The US Treasury has warned hedge funds about the rapid growth of 'tax alpha' strategies, which allow clients to lower tax bills through aggressive tax-loss harvesting techniques. This warning caused a 7% drop in shares of Affiliated Managers Group, a major player in this market. Between 2025 and April 2023, over $90 billion flowed into such hedge funds as wealthy investors sought innovative ways to reduce tax liabilities. Key hedge fund firms like AQR have developed these strategies using leverage and algorithmic trading. The Treasury plans to engage in dialogue with investment managers but did not announce new regulatory guidance. Officials expressed concerns that these strategies could diminish tax revenue for the government and urged caution for investors seeking seemingly lucrative offers.

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US Treasury sends warning to hedge funds over ‘tax alpha’ strategies

AMG shares tumble after officials question explosive growth of tax-loss harvesting investment techniques

The north entrance of the U.S. Treasury Department headquarters with a statue of Albert Gallatin in front. The Treasury stopped short of saying there would be new guidance for investment managers that could crimp some tax alpha strategies, but said there would be ‘serious dialogue with the market before positions harden’© 2025 J. David Ake

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Stephen Foley and Amelia Pollard in New York and Claire Jones in Washington

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The US Treasury on Tuesday said it would examine the explosive growth of strategies used by hedge funds to help clients lower their tax bills, warning that it will not turn a “blind eye to aggressive planning”.

The shot across the bows led to a 7 per cent fall in shares of Affiliated Managers Group, which owns a stake in AQR, one of the largest purveyors of so-called tax-aware investment strategies.

More than $90bn flowed into hedge funds offering “tax alpha” strategies between the start of 2025 and April this year, the FT previously reported, as investors sought a new twist on the age-old practice of tax-loss harvesting.

AQR and Quantinno, another hedge fund group set up by former AQR traders in 2018, have pioneered an approach that uses leverage and algorithmic trading to buy and short securities at scale, systematically realising losses on positions that can be offset against profits elsewhere.

That has spawned copycats and intense competition for clients that have attracted the attention of the Treasury, concerned that aggressive strategies are lowering tax income for the US government.

“We have seen pitch decks where they advertise that if you invest a million dollars, you may get a $300,000 ordinary loss,” Kevin Salinger, deputy assistant secretary for tax policy at the Treasury, told a Wall Street Tax Association seminar on Tuesday.

“I would advise investors to be cautious when something looks too good to be true because it probably is,” he said without naming any investment managers. His remarks were reported by Bloomberg.

The strategy has become wildly popular on Wall Street over the past year, as the wealthiest Americans have sought out new ways to lower their tax bills, even as certain corners of Wall Street have grown concerned that it has grown too quickly.

Yet AQR has previously said the “primary draw for investors” should be the returns from its strategies — the “pre-tax alpha”, or market-beating performance — before any tax benefits.

Salinger and Treasury colleagues stopped short of saying there would be new guidance for investment managers that could crimp some tax alpha strategies, but said there would be “serious dialogue with the market before positions harden”.

Shares in AMG fell 7 per cent to $340.58 on Tuesday. The group owns a portfolio of stakes in investment managers, of which AQR is among the largest contributors to its earnings, according to analysts.

The company has in recent months attracted short sellers betting that AQR’s tax-aware strategies could attract regulatory scrutiny.

Jay Horgen, AMG chief executive, addressed the controversy on an earnings call with analysts in May. “These tax-aware strategies . . . only speak to one aspect of AQR’s broad platform and its continued innovation,” he said.

The Treasury, AQR and Quantinno did not immediately respond to a request for comment.

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