Institutional Investor's Alpha Magazine - April 2008 - (Page 66)

Washington about them. In his eyes the industry’s abject failure to adequately represent itself in Washington had left it wide open to attack, and it needed to get to the nation’s capital posthaste and start politely introducing itself. Chanos learned soon enough, however, that few in the industry shared his views. That May, after he made a public pitch at a conference in Georgia for hedge funds to become more active in politics, none other than Kenneth Grifﬁn, founder of Citadel Investment Group, the $20 billion Chicago hedge fund ﬁrm, challenged him on his argument. “The view of our industry at the time,” Chanos recalls, “was, ignore Washington, and they will ignore you.” That sentiment was most clearly expressed by the musty Managed Funds Association, the industry’s main voice, which had been staunchly against any form of heightened government oversight ever since the issue was introduced in 1999 by then–Republican Representative Richard Baker of Louisiana. Chanos was so exasperated by the MFA’s obstructionism that he formed his own lobbying and policy group, the Coalition of Private Investment Cos. Times have changed, and today hedge fund managers are starting to realize that if they aren’t part of the debate in Washington, they won’t like the outcome. The whole regulatory landscape is in ﬂux, and government scrutiny of the hedge fund industry is penetrating almost every part of the business: how managers are taxed, from whom they can raise capital and how they are regulated. But the industry as a whole has failed to reach a consensus on almost any issue. Its newfound fondness for Washington is evinced by the money it is spending. SAC Capital Advisors, a $16 billion Stamford, Connecticut, hedge fund firm founded and run by Steven Cohen, donated $319,800 to the presidential campaign of Connecticut Senator Christopher Dodd. Paul Tudor Jones II’s Tudor Investment Corp., a $17 billion Greenwich, Connecticut–based ﬁ rm, has set up its own political action committee. Grifﬁ n’s Citadel paid $790,000 to Capitol Hill lobbyists last year, according to public ﬁ lings (see “The Money Trail,” page 68). Certain prominent hedge fund firms, among them the $35 billion quantitative powerhouse D.E. Shaw & Co. and $11 billion multistrategy shop Eton Park Capital Management, both based in New York, have gotten more involved on their own. THE BEST EXAMPLE OF THE INDUSTRY’S embrace of Washington is in the transformation of the MFA. When Treasury Secretary Henry Paulson Jr. last month proposed sweeping changes to the regulation and oversight of the ﬁ nancial markets, the MFA was front and center in expressing its support and the hedge fund industry’s new enthusiasm to work things out. “The MFA wants to be engaged in discussion and be viewed as a contributing source for whatever discussions may be ahead with regulatory reform,” says Baker, who is leading a new life today, having left Congress in February to take over as the group’s president. The very presence of Baker as a point person for the industry speaks volumes. Baker’s predecessor, Jack Gaine, had rightly or wrongly come to be associated with the organization’s obstructionist approach. With his contract due to expire at the end of 2007, he agreed, after discussions with the 20-member MFA board, to assume a different role in the organization. The board took it as an opportunity to revamp the group. Among those keen to attach a different face to the MFA were three new board members: Trey Beck, a managing director with D.E. Shaw; Michel Brogard, founder of New York–based Amber Capital Investment Management (and a member of Chanos’s lobbying group); and outgoing MFA Illustration by Harry Campbell for Alpha Power Players o one expects Congress to pass any new restrictions on hedge funds during an election year, but Democrats will probably still control both Houses next year, and they could ﬁ nd a willing partner in the White House for tax reform and a federal registration requirement. Here are some of the Capitol Hill heavyweights involved in hedge fund policy. SENATOR CHARLES SCHUMER, Democrat of New York and member of the Banking Committee and the Finance Committee, is especially inﬂuential when it comes to market regulation. As a top party fundraiser and chairman of the Democratic Senatorial Campaign Committee, he appreciates hedge funds’ deep pockets. Friends include Och-Ziff Capital Management Group founder Daniel Och and Tudor Investment Corp. founder Paul Tudor Jones II. SENATOR CHRISTOPHER DODD, Democrat of Connecticut, is from the home state of many a hedge fund. Chairman of the Banking Committee, he has been the biggest recipient of campaign largesse from hedge fund managers, but he’s no pushover, according to Jonathan Spalter, CEO of New York investment research ﬁrm Public Insight. Spalter says Dodd “is perceived favorably by many hedge funds in his district, but at the same time, he is not entirely predictable.” SENATOR MAX BAUCUS, Democrat of Montana and chairman of the Finance Committee, is pushing for reform on alternative-investment taxes. Baucus has been a proponent of raising taxes on publicly traded hedge funds and has speciﬁcally pushed for increasing the 15 percent capital gains tax rate on certain partnerships to the corporate income rate of 35 percent. SENATOR CHARLES GRASSLEY of Iowa is the ranking minority member of the Finance Committee and has been one of the most outspoken Republican critics of hedge funds. Last year he said regulators “need much more information about the activities of hedge funds in order to protect the markets from institutional insider trading and other potential abuses.” REPRESENTATIVE BARNEY FRANK, Democrat of Massachusetts, is chairman of the Financial Services Committee. Frank is heavily lobbied by the hedge fund industry but has proposed more market regulation. After the collapse of Bear Stearns Cos., he called for more central regulation of almost all ﬁnancial institutions — banks and hedge funds alike. REPRESENTATIVE CHARLES RANGEL, Democrat of New York, chairs the Ways and Means Committee. Any changes to the tax code have to go through him, and he favors the kind of reform Grassley supports. Rangel takes a populous tax-reform approach. “I am not trying to soak the rich,” he said last year. “I am trying to ﬁnd tax equity.” REPRESENTATIVE SANDER LEVIN, Democrat of Michigan, is on the Ways and Means Committee and has pushed for tax reform. Last year he co-sponsored a bill with Rangel and Frank that would raise taxes along the lines of what Baucus has proposed. — I.R.-S. N 66 • INSTITUTIONAL INVESTOR’S ALPHA • APRIL 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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