Hedge-fund billionaires were already struggling to keep investors from heading out the door. Then along came another problem: big tax bills.

David Einhorn, John Paulson, Steve Cohen and other high-profile managers cumulatively owed billions of dollars to federal, state and local governments for taxes, thanks to a 2008 rule change tied to offshore holdings that gave them a decade to comply. To make the payments, they had to pull some of their own money from their funds.

For some, the bill came at a time assets were already shrinking. Einhorn took out between $200 million and $300 million from his Greenlight Capital for taxes, according to Bloomberg estimates. Clients have withdrawn almost $3 billion from his funds in the last two years. Paulson, who has lost most of his clients at Paulson Co. since the financial crisis, also had to dip into one of his biggest hedge funds to pay the roughly $1.5 billion he owed.

Sacrificing assets is particularly painful now because replacing them is harder than ever. Clients aren’t exactly lining up — a net $9.8 billion came into hedge funds in 2017, a sliver of the $3.2 trillion in total industry assets — as many firms have faced multiple years of subpar performance.

“Most allocations to hedge funds are coming from redemptions from other hedge fund managers,” said Don Steinbrugge, head of hedge fund marketer Agecroft Partners.

Delayed Effect

Under the 2008 rule change, lawmakers decided that money managers who earned fees offshore and parked them there had to declare the money and pay taxes on it. Congress gave them until their 2017 tax bill came due to do so.

Some hedge fund titans complied over the last decade, but others waited as long as possible, benefiting from the magic of tax-deferred compounding — and hoping that someone would figure out a clever way for them to lower their tax obligations in the meantime. That didn’t happen.

The waiting trimmed some bills unintentionally. Both Paulson and Einhorn owed less than they might have because both of their firms have suffered losses that offset previous gains.

Paulson paid $500 million in taxes at the end of last year, and another $1 billion this year, the Wall Street Journal reported last week. Paulson recently closed some smaller funds at his firm, and pulled money from his Credit Opportunities Fund to pay the bill.

In 2011, Paulson managed $38 billion, about half of which was his own fortune, thanks in part to a fortuitous wager on subprime mortgages. Since then, wrong-way bets on gold, U.S. banks and pharmaceutical shares have sent assets tumbling and customers fleeing. Paulson now manages around $9 billion, most of it is his own money.

Einhorn’s fund dropped 20.5 percent in 2015, and even with gains in the subsequent two years, he was still almost 13 percent away from his high-water mark at the end of 2017. Greenlight’s flagship fund dropped about 14 percent in the first quarter.

Spokesmen for Paulson and Einhorn declined to comment.

Cohen and Edelman

A few hedge fund billionaires have been able to replace money they took out of their funds. Cohen pulled out close to $3 billion from his Point72 Asset Management for taxes. But he also raised about $3 billion early this year after reopening to outside clients following a Securities and Exchange Commission ban. His prior firm, SAC Capital Advisors, pleaded guilty to securities fraud and paid a record fine in 2013. A Point72 spokesman declined to comment on the tax bill.

Joe Edelman, who runs the $3.7 billion biotech hedge fund Perceptive Advisors, raised about $500 million from clients so he could take out that amount to pay taxes, according to two investors. A spokesman for Perceptive declined to comment. The firm has posted annualized returns of about 30 percent since it started in 1999.

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