Institutional Investor's Alpha Magazine - April 2008 - (Page 67)

chairman Adam Cooper, who is general counsel for Citadel. The new MFA chairman, Eric Vincent, president of New York–based Ospraie Management, says he wants hedge funds to take a more open approach to lawmakers (see “Power Players,” opposite page). “I care about this industry,” Vincent says. “I’ve thought a lot about the business, and I wanted to get more involved. I want the trade association to become more proactive.” A major test of the industry’s new activism is likely to be the issue of taxation. Last year Congress introduced a slate of proposed changes to the tax code that governs alternative investments like hedge funds. It drew immediate criticism from some quarters, and the private equity industry in particular was up in arms over a push to tax performance fees typically kept in offshore tax havens. Some hedge fund managers were opposed as well to a move to prevent managers from investing their compensation tax-free offshore. Though the proposals faltered, they are all but sure to be resurrected — leading Democrats in both houses and on the presidential trail have made clear it that they remain committed to hedge fund and private equity tax reform. Lawmakers may ﬁnd a more compliant industry than they would expect. Some managers privately admit that they support some of the tax proposals, and others advocate striking a compromise. But any changes will undoubtedly face opposition from within the hedge fund community, including some longtime MFA members. The MFA was founded in 1991 as the Managed Futures Association by an inﬂuential group of commodity trading advisers, among them Tudor, Moore Capital Management and Caxton Associates, most of which wanted to keep their distance from Washington. “Like lots of industries, the hedge fund industry for many years largely ignored Washington,” concedes Darcy Bradbury, director of external affairs for D.E. Shaw. “But collectively, we came to realize that if you don’t tell your story, someone else is going to tell it for you.” Carmencita Whonder, a former aide to Senator Charles Schumer, the New York Democrat who has been prominent in congressional dealings with hedge funds, agrees. “You may not like a piece of legislation, but sometimes you can lessen the blow if you are part of the process,” she says. The hands-off approach failed in two crucial ways: First, the hedge fund industry was unwilling to negotiate, insisting on maintaining an all-or-nothing stance. Second, it never truly tried to make friends on Capitol Hill, to reach out in a sustained way to staff aides or to implement a program to teach policymakers about hedge funds. The industry was barely known in Washington before September 1998 and the collapse of Long-Term Capital Management. In a turn of events echoed by the failure this year of Bear Stearns Cos., LTCM, a highly leveraged Greenwich, Connecticut, hedge fund, went into a death spiral, threatening the U.S. banking system. Congress suddenly became painfully aware of hedge funds and of their potential to disrupt entire economies. Lawmakers promptly Photo by David Deal for Alpha began to look at how to oversee the industry — Congress held hearings, the President’s Working Group on Financial Markets wrote a report, and a bill was offered. The LTCM ﬁ asco showcased an issue that remains unresolved to this day: the lack of transparency in hedge funds. For most of LTCM’s existence, few knew how drastically leveraged it was and how its bets had put the whole global web of banking at risk. Under the eye of the Federal Reserve Bank of New York, Wall Street investment banks devised a bailout, and a broader meltdown was averted. In addition, then-Congressman Baker introduced the Hedge Fund Disclosure Act of 1999, requiring the very biggest hedge funds — those with $3 billion or more in assets — to report their investment positions to the Fed. Baker called it a reasonable response. The hedge fund industry fought back. In its public comments, the MFA called Baker’s bill “a costly form of bureaucratic window dressing,” which would probably “obscure rather than illuminate important risk management issues.” The organization continued its hostile rhetoric as the debate progressed. Baker’s legislation ultimately died, the victim of a Richard Baker, the new president of the Managed Funds Association, is a former Republican congressman who once sought federal regulation of hedge funds. APRIL 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 67

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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