New York (HedgeCo.Net) – Banks that are helping hedge funds avoid taxes through a strategy known as “dividend arbitrage,” are being questioned by US regulators, the WSJ reports. The strategy can help clients cut taxes from as much as 30% of the dividend payment down to 10%.
According to Investopedia, dividend arbitrage is an options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before the ex-dividend date and then exercising the put after collecting the dividend.
“Banks and hedge funds say dividend arbitrage is an attractive, legal way to shrink tax bills through the differences in withholding rates around the world.” WSJ reports,” But Bank of America recently was questioned by U.S. regulators about potential legal and reputational risks from the maneuver, according to a spokesman for the Federal Reserve Bank of Richmond.” BoA said they were looking into the matter.
Hedge fund giants Citadel, Lansdowne, and Och-Ziff, were named in the article as having used and benefited from the strategy.
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