The US Treasury has announced it will scrutinize the rapid expansion of hedge fund strategies designed to reduce clients’ tax liabilities, cautioning that it will not overlook aggressive tax planning. The announcement, made on Tuesday, triggered a 7 percent drop in shares of Affiliated Managers Group, which holds a stake in AQR, one of the leading firms employing so-called tax-aware investment techniques.

Since the beginning of 2025, more than $90 billion has flowed into hedge funds promoting “tax alpha” strategies, which represent an evolution of traditional tax-loss harvesting methods. Firms such as AQR and Quantinno—a hedge fund founded by former AQR employees in 2018—have developed approaches that utilize leverage and algorithmic trading to simultaneously buy and short securities. This allows them to systematically realize losses on certain positions that can offset gains elsewhere in investors’ portfolios, thereby lowering overall tax burdens.

The growing popularity and proliferation of these strategies have raised concerns within the Treasury about their impact on federal tax revenue. Kevin Salinger, deputy assistant secretary for tax policy at the Treasury, spoke at a seminar by the Wall Street Tax Association on Tuesday, citing examples of marketing materials claiming investors could receive unusually large tax losses, such as a $300,000 ordinary loss on a $1 million investment. He urged caution among investors, suggesting that offers appearing too advantageous may carry hidden risks.

Wall Street has seen increasing demand for tax alpha products in the past year, particularly from high-net-worth individuals seeking innovative tax reduction methods. However, some market participants have grown uneasy about the speed and scale of the strategy’s growth.

AQR responded by emphasizing that the Treasury’s inquiry is part of an information-gathering process rather than an immediate move toward new regulations. The firm reiterated its commitment to operating within existing guidelines and regulatory frameworks while aiming to deliver strong pre-tax returns—referred to as “pre-tax alpha”—to investors. AQR maintains that the primary appeal of its strategies is market outperformance, not just the associated tax benefits.

While Treasury officials did not announce any forthcoming regulatory measures, they indicated plans for ongoing conversations with industry stakeholders before any policy decisions would be finalized. Representatives from the Treasury and Quantinno did not provide comments on the matter.

As the use of tax alpha strategies continues to expand, the Treasury’s engagement signals heightened scrutiny of financial innovations potentially affecting tax revenue, underscoring the balancing act between fostering investment returns and safeguarding the tax base.