Hedge funds could help finance growth: lawyer

Date: Wednesday, November 12, 2008
Author: Svea Herbst-Bayliss, Reuters.com

Hedge fund managers could play a key role in jump starting the ailing U.S. economy if Washington offers them appropriate tax breaks, a prominent hedge fund industry lawyer said on Tuesday.

Sitting on billions of dollars in cash, dozens of hedge funds are looking for investments at the same time cash- strapped small and mid-sized companies search for new money to help them stay in business.

Together these unlikely partners could find a way to escape a debilitating liquidity crisis that threatens to push the country further into its deepest financial crisis since the Great Depression, Perrie Weiner, a partner at law firm DLA Piper told Reuters in an interview.

"There is a way out, but the answer lies not with the current government rescue plan, but rather with hedge funds," Weiner, who advises dozens of hedge funds as international co-chair of DLA Piper's Securities Litigation group said one day before speaking about the topic at an industry conference.

"All the government needs to do is to relax Sarbanes Oxley on middle market companies and create tax incentives for hedge fund investments," he said.

Hedge funds, often run by former Wall Street traders and bankers, have generally not been popular on Main Street at a time many of these loosely regulated portfolios have been blamed for accelerating the stock market's recent drop.

But the world's estimated 9,000 hedge funds also invest roughly $1.7 trillion and are sitting on a pile of cash looking for good ideas, industry experts and investors said. Hedge funds are said to be sitting on a pile of cash equivalents of as much as $400 billion, analysts at Goldman Sachs have estimated.

To get hedge fund money into smaller private or publicly traded companies, Weiner is proposing that the government suspend capital gains taxes for hedge fund investors if their investments make money.

If there are losses instead, he suggests the government allow investors to treat those as ordinary business losses rather than a capital loss.

"It is small businesses that create and provide the vast majority of jobs in the United States," Weiner said, adding "a plan of this sort promises a way to retain and create much needed jobs and employment" at a time the U.S. unemployment stands at 6.5 percent, its highest since 1994.

The companies would receive the money in the form of a PIPES, or private placement in Public Entity, financing, Weiner said, adding that for PIPE investments of $30 million or less, the government might consider relaxing or suspending the public company's Sarbanes Oxley compliance requirements.

Weiner's proposal is being circulated in Washington -- Senator Charles Schumer who heads the powerful Senate Finance Committee has seen it -- at a time the U.S. government's $700 billion bailout package for the economy is being criticized for not doing enough to reinvigorate the economy quickly.

While the U.S. Treasury pumped billions of dollars into some of the largest U.S. banks to help unfreeze credit, banks have not been lending that money out as quickly as lawmakers expected and this is hurting small companies.

The proposal also comes at a time when several lawmakers have suggested they plan to impose more regulations on hedge funds.

(Editing by Andre Grenon)