Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: accountclosed who wrote (51662)	3/12/1999 5:36:00 PM
From: Knighty Tin	Read Replies (1) \| Respond to of 132070

AR, As a former mutual fund portfolio manager who still holds the record for turnover, the Short-Short Rule was the bane of my existence and something I lobbied against and coerced my firm and The Investment Co. Institute to lobby against. Get ready for some heavy preaching. <g> Here is how it worked: 1. Mutual Funds do not pay taxes on their income or capital gains. They distribute most realized income to shareholders and the shareholders pay individual or corporate income taxes on the distributions. This is a benefit not offered to other types of corporations. Unfortunately, Congress, way back in the Depression, was worried about crazy fund managers manipulating stocks and bonds, so they put a limit on turnover. That limit was the short-short rule. 2. The Short Short Rule stated that no more than 30% of a mutual fund's total GROSS income could be derived from gains on shares held less than 90 days. This doesn't sound so gruesome, but it is a booger for an options player, as I was. And the key is the word gross income, not net. Let me give some example of how this hurt my returns (which were still pretty damned outstanding <g>): I buy a T-Bond at 100 and sell a call 9 months out for 4 points. This was a fairly regular type of trade in my Govt. options fund. But, being the brilliant fund manager I am (don't throw up, yet, it gets worse <g>), I bought the bottom and the bond goes up to 106 in two weeks. The call loses nearly all of its premium and is trading for $7. I would love to sell the bond for $106, buy back the call for $7, and rake in $3 in two weeks on that trade, annualizing out to some tremendous rate of return and, even more importantly, getting my shareholders money off the table before the bond traders wise up. Unfortunately, you and I know I have made $3. +$6 on the bonds, -$3 on the calls. But the IRS said I made +$6 on the bonds as gross income. That $6 goes into my short short pile. It is not offset by the $3 loss on the calls. Since I cannot end the year with over 30% of my gross income in the short short column, I am forced to hold many uneconomical positions beyond their optimal trade dates, sometimes months beyond. So, what is the penalty if I miss the 30% number? The fund is no longer a mutual fund and has to pay corporate taxes. The shareholders bought thinking they had a mutual fund, so they sue the management co. Since the numbers,$1.3 billion in income the last year, for example, were large beyond any chance the co. could cover them, this was a fate that meant death for the firm and, perhaps, for the parent. I kept a paper portfolio of trades I would do without the short-short (Time stamped and all. My stat assistant really loved this job <g>) and compared the results vs. the actual trades I had to do short-short retrained. The first year I ran the fund, short short cost the shareholders 7.43%, which I thought was criminal. It was finally repealed a couple of years ago. Praise the Lord and pass the ammunition. <g> MB