Does the employee fund actually beat the S&P 500?
I am a big tech Staff SWE considering an offer at a top quant hedge fund (back office/support role).
One of the purported big benefits is "the employee fund" - apparently employees do not pay fees on fund returns. I'd start $800k invested in the fund, with some portion vesting every year, and some of my yearly bonus being deferred into it as well.
However, one thing that is unclear to me is whether this is actually a superior strategy to holding the same amount in the S&P in high taxation regimes like NYC. From my understanding, because these funds trade so frequently, I'm paying ~51% taxes on all gains every year, whereas with the S&P I only pay taxes when I sell (and I can sell in a cheaper state.)
Even if the fund returns, say, 20% gains before fees y/y, isn't that just 10% after taxes and thus not terribly different? Someone, please help me understand why the employee fund is so coveted, since I'm clearly not getting it! (I have zero financial background, as you can probably tell!)
At a pod shop and was in a similar predicament. My thought process was ease of mind / capital preservation. Our fund averages ~16% annual returns (so 8% after tax assuming a 50% tax regime, actual comes out to slightly higher), which is in line if not slightly below the S&P 500. However, our employee fund is market neutral and has never had a down year. Especially in times like this where it feels like the broader market is heavily tech-weighted and on the cusp of the AI bubble potentially popping, putting some of my money in the employee fund gives me peace of mind that even though I’m giving up returns, my money is more hedged, and to me that peace of mind is worth the loss in potential gains.
This is helpful, so if I understand correctly, employee funds are not "golden tickets" that will make you rich, but they do help with wealth preservation. Essentially you're accepting slightly lower returns for much lower risk?
Depends on the fund you’re at. If you’re talented and lucky enough to be working at RenTech, that very much could be a golden ticket. If you’re at some LO SM like Lone Pine, I wouldn’t treat your investment as capital preservation but rather more like extra beta. If you’re at some pod shop that runs market neutral, then capital preservation is fair.
At the end of the day, it all depends on your personal financial situation and risk appetite. Personally, I have roughly 1/3 of my overall assets in the employee fund (with the other 2/3 split essentially as 60% public markets, 20% private markets as an accredited investor, and 20% cash / money market). My personal allocation allows me to still take on risk and according returns with most of my net worth, but also have the comfort that a third of my net worth (that if the market or my employment goes to shit, I can live comfortably on for a long time) is very hedged and has little chance of disappearing while still easily beating out inflation / CoL every year.
This is very much how LPs look at the multistrat product as well... it is a bond replacement, not an equity replacement. Bonds have similar tax and wealth preservation properties but a much lower return.
i’m curious as to why employee fund investments get taxed as income and not capital gains?
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