Eric Hovde’s firm invested millions in offshore tax havens

Eric Hovde, the Republican U.S. Senate candidate from Wisconsin, oversaw hedge funds that stashed hundreds of millions of dollars in the Cayman Islands, a popular offshore tax haven.

Hovde launched his campaign challenging incumbent Democratic Sen. Tammy Baldwin last year. He is expected to easily win the Republican primary on Aug. 13.

In 1994, Hovde co-founded Hovde Capital, an asset management firm that oversees hedge funds. According to the Hovde Capital website, Hovde was responsible for “investment strategy and day-to-day oversight” of the company’s investments.

Asset management firms are required by law to file an ADV Form with the U.S. Securities and Exchange Commission (SEC). An ADV Form provides information about the firm and holdings under its management.

According to ADV Form disclosures, Hovde Capital managed four hedge funds domiciled in the Cayman Islands. Between 2004 and 2013, the combined value of these funds ranged from $13 million to $920 million. 

One of these funds came under scrutiny during Hovde’s failed 2012 campaign for U.S. Senate. The Financial Institution Partners Master Fund (FIP) was incorporated in the Cayman Islands in 2008 and dissolved in 2014. Thirteen percent of the master fund was owned by Hovde Capital. The Milwaukee Journal Sentinel reported that FIP was set up specifically for foreign investors.

Hovde’s 2012 campaign said that Hovde had a controlling stake in FIP but did not personally own it. They said he was a minority investor in U.S. Delaware, a feeder fund that pooled money from various sources to invest in FIP. According to personal financial disclosures from Hovde’s 2012 campaign, Hovde reported personal holdings in FIP between $1 million and $5 million.

Financial Institution Partners, LTD was another feeder fund for FIP that was also controlled by Hovde Capital. This fund was incorporated in the Cayman Islands in 2002 and liquidated in 2013. Its highest reported value was $477 million in 2009. Hovde’s 2012 campaign said he was a director of Financial Institution Partners, LTD but had no personal investments in it.

A similar dynamic existed between the Hovde Credit Opportunities Fund, LTD and the Hovde Credit Opportunities Master Fund, both of which were incorporated in the Cayman Islands and overseen by Hovde Capital before being dissolved in 2014. 

The Hovde Credit Opportunities Master Fund was the flagship fund of Hovde Capital. In 2013, the financial publication Hedge Fund Alert reported that Hovde personally managed the master fund. In his 2012 financial disclosures, Hovde reported personal holdings of $25 million in the fund.

Historically, hedge funds domiciled in the Cayman Islands have allowed investors from outside the U.S. to avoid paying U.S. taxes. Offshore hedge funds may also be able to defer paying U.S. taxes on their profits. There are also non-tax reasons for hedge funds to bank offshore, including ease of setup and robust legal protections for investors.

It is not illegal for U.S. hedge funds to operate in the Cayman Islands, but the funds are required to comply with U.S. banking laws and regulations. There is no indication that Hovde Capital has been penalized for federal violations.

The Economic Policy Institute reported in 2017 that offshore tax havens resulted in billions of lost tax revenue.

In March 2012, Hovde was asked by an interviewer with WFAW Radio if he would crack down on offshore banking if elected to the U.S. Senate. He said he “wouldn’t necessarily” and made a distinction between companies that bank offshore for tax purposes and those that do so for other business reasons.

“If it’s done for business necessity, it’s one thing,” Hovde said. “But if it’s just, you know, set up, and I’ve seen this happen, so many cases, where things are set up for, for tax reasons, which is unfortunate. One of my businesses is an asset management business. The only way we can have foreign investors invest in this company, or into this country is through offshore tax vehicles.”

Hovde has endorsed extending the Tax Cuts and Jobs Act of 2021, which created tax cuts for wealthy Americans and big corporations.