A recent Revenue Ruling 2008-39 by the Internal Revenue Service (IRS) may have a direct impact upon the deductibility of certain expenses for funds of hedge funds and their investors.
The new ruling deals with the deduction of investment interest expense for trading funds and fund-level expenses incurred by fund-of-hedge funds.
The rules are complex, but the result for most high net-worth investors in hedge funds is that management expenses for the funds they invest in are likely to be subject to percentage limitations of which they were previously free.
It is likely that the ruling could also make a difference to hedge funds operating under a 'master-feeder' structure.
The new regulations have immediate effect.
A separate IRS ruling, 2008-38, dealing with the deductibility of interest expense did however confirm that investors would be able to continue to take advantage of existing deduction rules.
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