Lobbying For Laissez-Faire
Hedge funds have always operated with few rules and scant oversight, their investment strategies shrouded in secrecy. But with the Securities & Exchange Commission poised to propose on July 14 that they must register with the agency, the funds have emerged from the shadows to fight the attempt to rein them in. Armed with PowerPoint presentations and piles of campaign cash, industry officials are beating a path to top policymakers to deliver their message: Hands off hedge funds.
Experts in aggressive trading, hedge funds are now learning to throw their weight around Washington, too. In the past six months, John G. Gaine, president of the Managed Funds Assn. -- the trade group for the $800-billion industry -- has met or spoken with SEC Chairman William H. Donaldson, Federal Reserve Chairman Alan Greenspan, Treasury Secretary John W. Snow, and House Financial Services Committee Chairman Michael G. Oxley (R-Ohio) to hammer home objections to the SEC plan. The new rule would let the SEC review hedge funds' investment strategies and check whether they are obeying the nation's securities laws. It also would raise the bar for people seeking to invest in most hedge funds: They would have to show a net worth of $1.5 million, up from $1 million.
Hedge-fund execs meanwhile have been busy writing checks to Washington pols. Employees of 17 funds that BusinessWeek identified as major donors have given $1.6 million to federal candidates and party committees for the 2004 elections, up from just $987,000 in 2002, according to the Center for Responsive Politics in Washington, which tracks campaign-finance data. With the industry boasting more than its share of liberals, Democrats pocketed 56% of the money. Some of the money may not be aimed at influencing the hedge-fund proposal.
More than any other firm, New York-based Cerberus Capital Management, which ranks as the 12th-largest hedge-fund manager with some $9 billion in assets, has used campaign contributions and top-drawer lobbyists to gain entrée to lawmakers and top officials. Cerberus, for example, hired law firm Patton Boggs LLP, one of Washington's premier lobbying outfits. Patton Boggs then set up a June 10 meeting between Donaldson and former Vice-President Dan Quayle, who is chairman of Cerberus Global Investments, the firm's private-equity arm.
BusinessWeek has learned that Cerberus, with the help of Patton Boggs, even tried to persuade the House Appropriations Committee to tie Donaldson's hands completely. In June, Cerberus sought to have a restriction attached to the SEC's fiscal 2005 budget that would prevent the commission from using tax dollars to enforce the new rules on hedge funds. But in mid-June, Oxley, whose Financial Services Committee oversees the SEC, got wind of the maneuver and fired off a letter to the appropriations panel arguing that it was not right to bypass him on such an important matter. The restriction was never formally proposed, but hedge funds still may try to block Donaldson when the Senate acts on the commission's budget. Cerberus officials and Patton Boggs did not return repeated phone calls asking for comment.
Cerberus has been busy courting key senators as well. One of the political action committees of Senate Banking Committee Chairman Richard C. Shelby (R-Ala.), for example, has received $133,000 from hedge funds and their law firms in the current election cycle -- at least $79,500 of it from Cerberus officials and their spouses. Shelby, whose spokesman says he hasn't decided whether or not to support the SEC proposal, plans to hold a hearing on it on July 15. Senator Charles E. Schumer (D-N.Y.) is another industry favorite: The 17 funds have given him $91,000. Schumer, who represents a state where many hedge funds operate and who sits on the Banking Committee, "is studying the issue carefully," says a spokesman for the senator.
"SMELLS LIKE TROUBLE"
Hedge-fund officials say regulation is misguided. The funds are private investment pools for the rich, who understand the risks and can comfortably absorb potential losses, they say. But what really worries hedge funds is that registration could be the first step on a slippery slope toward more intrusive rules. It's a concern that Greenspan appears to share. The Fed chairman told Congress at a February hearing that anything beyond registration could reduce the market liquidity that hedge funds generate by their voracious buying and selling of stocks, bonds, and commodities.
Not all hedge-fund players are digging in their heels. Already, some 40% of fund managers have voluntarily registered, mainly to attract pension-fund investments. Others think a "just say no" stance is a futile waste of political capital. James S. Chanos, founder of Kynikos Associates Ltd., a New York investment firm that advises hedge funds, believes the industry has grown too big, too fast to escape the regulators' radar. Chanos, who with his wife and Kynikos colleagues, has ponied up $136,000 in campaign contributions, favors a limited registry that would let the SEC keep a list of hedge funds without actually nosing around inside them. Kynikos has hired Washington lobbyist Andrew S. Lowenthal, vice-president of Van Scoyoc Associates, in hopes of jawboning the SEC into such a compromise. Chanos did not return phone calls.
But Donaldson seems determined to bring hedge funds to heel. The Wall Street vet frets over their dizzying growth and sometimes unsavory behavior. Forty funds have been caught up in the mutual-fund trading scandal that began last September, while the SEC has opened fraud investigations into another 41 since 2000. "You've got the acceleration of money going into hedge funds, more people starting hedge funds, and everyone striving to get the performance that justifies the high level of fees," says Donaldson. "That smells like trouble."
Hedge-fund managers are used to moving markets with their big bets. They're about to find out whether their money talks as loudly in Washington.
By Amy Borrus and Paula Dwyer in Washington