Regulators set to act on hedge fund pay: CQS

Date: Tuesday, March 24, 2009
Author: Laurence Fletcher,

Financial regulators are likely to bring in rules allowing investors to sue if hedge fund fees and manager pay do not match performance over the longer term, said Michael Hintze, chief executive of hedge fund firm CQS. Hintze told the Reuters Hedge Funds and Private Equity Summit in London that a hedge fund manager who makes big gains one year but big losses the next could be sued if they take home a big pay packet the first year but give investors none of this back the next.

"I think you're going to be find there'll be more regulation, it's going to be more aggressive regulation ... talking about pay and how people are paid," he said.

The hedge fund industry has seen some enormous payouts in recent years to managers who have made good investment calls.

In 2007, for example, John Paulson earned $3.7 billion after betting investment grade mortgage bonds would be subject to default in record numbers, according to Alpha Magazine.

George Soros, whose Quantum Endowment fund rose 32 percent, earned $2.9 billion while James Simons, founder of Renaissance Technologies Corp, earned $2.8 billion.

"(Someone) can only earn that sort of money if he's actually made money for his investors. The real issue is does he make it one year and then lose it the next year?," said Hintze.

"I would suggest that given the (FSA) guidelines, if that did happen and there weren't a clawback there would be recourse through law."

Many hedge funds do not have a provision in their offering documents allowing investors a clawback if performance slumps.

Hintze added he didn't "see why you would need to" regulate in the area of prime broker leverage "because the market will re-adjust."

Hintze also said CQS which manages $6.5 billion in assets and has offices in London, Geneva, Hong Kong and the Cayman Islands, would not close any of its offices but could shift the weighting of its business if local taxes change.

"I don't think we'll ever abandon any office, but there's no question that if the tax does change you can start changing the critical mass in that area.

(Additional reporting by Martin de Sa'Pinto; editing by Simon Jessop)