Hedge Funds

new_york_times:http://www.nytimes.com/2008/11/13/business/13hedge.html

By LOUISE STORY
Published: November 12, 2008
Hedge fund managers usually shun the spotlight. But five of them, billionaires all, are about to come under the glare on Capitol Hill.
The money managers — Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros — have been called by a House panel to discuss some of their trade secrets at a hearing on Thursday.
The topics are likely to include the managers’ use of leverage — the borrowed money that fuels investment returns on the way up but can be devastating on the way down — and the managers’ pay.
Also front and center will be the matter of oversight, one of the most contentious issues confronting the loosely regulated hedge fund industry. Regulation, or the lack of it, has been an issue since the 1990s, but it has come to the fore this year as questions have swirled about hedge funds’ role in the financial crisis.
Legislators want to know what went wrong on Wall Street, where hedge funds often play a huge part. The nearly $2 trillion industry manages money for some of the largest pension funds and contributes to the twists and turns of the markets. Hedge fund traders are among the highest-paid workers in finance, commonly making millions, and sometimes billions, a year.
The five managers to testify before the House Committee on Oversight and Government Reform were selected because they each earned more than $1 billion in 2007. They range from industry veterans like Mr. Soros, who is known for his liberal political views and donations, to traders like Mr. Paulson, who foresaw the problems in the subprime mortgage market and made billions betting against mortgage investments.
“Some experts call them the shadow banking system because they operate almost entirely unregulated,” said Representative Henry A. Waxman, Democrat of California, the chairman of the committee. “Very little is known about how they operate and the types of systemic risk they can generate.”
As policy makers consider overhauling the rules that apply to mortgage lenders, bankers and investors, hedge funds may also face new requirements for the disclosure of their trading methods. The Federal Reserve and other regulatory agencies have been studying the effects of hedge funds on the market, and questions linger over what the government would do if a large hedge fund began to collapse.
“On Capital Hill, there certainly is appetite for more hedge fund regulation,” said Houman B. Shadab, a senior research fellow at the Mercatus Center at George Mason University, who will testify at the House hearing. “It’s not obvious to me that hedge funds caused this crisis, but they have been affected by it, there’s no doubt about that.”
Three of the hedge fund managers who are testifying are facing huge losses. Mr. Griffin, who started trading in the 1980s out of his Harvard dorm room, has two funds down more than 30 percent this year. His company, Citadel Investment Group, is viewed as a bellwether for the industry because it trades in most types of assets, but two of his funds are down more than the 20 percent that is the average loss among hedge funds, according to estimates from Hedge Fund Research, a firm in Chicago that tracks the industry.
Mr. Falcone, a stock-picker who runs Harbinger Capital, is down after a disastrous September and October.
Mr. Simons is a former mathematics professor who runs Renaissance Technologies, a secretive trading operation in Long Island that makes bets based on computer models. One of Renaissance’s institutional stock funds is down 14 percent this year. However, Renaissance marketed the fund as one that would beat the broader stock market, which it is doing.
Hedge funds already follow some regulations. Funds that trade in commodities, for instance, have to disclose some holdings to the Commodity Futures Trading Commission. And large hedge funds are required to publicly disclose substantial stock holdings through the Securities and Exchange Commission. Since September, hedge funds have also disclosed short sales to the S.E.C., but not to the public.
The industry’s association, the Managed Funds Association, and a group of hedge funds met with regulators in October to discuss the effects of the crisis. The president of the hedge fund association is Richard H. Baker, a Republican who represented a district in Louisiana in the House of Representatives until earlier this year. For 12 years, Mr. Baker was chairman of the subcommittee on capital markets within the House Financial Services Committee.
Mr. Baker will not be attending the hearing because he was so recently a member of Congress. But analysts said he would be heavily involved in the battle to come over hedge funds.
“He was an early warner about Fannie and Freddie,” said Robert Litan, vice president for research and policy at the Kauffman Foundation, an organization dedicated to the promotion of entrepreneurship. “He’ll say, ‘Look, I called Fannie and Freddie correctly. I know a crisis when I see it.’ ”