Vanguard program draws hedge fund shares

BOSTON — Hedge fund shares fast are becoming an important source of new donations for the Vanguard Charitable Endowment Program. Over the past 15 months, the $1.62 billion donor-advised fund founded in 1997 by The Vanguard Group Inc. in Malvern, Pa., has accepted 20 donations of hedge fund shares, according to executive director Ben Pierce. The biggest individual donation was valued at $10 million, he said. “You get 50 people to do that in this country, and you’ve got some real, real, real money,” Mr. Pierce said, adding that donors can get breaks on capital gains taxes and fair-market-value tax deductions for their gifts. Vanguard, which never had received offers for hedge fund donations until recently, appears to stand out among its rivals. A check of donor-advised funds founded by Fidelity Investments of Boston, The Charles Schwab Corp. of San Francisco and T. Rowe Price Group Inc. of Baltimore turned up no hedge fund share donations. “There’s just been no demand from our donors,” Fidelity spokeswoman Jennifer Engle said of the Fidelity Charitable Gift Fund. The more than $4 billion gift fund, the nation’s largest donor-advised fund, would be willing to accept hedge fund shares, however, she said.
The T. Rowe Price Program for Charitable Giving also has never been offered hedge fund shares but would review any such offers with legal counsel and its board, T. Rowe spokesman Steve Norwitz said. Schwab Charitable Fund has accepted donations of limited partnerships but hasn’t been approached about hedge fund contributions, said Nicholas Hodges, chief administrative officer at Schwab Charitable, a charity that oversees the fund. But would it consider them? “Absolutely,” Mr. Hodges said, adding that Schwab Charitable uses Charitable Solutions LLC as an intermediary when accepting such non-traditional donations. The Atlanta-based company uses its own donor-advised fund to act as a holding tank for assets that are less liquid, such as real estate. “Gifts of these types of investments can actually produce unrelated-business income tax, and so to avoid that we tend to use Charitable Solutions for those sorts of contributions,” Mr. Hodges said. Still, the nearly $1.6 billion Schwab Charitable Fund’s offer to accept hedge fund shares “is not open to the world,” president Kim Wright-Violich said. One reason Schwab Charitable doesn’t “tout” that it would accept hedge fund shares is because such donations need to be large and would have to be evaluated on a case-by-case basis, she said. “If the hedge fund is not easy to value, if it’s not easy to liquidate, if there is something about its holdings that doesn’t meet a criteria that we’d have, then we’d have to turn it down,” Ms. Wright-Violich said. Indeed, Vanguard already has rejected seven offers to donate hedge fund shares, primarily due to liquidation-related restrictions set by the hedge funds themselves, Mr. Pierce said. At Vanguard, the minimum threshold for donating hedge fund shares is a gift of about $250,000, he said, adding that he was “very surprised” competitors haven’t seen similar interest in donating hedge fund shares. Vanguard has done some “spot marketing” around hedge fund donations but hasn’t been aggressively courting them, Mr. Pierce said. Valuation and liquidity are key factors when donating hedge fund shares, he said. Determining the shares’ value is important, because donors and advisers need to gauge the tax deduction. They also need to be concerned about liquidation restrictions, Mr. Pierce said. Hedge funds have different rules about when investors can liquidate their holdings, so donors need to plan ahead. Programs like Vanguard Charitable don’t want to own hedge fund shares for long, Mr. Pierce said. “They could lose a lot of value,” he said. Though it has a law firm review documents, Vanguard doesn’t use a third party to accept hedge fund share donations initially, Mr. Pierce said. Although donating hedge fund shares takes some planning, it can be a win-win for donors and charities which many financial advisers are unaware of, he said. Even so, some financial advisers said that hedge fund shares wouldn’t be the first thing they’d recommend clients donate. “It could make sense if there was a large unrealized gain within the hedge fund, [but] that’s not generally the case within hedge funds,” said William Baldwin, president of Pillar Financial Advisors Inc. of Waltham, Mass., whose firm manages $700 million for its predominantly high-net-worth clients. Hedge funds typically realize gains on a current basis, he said. Hedge funds tend to have fewer imbedded gains, because they trade more frequently, thereby realizing gains more quickly than many mutual funds, said Robert Glovsky, president of Boston-based Mintz Levin Financial Advisors LLC. Although donors potentially could avoid capital gains taxes if they donate hedge fund shares, the question is how much, he said. Liquidation also is an issue, said Mr. Glovsky, whose firm manages more than $1 billion for clients. In addition to restrictions about when clients can liquidate shares, hedge funds, for instance, may allow investors to take out 90% and make them wait a year for the rest. “These are not the most practical investments to donate, because one, there probably isn’t a large appreciation, and two, because hedge funds aren’t quite as liquid as individual stocks or mutual funds,” Mr. Glovsky said. “It’s not the first asset you would look to give away.”