SACHA PFEIFFER, HOST:
Some millionaires and billionaires are plowing money into a tax loophole in the U.S. to slash their taxes to zero. Our colleagues at The Indicator from Planet Money, Adrian Ma and Wailin Wong, explain who came up with it and how the strategy works.
ADRIAN MA, BYLINE: The story of this era's great American tax dodge starts with a man named Cliff Asness. Cliff worked at Goldman Sachs in the '90s and around that time also got a Ph.D. in finance.
LOUKIA GYFTOPOULOU: Cliff Asness is a very big, bigger-than-life personality.
WAILIN WONG, BYLINE: That's Bloomberg reporter Loukia Gyftopoulou. She covers the wealth management industry and has reported in depth on Cliff's hedge fund.
GYFTOPOULOU: He's, let's say, a mad genius, who's found this way to help rich people slash their tax bills potentially to the extreme.
WONG: After his stint at Goldman, Cliff struck out on his own. He set up a hedge fund called AQR Capital Management, and for years, AQR was a pretty typical hedge fund. But then a few years ago, Loukia says, they made a pivot. They shifted towards something called tax-aware investing.
GYFTOPOULOU: We help rich people slash their tax bills. That's what tax-aware investing means.
MA: One classic strategy for doing that is something called tax loss harvesting. That's when you sell off losing stocks and write off those losses to reduce your tax bill.
WONG: Cliff and his team at AQR Capital took this basic strategy and developed what's called a tax-aware, long-short strategy. Basically, it means that they create complicated investment portfolios purposely engineered to generate losses. A few years ago, AQR started offering this strategy to clients who had at least $1 million to invest. And Loukia says they exploded in popularity.
GYFTOPOULOU: They went from having 3 billion in these accounts to having 70 billion. This kind of puts a bit in perspective how much people want something that will help them not pay their dues to the government.
MA: And that's why in just a couple of years, AQR capital has grown into the world's largest hedge fund. And now this strategy is in such high demand among wealthy clients that other investment firms have started offering their own similar investment products.
WONG: Loukia says these funds are a sign of an anti-tax mood among the rich, but it's also occurring during a growing wealth tax conversation in politics. Policymakers in states like California, Maryland and New York are debating new taxes on the rich.
MA: I think a lot of people would hear this and feel like, it doesn't seem right. Do you think people would be justified in feeling that way?
GYFTOPOULOU: If you are a schoolteacher and you pay your full amount in tax, and somebody with a lot more money can avoid it, it's fair for people to wonder why.
WONG: It's possible the IRS may be wondering why too. Recently, Treasury department officials expressed concern about what they called potentially abusive tax avoidance strategies, and Congress could, in theory, close the loophole. Amid this uncertainty, some investment firms like Charles Schwab and Fidelity that work with AQR have pulled back on offering this type of account to new clients.
MA: And yet, Loukia thinks this isn't going away. And in fact, some money managers have even begun selling this tax avoidance tool to the masses.
WONG: Wailin Wong.
MA: Adrian Ma, NPR News.
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