Soros, Falcone Defend Hedge-Fund Industry Before House Panel
Nov. 13 (Bloomberg) — Hedge-fund managers defended their practices and profits in testimony to a congressional committee while splitting over whether more industry regulation is needed.
“This is not a case where management takes huge bonuses or stock options while the company is failing,” Philip Falcone, senior managing director of New York-based Harbinger Capital Partners said in written testimony to the House Committee on Oversight and Government Reform.
Still, Falcone urged Congress to regulate the industry and require more transparency, while George Soros, founder of Soros Fund Management LLC in New York, cautioned Congress against “ill-considered” regulations.
Soros, Falcone, Paulson & Co.’s John Paulson, James Simons of Renaissance Technologies LLC and Kenneth Griffin of Citadel Investment Group LLC in Chicago, who are among the world’s richest hedge-fund managers, were called to testify today as part of a congressional investigation into the credit crunch that has slowed the global economy.
Committee Chairman Henry Waxman is to question the men this morning about their bets against subprime mortgages and whether their industry is a risk to the financial system.
Falcone said he supported more public disclosure and transparency. Investors, he said, “have a right to know what assets companies have an interest in — whether on or off their balance sheets — and what those assets are really worth.”
In their written statements delivered to the committee, the hedge-fund managers also defended their multimillion-dollar salaries, saying they earned money only when their investors did.
“In our business, one of the most fundamental principles is alignment of our interests with those of our clients,” Paulson said. His fund shares profits with its investors, taking 20 percent. “All of our funds have a ‘high water mark’, which means that if we lose money for our investors, we have to earn it back before we share in future profits.”
Waxman, who last month grilled Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc., about the bank’s demise, doesn’t have jurisdiction over securities-industry legislation. Even so, his interest suggests the $1.7 trillion industry faces increased scrutiny and regulation next year after President-elect Barack Obama takes office.
“In an attempt to respond to public outcry and political demand, the industry expects lawmakers to implement new rules that will limit leverage, restrict the ability to short securities and increase taxes on the wealthy,” said Ron Geffner, a lawyer at New York-based Sadis & Goldberg LLP, which represents hedge funds.
Regulators have already taken some steps. In September, the U.S. Securities and Exchange Commission temporarily banned the short sale of some stocks. The agency now requires funds to disclose the shares they are wagering will tumble, though those reports won’t be made public. In a short sale, a trader borrows shares and then sells them immediately in the hopes they can be bought back later at a cheaper price.
The witnesses, all longtime fund managers, earned more than $1 billion last year according to a list compiled by Institutional Investor’s Alpha Magazine.
Waxman asked the managers to provide documents, including e- mails, that discussed the likelihood that their own, or other, hedge funds would collapse and the risk to the financial system if they did.
He also asked for their levels of borrowing and their investments in mortgage-backed securities, collateralized debt obligations and credit-default swaps going back to the beginning of 2005. Some managers used these securities to wager on subprime mortgages and on the credit-worthiness of investment banks.
Waxman also ask for compensation data of the two highest- paid officers at each firm, the formula used to arrive at that amount and the tax treatment of their pay.
Soros, 78, is the chairman of a $19 billion. He has called credit-default swaps the next crisis area because the market is unregulated, and he has recommended the creation of an exchange where these contracts could be traded.
Paulson, 52, runs a fund that manages about $36 billion. His Credit Opportunities Fund soared almost sixfold in 2007, primarily on wagers that subprime mortgages would tumble. Paulson’s Advantage Plus fund has climbed 29 percent this year through October while many managers are enduring the worst year of their careers.
Hedge funds lost an average of 15.5 percent this year through Oct. 31, according to data compiled by Chicago-based Hedge Fund Research Inc.
Falcone, 46, also profited from a drop in subprime mortgages last year, when his fund, now about $20 billion, doubled. This year the fund was up 42 percent at the end of June and has since tumbled to a loss of about 13 percent.
Simons, 70, runs his $29 billion fund out of East Setauket, New York. The former academic makes money by using computer models to trade. His Medallion Fund, made up of his own money and that of his employees, is up more than 50 percent this year.
Griffin, 40, runs the $16 billion Citadel Investment Group LLC in Chicago, and has faced the toughest year out of the five billionaire managers. His funds dropped 38 percent this year through Nov. 4.