Hedge Funds Mobilize Against ‘Onerous’ Systemic-Risk Assessment

Date: Wednesday, December 2, 2009
Author: Robert Schmidt, Bloomberg

Hedge funds are fighting what they call a punitive provision in the U.S. House regulatory overhaul bill that requires the private investment pools to pay into a fund for rescuing failed companies ahead of other financial firms.

In a letter sent today to House Financial Services Chairman Barney Frank, the Managed Funds Association said it was “extremely troubled” by language in the panel’s systemic-risk legislation that requires hedge funds with more than $10 billion in assets to pay into a fund for winding down too-big-to fail companies. Other firms get assessed at $50 billion.

“The bill now perversely singles out hedge funds for more onerous treatment without any articulated policy rationale,” association President Richard Baker, a former Republican congressman from Louisiana, wrote in the letter. “We are troubled by this.”

Frank’s committee is set to vote tomorrow on the systemic- risk legislation, part of Congress’s overhaul of financial rules in the wake of the credit crisis and last year’s $700 billion Wall Street rescue. The measure would shift the costs for resolving firms away from taxpayers who paid for the banking bailout.

The provision singling out hedge funds was approved by the committee on Nov. 19 as part of an amendment introduced by Representative Brad Sherman, a California Democrat. It isn’t likely to be stripped from the bill in committee, so the hedge fund lobby will have to fight the measure either on the House floor or when it is reconciled with Senate legislation.

The Managed Funds Association estimates more than 20 hedge funds may be subject to the $10 billion threshold. If that is raised to $50 billion, no hedge funds would have to pay in. Absolute Return magazine, which ranks hedge funds, identifies Bridgewater Associates Inc. as the biggest, with $37 billion under management as of July 2009.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.