Summer Ayers LePree (Holland & Knight, Miami) has posted Taxation of US Tax-Exempt Entities’ Offshore Hedge Fund Investments- Application of the Section 514 Debt-Financed Rules to Leveraged Hedge Funds and Derivatives and the Case for Equalization, 60 Tax Law. ___ (2008), on SSRN.  Here is the abstract:

Several tax issues involving hedge funds have been receiving substantial attention, both in the media and in Congress. One of these issues involves the immense amounts being invested in offshore hedge funds by tax-exempt entities such as university endowments and pension trusts. These investments are made offshore, in sunny spots like the Cayman Islands, to enable these tax-exempt investors to avoid tax liability. If the same investments were made domestically, the tax-exempt investors would be subject to tax at a rate of 35% on some portion of their investment income. This paper examines this disparate tax treatment and the history and policy behind the rules that give rise to it, and then considers several potential means of equalization.