Wall Street is agog over the latest tax avoidance hedge fund strategies, pioneered by AQR Capital Management, which account for more than $100 billion in assets under management. But the critiques are coming — even from inside the hedge fund tent.
Nate Koppikar, cofounder of short-biased hedge fund Orso Partners, says the “tax avoidance” of these products has become an asset class that ultimately may not withstand regulatory scrutiny — and is also heavily reliant on significant leverage, creating a “ticking time bomb.” He even compares AQR’s products to Renaissance Technologies’ “options basket trade” that in 2021 resulted in a multi-billion dollar tax settlement with the IRS.
Known for his prescience in spotting the technology bubble in early 2022 and the trouble in publicly traded private equity firms in 2023, Koppikar is now shorting Affiliated Managers Group, which owns a minority stake in AQR. AMG’s CFO has said that the company expects AQR to account for more than 20 percent of its earnings this year. AMG did not return a request for comment.
AQR’s total assets surged by a record $65 billion in 2025 alone. According to Bloomberg, the firm’s tax-aware business had tripled in size last year by September, when it was $45 billion. By year-end, more than a third of its total assets of $179 billion were held in tax-aware funds. AQR now has about $68.8 billion in what it calls tax-aware products.
The timing of the recent growth is not surprising, says Daniel Hemel, a law professor at New York University who specializes in taxation and is familiar with these strategies. “The IRS has shown little willingness to crack down on loopholes under Trump. So the outlook for tax-aware funds is definitely better in April 2026 than it was in October 2024.”
Others have been copying AQR, including Hoon Kim, a former AQR principal who started Quantinno Capital Management, which now runs $48.4 billion in these strategies, according to its website. Others include Two Sigma and WorldQuant. Both firms declined to comment. Quantinno did not respond to an email requesting comment.
Koppikar argued in a recent letter to Orso’s investors, obtained by Institutional Investor, that while these strategies may appear legitimate, their economic outcomes could draw regulatory scrutiny.
He explained that when the sale of an asset creates a huge capital gain, to avoid paying tax on it, the owner can immediately put that money into an AQR account that goes both long and short numerous stocks, often using copious amounts of leverage.
The idea is to keep the long positions but cover the losers (theoretically mostly shorts) to create tax losses, he said. As long as no gains on the winners are realized, no tax is incurred on them. At the same time, the tax losses accumulate. And if an investor holds on to the gains until death, Koppikar explained, the assets can be passed on to heirs with a stepped-up basis under U.S. tax law, making the strategy one of “generational wealth transfer.”
Koppikar continued, “Looking under the hood, the true ‘alpha’ of this product is simply extreme tax avoidance. The mechanical goal of the fund is to aggressively realize net capital losses on the short side while perpetually deferring the realization of gains on the long side.”
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Michelle Celarier 