WASHINGTON (Bloomberg) — The US Treasury Department said it’s considering ways to end a “loophole” that allows hedge-fund managers to avoid taxes by routing their investments through reinsurance companies in low-tax countries like Bermuda.

The Treasury, in an August 9 letter obtained by Bloomberg News yesterday, told Senate Finance Committee Chairman Ron Wyden that it’s concerned about such arrangements and is weighing legislative and administrative responses.

Among the hedge-fund managers who have set up Bermuda insurance vehicles in recent years are John Paulson’s Paulson & Co and Steven Cohen’s SAC Capital Advisors LP. Cohen has since cut ties with his reinsurer, that was later bought out by a group of investors headed by Brian Duperreault to become Hamilton Insurance Group.

Dan Loeb of Third Point LLC also set up Third Point Re, which is now a publicly traded company.

In June, Wyden, an Oregon Democrat, pressed the Treasury Department to explain why hedge-fund insurers continue to proliferate after the Internal Revenue Service promised a crackdown in 2003.

The IRS has occasionally challenged aspects of such arrangements, Assistant Treasury Secretary Alastair Fitzpayne responded in the August 9 letter. Treasury has had “significant difficulties” in tackling the issue because the relevant laws are vague, Fitzpayne wrote.

Individual investors in hedge funds that trade frequently generally must pay the ordinary income-tax rate on their earnings each year, whether they withdraw money from the fund or not. The current top marginal tax rate is 39.6 percent.

By investing in a fund indirectly, through an insurer in a country with no corporate income tax, they can defer taxes until they sell the investment and pay the lower long-term US capital gains rate of 20 percent.

For tax authorities, the key is determining whether a company is truly in the insurance business, or just a US investment manager in disguise.

“While there may not be a bright line,” Wyden wrote yesterday in a response to Fitzpayne, “I am concerned that under the current tax administration practices and constraints there isn’t any line at all.”

Wyden wrote that he was “sceptical” that the Paulson and SAC vehicles, in particular, should have qualified as being in the insurance business.

Insurance liabilities were equal to only about one percent of each company’s assets in 2012, he said. Both companies sell a type of insurance known as reinsurance, which is basically back-up coverage for primary insurance carriers.

The average ratio for similar Bermuda insurers that year was 58 percent, according to a study prepared for Wyden by Congress’s non-partisan Joint Committee on Taxation. The company with the next-lowest ratio, another hedge fund-backed reinsurer, had a ratio of 12 percent. All the others had ratios that exceeded 24 percent.

The Paulson & Co vehicle was created in 2012, when top executives at the New York-based money manager put $450 million of their own money into Pacre Ltd. Pacre had no employees and sold far less reinsurance than the industry norm, and invested virtually all of its assets in Paulson & Co hedge funds.

Cohen’s SAC established another Bermuda vehicle, SAC Re, later that year. SAC Re was sold to other investors last year when he stopped managing money for outside clients.

His family’s money-management firm is now known as Point72 Asset Management LP.

Armed Leslie, a Paulson & Co spokesman, declined to comment, as did Jonathan Gasthalter, a spokesman for Cohen.

House Ways and Means Chairman Dave Camp, a Michigan Republican, this year proposed addressing the issue as part of a broader revision of the tax code, by defining how much insurance a company must sell to receive the preferential tax treatment. Wyden’s predecessor on Senate Finance, Max Baucus, had made a similar proposal late last year.