Interesting article in Bloomberg:  Hedge-Fund Technique by Harvard, Stanford Gets Senate Scrutiny, by Ryan J. Donmoyer:

Senate aides, looking for new sources of revenue, are studying how Harvard, Yale and Stanford are using offshore hedge funds to avoid tax bills. Staff of the Finance Committee discussed the matter yesterday with experts on taxes and hedge funds at a closed-door meeting on Capitol Hill [blogged here], according to four congressional aides who were present. The discussion was part of a broader review of the tax treatment of hedge funds and private-equity firms that the committee staff is conducting as lawmakers search for revenue to offset the costs of tax and budget priorities. …

Universities, pension funds, and foundations don’t owe tax on most investment proceeds, though they are required to pay “unrelated business income tax” when they receive profits from debt-financed investing. Hedge funds set up “blocker” companies in tax havens such as the Cayman Islands that convert such profit into dividends, which aren’t taxed. Congressional aides who attended the meeting said the inquiry has established that the endowments of many universities, including Harvard, Yale and Stanford, use this technique.