Hedge Fund Managers Step Up Activism
Saturday, May 12, 2007; 1:41 PM
WASHINGTON -- With Congress always looking for new ways to boost tax receipts and protect individual investors, it's natural for hedge fund managers to worry that they have a bull's-eye on their chests _ especially now that word is out that some of them made more than $1 billion apiece last year.
Politicians of both parties have long criticized the lack of regulation of hedge funds, vast pools of capital that operate secretively, without having to make the disclosures that other investment firms such as mutual funds do. Adding to their explosive growth and unbridled operations, the jaw-dropping compensation of their executives has made hedge funds even more tempting targets to federal lawmakers.
That helps explain a recent surge in the hiring of lobbyists and stepped-up contributions to political action committees by managers in the trillion-dollar hedge fund industry and top officials of private-equity groups that have piled up billions in profits in recent years.
Hedge fund executives gave at least $2.3 million in campaign donations during the 2004 election, compared with $576,000 four years earlier, according to federal election data compiled by the nonpartisan Center for Responsive Politics. In 2006, that jumped to around $6 million.
"Particular industries reach a point where they get big enough that they realize that Congress can, intentionally or unintentionally, harm them through taxation or regulation," said Frank Fahrenkopf, a prominent Washington figure and lobbyist who headed the Republican National Committee in the 1980s.
Ever since a Fortune magazine writer and four pals scraped together $100,000 in 1949 to start what became the first hedge fund, the industry has flown under the public-policy radar. But the "absolutely obscene" profits, as one fund's managing partner called them recently, and the massive loss to a California public pension fund from a hedge fund investment blowup last fall have drawn new and unwanted attention.
Sen. Charles Grassley, R-Iowa, the senior Republican on the tax-writing Senate Finance Committee, and Sen. Max Baucus, the Montana Democrat who heads the panel, are looking closely at how the profits of managers of hedge funds, as well as private-equity funds, are taxed, and whether that should be changed.
One question on the table at a closed-door meeting committee aides held this week with tax practitioners and academic experts: Is it fair for the managers' portion of the funds' anticipated future profits to be taxed at 15 percent, the rate for capital gains, rather than at income-tax rates of up to 35 percent?
Depending on the answer, that could mean tens of millions of dollars in higher tax bills for executives like James Simons, a math whiz and former professor and Pentagon code breaker who founded hedge fund Renaissance Technologies Corp.
Simons pulled in $1.7 billion last year, topping the hedge fund executive pay list compiled by Alpha magazine, published by Institutional Investor. He was followed by Kenneth Griffin of Citadel Investment Group, $1.4 billion, and Sears Holding Corp. Chairman Edward Lampert, whose returns from his ESL Investments was $1.3 billion. Also high on the list were liberal activist George Soros, Quantum Fund, $950 million; and Steven Cohen, SAC Capital Advisors, $900 million.
It's far too early to say how politically difficult it might be to change the tax regime in a way that would withstand legal challenge. But hedge fund managers aren't taking any chances, especially in light of criticism that the U.S. tax code has become far too sympathetic to the wealthy in recent years.
"We're making a very, very big drive to grow our" political action committee, said John Gaine, president of the Managed Funds Association, which he called the largest and "loudest" of several hedge fund industry lobby groups. "There's a broader awakening of our membership to the need to pay attention to Washington."