Institutional Investor's Alpha Magazine - December 2008 / January 2009 - (Page 27)

In 2009 hedge fund registration is all but inevitable. The big question is whether Congress will require that it be done through the SEC, the Federal Reserve System or some other regulatory body. Congress is also likely to make hedge funds pay higher taxes by eliminating their ability to keep proﬁts offshore and possibly forcing managers to treat them as ordinary income. The next crucial fight for hedge funds will be over more general reform of capital markets regulations. The stakes are high, as some of the issues in question — in particular, short-selling and leverage — are central to hedge funds’ investment strategies. “Now the focus is going to be more on systemic risk and preserving market integrity,” says Eric Vincent, chairman of the Managed Funds Association, the hedge fund industry’s main lobbying group in Washington. Vincent is also president of Ospraie Management, a New York–based, $4 billion commodities hedge fund ﬁrm that has suffered its own knocks. In September the ﬁrm began liquidating its ﬂagship Ospraie Fund, which was down nearly 40 percent for the year. Washington itself is in transition. President-elect Barack Obama has made it clear that he won’t follow in President George W. Bush’s footsteps when it comes to economic policy. Timothy Geithner, Obama’s nominee to replace Paulson at the Treasury, was a strong proponent of reforming the credit derivatives market during his ﬁve years as president of the New York Fed. Lawrence Summers, who will be Obama’s top economic adviser as head of the National Economic Council, was deputy Treasury secretary in 1998 during the collapse of LTCM (Geithner was at Treasury then too, as undersecretary for international affairs). Summers also has an insider’s perspective on hedge funds, having spent the past two years working part-time as a managing director at D.E. Shaw & Co., advising the $36 billion multistrategy giant on portfolio management and new strategic initiatives. Although their asset base is shrinking — at the end of October it was an estimated $1.6 trillion globally, down from nearly $2 trillion at the start of 2008 — hedge fund managers remain key participants in the markets. They are also among the biggest users of many of the instruments and practices under the most regulatory scrutiny, including over-the-counter credit derivatives and leverage. Although hedge funds in the past have shied away from the spotlight, this time they want to help shape the debate. “As important market participants, we would want a seat at the table,” says Vincent. Hedge funds were offered something like that in November, when managers Philip Falcone, Kenneth Grifﬁn, John Paulson, James Simons and George Soros were called to testify before the House Committee on Oversight and Government Reform as part of a series of hearings held by committee chairman Henry Waxman on the ﬁnancial crisis. The hearing was possibly the largest assemblage of wealth ever seen in Congress — the ﬁve men topped Alpha’s most recent list of best-paid hedge fund managers, each earning at least $1.5 billion in 2007 — and is a clear sign of the scrutiny that lies ahead for the industry. Although many of the major power brokers on Capitol Hill haven’t changed, their ability to get legislation passed has gotten a huge boost now that Democrats will have control of the White House and solid majorities in both houses of Congress. As chairman of the House Financial Services Committee, Massachusetts Representative Barney Frank PENSION PROTECTION T wo years ago hedge fund managers enjoyed a rare victory with the passage of the 2006 U.S. Pension Protection Act. The law put in place measures to ensure that corporate pension plans are fully funded, starting in 2011, but by more clearly defining the rules regarding how much corporate money hedge funds can run, it also effectively allowed them to manage more pension assets. That could change. Following the large double-digit losses by most U.S. pension plans in 2008, Congress is being lobbied to temporarily lift the funding requirements of PPA. The plans at the 1,500 biggest U.S. companies were just 80 percent funded at the end of November, according to human resources consulting firm Mercer. With the economy in recession and no end in sight to the market volatility, the fear is that most plans will not be able to reach the funding target in time. Geoff Manville, head of legislative affairs at Mercer, doubts Congress will reopen PPA. But he thinks it is likely it will look at the question of limiting pensions investments in hedge funds. “There will be talk about it,” he says. Iowa Republican Senator Charles Grassley, ranking minority member of the Senate Finance Committee, is ready for the debate. An outspoken critic of the opacity of hedge funds, Grassley is concerned about regular workers losing their retirement savings. He announced in November his intention to reintroduce legislation in early 2009 that would require hedge fund managers to register with the Securities and Exchange Commission. This would be the ﬁrst major effort in the Senate to address registration since the U.S. Court of Appeals for the District of Columbia overturned it in a June 2006 ruling, two months before PPA was signed into law. The push for more protection for pension beneﬁciaries invested in hedge funds got a boost from a September U.S. Government Accountability Ofﬁce report. It suggested that the Department of Labor provide better guidance to pension plans investing in hedge funds, a recommendation that has been heartily endorsed by Grassley and Senate Finance Commit tee chairman Max Baucus, a Democrat from Montana. “It is critical that we take great care as pensions invest more in hedge funds and private equity,” Baucus said at the time. “If the pension investments sour, the retirement savings of millions of Americans could suffer.” — I.R-S. will be leading the charge on market reform in the House, and he will have an ally in California Democrat Waxman, the new chairman of the Committee on Energy and Commerce. Frank’s counterpart on the Senate Banking, Housing and Urban Affairs Committee, Connecticut Democrat Christopher Dodd, will probably take a more moderate stance (his state is home to some of the world’s biggest hedge fund ﬁrms). Iowa Republican Charles Grassley, the ranking minority member on the Senate Finance Committee, has no such conﬂict. He has already said he will reintroduce legislation requiring registration (see box, above). One of the top priorities of legislators and regulators will be the OTC derivatives market, which despite its DECEMBER 2008/JANUARY 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 27

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

Institutional Investor's Alpha Magazine - December 2008 Contents Letter from the Editor Longs & Shorts Inside the Trade Pension Corner The Good Guys Interview: Stanley Fink Cover Story: The New Regulatory Reality United States: The Usual Suspects Europe: Flirting with Unity Asia-Pacific: What Asian Contagion? In Theory In Focus Strategies Research Center Alpha Bytes Unhedged Commentary

Institutional Investor's Alpha Magazine - December 2008

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