Welcome to CanadianHedgeWatch.com
Monday, December 9, 2019

Hedge Funds Step Up Efforts to Avert Tougher Rules

Date: Tuesday, June 23, 2009
Author: Louise Story, New York Times

First hedge funds battled the markets. Now they are battling Washington.

After a tumultuous run for many of these funds, this normally secretive corner of Wall Street is mobilizing its money and power to fend off tougher oversight, higher taxes and much greater transparency.

At the center of the fray is Richard H. Baker, the former Republican congressman who now leads the industry’s main lobbying group, the Managed Funds Association.

This year Mr. Baker has tried to persuade hedge fund managers to support proposals to require funds to register with federal regulators — a move some big funds did not initially support, but one many others see as a bargaining chip that could avert even tougher restrictions.

Mr. Baker has also met with Treasury officials and has been the host of gatherings to raise money for Christopher J. Dodd, the Democratic chairman of the Senate Banking Committee. He has events planned for Barney Frank, the Democratic leader of the House Financial Services Committee, and Mr. Frank’s Republican counterpart, Richard C. Shelby.

The effort seems to be working. The proposals for hedge funds laid out by the Obama administration last week, as part of its overhaul of financial regulation, are strikingly similar to those that hedge fund lobbyists said they would accept. In an interview, Mr. Baker said that hedge funds were simply catching up in Washington with other financial companies, like banks and mutual funds, which have lobbied successfully for years.

“They were much more engaged and successful on that front than we were,” said Mr. Baker, the former chairman of a subcommittee of the House Financial Services committee.

Donations in the industry have long been slanted toward Democratic candidates, and $11 million of last year’s nearly $17 million in donations were doled out to Democrats, according to the Center for Responsive Politics.

In the last two years, fund managers have also spent about $15 million on lobbyists, quadruple the amount they spent in past years.

The registration of hedge funds, as well as private equity firms, has figured prominently in discussions of reform for years. Mr. Baker himself wrote it into a bill back in 1999, after the near collapse of the hedge fund Long Term Capital Management prompted federal officials to broker a Wall Street-led rescue.

Mandatory registration has been discussed for so long, in fact, that many in the industry regard it as the issue to fight over to avoid other, more pressing matters.

“It’s a red herring,” said Robert Sloan, managing partner at S3, which helps hedge funds manage their positions. “What other business in the world doesn’t want to register its name and number, the mafia? The real issues are counterparties, leverage, shorting, derivatives and exchanges.”

The Citadel Investment Group has been focused on those issues. Kenneth C. Griffin, the Citadel chief executive, testified in Congress about derivatives trading on Monday.

People who study the industry wonder if the hedge fund operators can stick together. Two years ago, funds split into competing groups after disagreements about the Managed Funds Association’s positions.

One of the groups, led by James Chanos, the prominent short-seller who runs Kynikos Associates, was an early supporter of registration. The group, called the Coalition of Private Investment Companies, has put up Web sites recently to educate the public on hedge funds and short-selling.

Also two years ago, some hedge funds split away from the association into a group to fight proposals to change the so-called carried-interest tax, which allows partnerships to pay capital gains taxes on income they earn over time. That loophole — under debate again in this Congress — generates billions of dollars in gains to hedge funds and private equity firms.

The Tudor Investment Group, one of the few funds to have set up its own political action committee, was an ardent opponent of the change. An economist from Tudor, Robert McNally, toured Washington last year using his expertise on oil as an entree but steering conversations quickly to carried interest, according to Congressional staff members.

Other hedge fund chiefs have visited the Hill on their own lately. James Simons, the former mathematics professor who runs Renaissance, met with lawmakers from a subcommittee of the House Financial Services Committee this month. And lobbyists for the Private Equity Council, which is trying to differentiate its members from hedge funds, met recently with staff members on that same committee.

Mr. Baker’s association listed a dozen bills as being of interest in an April lobbying disclosure form, that put its lobbying spending at $750,000 a quarter. Since then, other issues have arisen, like hedge fund rules in Europe that hedge funds have asked the Treasury Department to oppose. A spokesman for the Treasury Department said the Treasury met not only with hedge funds, but with other groups as well.

Mr. Baker said in an interview that if the carried-interest tax loophole were closed, he would push for a delay before doing so.

He also said no hedge funds should be deemed “systemically important,” a designation that would open them to greater scrutiny under the Obama administration’s proposals. People who follow the industry dismiss his position as jockeying.

“It’s disingenuous for anyone to claim in this day and age that no hedge fund is systemically important,” said Andrew W. Lo, a professor at the Massachusetts Institute of Technology who has studied hedge funds for more than a decade. “Frankly I don’t think any hedge fund manager in his right mind could argue that the industry needs no oversight.”