governor as that year's Act 43:

Is a "filial support" law the way right direction to go in seeking payment sources for long-term care? Should the moral obligation that many people feel to provide financial assistance for long-term care for family members be backed by a legal support obligation?

If this is a good law, perhaps the public needs to understand it exists so that it stops operating primarily as a retroactive collection tool, a "gotcha law."

And if it isn't the right law for Pennsylvania in modern times, perhaps the hour has come to seek open debate and action by the legislature.

Update: 08/05/08:

Patti Spencer, Esq., of Lancaster, PA, noted this posting in an article posted July 28, 2008, on her Pennsylvania Fiduciary Litigation blog, entitled "Am I My Mother's Keeper?":

Neil Hendershot has an excellent post today on Pennsylvania's Filial Support Statute. He quotes Professor Katherine Pearson's sidebar in the Summer 2008 issue of Adventures in Law and Aging, "“SO, WHAT IS THIS ‘FILIAL SUPPORT’ THING?” and provides many citations to useful resources. * * *

Patti provided a history of "filial support" laws in Pennsylvania and adds her comments. I recommend reading her article.

Update: 08/07/08:

For a more generic consideration of childrens' responsibilities for their parents debts, and for suggestions how children might address the problem with their parents before the obligations become overwhelming, read "Should you worry about your parents' debts?" by Liz Pulliam Weston, posted on MSN Money:

With finances more complicated, the credit easier and the scammers relentless, more and more members of a frugal generation are deep in debt. Here's how you're affected -- and how to help.

Update: 07/16/09:

Two articles were published by national media in one week that focused on Pennsylvania's "filial responsibility" law and provided personal examples of their recent selective enforcement. See: PA EE&F Law Blog post PA's "Filial Responsibility" Law in the News (07/16/09).

Hedge Funds as an Investment, Pt. II

Fiduciaries investigating hedge funds as an investment should read the Press Release, dated April 15, 2008, issued by the United States Treasury entitled "PWG Private-Sector Committees Release Best Practices for Hedge Fund Participants" (HP-927).

It announced release of a report, which should become "required reading" for any fiduciary contemplating hedge fund investments: the "Report of the Investors' Committee to the President's Working Group on Financial Markets" (PDF format, 205 KB, 63 pages).

I asked in yesterday's posting Hedge Funds as an Investment, Pt. I, "What should a fiduciary know about hedge funds?" This Report contains the answers.

The Press Release summarized the importance of the Report:

Two blue-ribbon private-sector committees established by the President's Working Group released separate yet complementary sets of best practices for hedge fund investors and asset managers today, in the most comprehensive public-private effort to increase accountability for participants in this industry. * * *

The Press Release (also available in PDF format here) noted the fast-paced, high-level, top-priority nature of the study that led to the Report's issuance:

The PWG tasked the committees, selected in September 2007 and comprised of well-respected asset managers and investors, with collaborating on industry issues and developing a set of best practices for their respective groups of stakeholders. Their work was based on the PWG's Principles and Guidelines Regarding Private Pools of Capital issued in February 2007, which sought to enhance investor protections and systemic risk safeguards. The best practices may be viewed at the committees' websites, www.amaicmte.org.

The PWG includes the heads of the U.S. Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The best practices for the asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. * * *

During that process, on September 17, 2007, a Pennsylvanian, Blaine F. Aikin (managing partner and chief knowledge officer of fi360, of Sewickley, PA), published an article in the "international newspaper of money management", Pensions & Investments, also posted online, entitled "Hedge funds present fiduciary hurdles"?

His excellent article began with a caution to fiduciaries regarding hedge funds:

While it might be true that no investment is inherently imprudent, some start with a presumption of guilt until proven innocent.

Hedge funds fit into this category because of the inherent hurdles they present to fulfilling a fiduciary’s duties to their client. * * *

He then proposed a five-part inquiry by any fiduciary who contemplated a hedge fund investment:

1. Are you permitted to hold this type of investment?

2. Do you believe financial markets are inefficient and that such inefficiencies are exploitable?

3. Can you adequately evaluate the positions held in the hedge fund investment and the associated risks of those positions?

4. Are the fees and expenses of hedge funds fair and reasonable?

5. What recourse do you have if something goes wrong?

After explaining the risks underlying, and reasons for, each inquiry, he offered this advice:

Only after you have considered these questions and conclusively proven that your fiduciary duties are being met can you feel comfortable in selecting hedge fund investments.

Fiduciaries operate in a special relationship of trust and legal and ethical responsibility for managing the money of others. When it comes to hedge fund investing, the obligations attendant to the fiduciary role point directly to the line of inquiry presented above.

In my view, the hurdles that must be cleared to justify making hedge fund investments are too high for most fiduciaries. Those that do decide to proceed down the hedge fund path should be prepared to demonstrate that they did so properly by having a compelling case for their conduct prepared in advance.

When, on April 15, 2008, U.S. Treasury Secretary Henry M. Paulson, Jr. made remarks upon the issuance of the Report, reproduced in a Press Release, entitled "Secretary Paulson Opening Remarks at Release of Best Practice Recommendations by PWG Private Sector Committees" (HP-926), he mirrored the need for accountability regarding private pooled investments, including hedge funds:

Last September, experienced industry professionals from some of the most respected institutions agreed to serve on two new committees to address market issues and develop "best practices" for private pools of capital – one from the perspective of investors and one from the perspective of asset managers.

The President's Working Group encouraged the committees to use the PWG principles and guidelines as the foundation for their best practices, and they have done so. As we said when announcing these committees --- we want the world's highest investor protection standards; we want to guard against systemic risk and keep the United States the most competitive financial marketplace in the world. * * *

The Press Release (HP-926) noted key components of the Report:

The best practices for investors include a Fiduciary's Guide and an Investor's Guide.

The Fiduciary's Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio.

The Investor's Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. * * *

Both best practices documents recommend innovative and far-reaching practices that exceed existing industry standards. The recommendations complement each other by encouraging both types of market participants to hold the other more accountable.* * *

The Executive Summary of the Report, reproduced (along with the Report's "Table of Contents") by Asiaing online, noted its importance to private investors, institutional investors, and fiduciary investors:

Thousands of institutional and individual investors meet the legal requirements to invest in hedge funds, but it is not always appropriate for them to do so.

Prudent evaluation and management of hedge fund investments may require specific knowledge of a range of investment strategies, relevant risks, legal and regulatory constraints, taxation, accounting, valuation, liquidity, and reporting considerations.

Fiduciaries must take appropriate steps to determine whether an allocation of assets to hedge funds contributes to an institution’s investment objectives, and whether internal staff or agents of the institution have sufficient resources and expertise to effectively manage a hedge fund component of an investment portfolio. * * *

Are you an investor or a fiduciary who is considering a hedge fund investment, or do you advise one about such an investment? Then you must read the Report.

Update: 07/29/08:

On July 29, 2008, The Wall Street Journal's "Wealth Report", noted in a posting entitled "Wealthy Investors Cling to Hedge Funds" that "[d]espite all the bad press about hedge-fund performance recently, a Bank of America survey found that hedge funds are still popular with the rich."

The survey, of 400 clients with $3 million or more in investible assets, found that more than half of those with hedge-fund investments were “satisfied” with the funds’ performance.

That compares with an approval rating of just 30% for traditional investments such as stocks and bonds. Other alternatives also fared better than stocks and bonds: a 41% approval rating for venture capital, 41% for real-estate, and 35% for private equity. * * *

So the poor performance of hedge funds beats the horrid performance of stocks. The survey also found that investors who had held hedge funds the longest were the most satisfied. Those who had been investing in hedge funds for 10 years or more were twice as likely as those with less experience to be “extremely satisfied” — probably because they had all those heady days of double-digit returns to factor in to their assessment.

The critical question is whether the rich will keep putting money into hedge funds. Funding for new funds is drying up: In the U.S. the number of new funds has dropped by half. It’s about the same in Europe. * * *

Update: 09/06/08:

NBC News broadcast a Dateline NBC segment by correspondent Dennis Murphy on Friday, September 5, 2008, at 10:00 p.m., entitled "Mystery of the missing millionaire."

A wealthy hedge fund manager whom the rich and powerful trusted with their fortunes suddenly disappears – and the money was gone too. Turns out, all along he'd been playing a dangerous game with very high stakes. Dennis Murphy reports.

The description of the investigative report explores "hedge funds" and their managers, and reinforces some of the concerns expressed in recent years:

This giddy era, before the market’s recent swan dive, was dubbed “the new gilded age” and some of the young men becoming as rich as any Rockefeller or Andrew Carnegie of days past were masters of something known on Wall Street as a "hedge fund."

Top hedge fund managers have been reported to make anywhere from $100 million to a billion dollars a year. They do it by making already wealthy people and institutions even richer.

Someone who wanted in on the hedge fund action in the worst way was Samuel Israel III. He was a Wall Street guy who’d worked his way up here and there in the ‘80s and ‘90s as a trader. * * *

A hedge fund, like the one Sam Israel was starting up, is like a private club for wealthy investors. It usually takes a million dollars to get in the door.

And the very best hedge fund managers are a high priesthood of brilliant traders. They place complex bets that can pay off handsomely, even when others are losing their shirts. * * *

The website for the recent broadcast segment referenced a previous helpful MSNBC commentary, "What is the deal with hedge funds?" (08/27/07), by John W. Schoen, Senior Producer.