It looks like hedge funds and private equity funds are the new punching bag for populist pandering politicians. They don’t deserve it.
Now, I am not an apologist for the alternative investment community. I have already gone on record favoring a higher threshold for defining an accredited investor. I think all hedge funds should be regulated and their carried interest should be taxed like all other corporate revenue instead of as long-term capital gains (more on this another time).
That said, I am very concerned that in both the U.S. and Europe, legislators and regulators are playing, Who can make the alternative investor set squirm more?
On the heels of Paulson & Co. popping up in the SEC’s complaint against Goldman Sachs for not disclosing material information to investors in one of its crappy mortgage products, we learned the SEC is looking into whether hedge funds acted improperly when more than 100 desperate funds facing an avalanche of redemption requests from panicky investors threw up gates to protect illiquid or long dated securities, so they wouldn’t have to unload them on the cheap in a collapsed market, causing every investor in the fund to lose more money than they already did.
Now the Brits are trying to outdo the Americans. According to the Wall Street Journal, the European Parliament wants to subject hedgies and PE funds to much more onerous disclosure, monitoring and capital requirements. They want PE and VC portfolio companies to disclose development progress.
They also want to put major restrictions on the hedge fund and PE industry. One proposal would not allow foreign funds to raise money from EU investors. They also want to cap borrowing and require managers to have some of their capital held with third parties, according to businessweek.com.
The populists seeking greater scrutiny and restrictions know that hedge funds don’t have a strong lobby and are not the type of group to attract widespread sympathy, especially given that the top earners make more than $1 billion in a year and dozens of hedgies regularly earn more than $100 million per year. No one is going around worrying how hedge fund managers are going to be able to make a living.
However, what the critics don’t want to admit is that hedge funds have not cost tax-payers a dime in the most recent market meltdowns. Sure, a number of them went out of business after 2008, and after 2000 and after 1994, three of the worst years for this crowd. But, the only ones who lost were the principals and their limited partners — all accredited investors.
And no, the government did not bail out Long Term Capital in the late 1990s. Banks and investment banks did, on the prodding and leadership — and not the spending — by the New York Federal Reserve.
Hedge funds and private equity sponsors also did not come close to posing systemic risk in 2008. And, at the end of the day, that is the purpose of the overall financial reform bill, right? To prevent systemic risk. But, like the Iraq war and the hunt for weapons of mass destruction, the original goal of the bill seems to be forgotten and blurred.
Now, politicians, regulators and populists — including the right-leaning Tea Partiers — have gone on a witch hunt of the very, very, very successful class.
Look, as I have already said, I am not an apologist for the industry. But, let’s not forget: It was the regulated guys — the bankers and the investment banks — that put us on the brink of another depression, not the lightly-regulated crowd.
Stephen Taub, who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines.
