Lot Layering: The New Frontier for Hedge Fund Partnership Allocations
The Journal of Wealth Management, Summer 2020, 23 (1) 22-31; DOI: https://doi.org/10.3905/jwm.2019.1.097
21 Pages Posted: 21 Oct 2019 Last revised: 9 Feb 2021
Date Written: January 30, 2020
Lot layering may help hedge funds improve the alignment between tax outcomes and the economic experience of their investors. Although lot layering is considered by most tax experts to be the most precise method of partnership allocations, this commonly understood precision is reduced upon redemptions due to the cumbersome and uneconomic basis adjustment method stipulated by Treasury regulations. We propose that changes be made to the current regulations that could remedy this problem. Despite its unavoidable deficiency caused by the basis adjustment requirements under the current regulations, we believe that lot layering aligns tax and economics more closely than do any of the “aggregation” methods presently used by most hedge funds.
Keywords: Lot Layering, Partnership Allocations, Taxation of Partnerships, Securities Partnerships, Hedge Funds
JEL Classification: G23, G28, H20, H24, K34
Suggested Citation: Suggested Citation