Big Money Still Learning to Lobby
By JENNY ANDERSON
Published: March 13, 2007
On a cold evening in late January, Senator Charles E. Schumer invited a who’s who of hedge funds to dinner at Bottega del Vino on the Upper East Side of Manhattan. More than $100 billion worth of wealth sat around the table, including Paul Tudor Jones of Tudor Capital; Steven Cohen of SAC Capital; Stanley Druckenmiller of Duquesne Capital; and James Chanos of Kynikos Capital, according to a person who was briefed on the dinner.
Mr. Schumer, the New York Democrat, had some simple advice for the billionaires in his midst: If you want Washington to work with you, you had better work better with one another. (Mr. Schumer and the hedge fund managers declined to comment).
While hedge funds confidently flex their muscles in the markets and in boardrooms, in Washington they are experiencing the awkward growing pains of a relatively new industry coming to grips with its own power. Some hedge funds like D. E. Shaw and Cerberus Capital Management have spent time and money in the capital, but most funds have been content to hope Washington will not rear its regulatory head.
Now, united by a desire to avoid stringent regulation and a healthy sense of competition — there are three hedge fund lobbying groups — the industry seems resigned to no longer being a wallflower and looks set to join the dance with Congress.
So far the industry’s efforts have witnessed remarkable results. More than two years after the Securities and Exchange Commission required that funds register with the agency — a move overturned by a federal appeals court last summer — the Treasury Department, the Federal Reserve, Congress and the S.E.C. seem to agree: hedge funds are as regulated today as they should be.
“They’ve been extraordinarily effective in lobbying, which is pretty amazing given Long-Term Capital Management and the number of other cases involving problems with hedge funds,” said David Tittsworth, head of the Investment Adviser Association, a group which represents registered investment advisers. “The hedge fund industry — whoever they are and whoever is representing them — has been successful in fighting a centralized and comprehensive regulatory scheme.”
Their efforts, though, may have more to do with an unusually benign environment for regulation than any well-oiled and deep-pocketed campaign. Henry M. Paulson Jr., the Treasury secretary, was chief executive of Goldman Sachs, which services hedge funds and runs its own hedge funds; the Federal Reserve continues to take a hands-off attitude toward hedge funds; and the Democratic chairman of the Senate Banking Committee, Christopher J. Dodd comes from Connecticut, home to a large number of hedge funds.
For an industry drenched in money — hedge funds manage more than $1.4 trillion today — hedge funds have spent a pittance on winning over Washington. From 1998 through 2006, 15 hedge funds — the sum total of those that have registered their activity — have spent $7.7 million lobbying Congress, according to the Center for Responsive Politics.
The top spender on lobbying is Cerberus Capital Management, a hedge fund better known for its private equity investments. Cerberus spent $2.1 million from 2001 through 2006. Issues range from registration to asbestos litigation and military spending bills.
“The small proportion of money they are spending is related to the fact that they are not heavily regulated,” said Tim La Pira, a lobbying researcher at the Center for Responsive Politics. “Heavily regulated industries like banking or oil and gas spend an enormous amount of money because they have a history and legacy of being regulated.”
The hedge funds’ main trade association does not appear to have significant financial influence either. From 1998 through 2006, the Managed Funds Association spent only $752,000 lobbying. Its political action committee raised $169,500 in 2006 and made contributions of $112,600. By way of comparison, Merrill Lynch spent $4 million in 2006 alone, and the Investment Company Institute, representing the mutual fund industry, spent $5.4 million last year.
Political contributions show a similar pattern: the numbers are growing, but pale against the wealth managed by the fast-growing industry. In 2006, individuals at hedge funds as well as their spouses (if the spouse does not list an independent source of income) contributed $6.2 million (69 percent to Democrats and 27 percent to Republicans). That was up from the 2004 election cycle when individuals gave $5 million (67 percent to Democrats and 33 percent to Republicans). Top donors include Richard Perry of Perry Capital and his wife, Lisa ($202,850 in 2006); Kenneth C. Griffin of the Citadel Investment Group and his wife, Anne, who works for Aragon Global Management ($192,857); and Robert Soros and his wife, Melissa, a filmmaker ($171,500), according to the Center for Responsive Politics.
But Washington has turned its attention to the fast-growing hedge fund industry — as well as other alternative investment vehicles, like private equity. As members of Congress show growing interest, the industry seems increasingly resolved to make its case on Capitol Hill before another major hedge fund blow-up forces it to act on the defensive.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, will hold hearings today on hedge funds. Last week, Senator Charles E. Grassley, Republican of Iowa, sought to offer an amendment to a Homeland Security bill that would have required hedge funds to register, but he was rebuffed before it came to a vote.
A decidedly antiregulation environment in Washington has helped the industry. Four reports have been released in the last four months contending that American capital markets are less competitive, with excessive litigation and regulation being top culprits in each report. (Citadel Investment, a huge Chicago-based hedge fund, was among the groups that paid for the report.)
Late last month, the President’s Working Group, which includes the heads of the Treasury, the S.E.C., the Federal Reserve and the Commodity Futures Trading Commission, issued a long-awaited report on the potential risks of hedge funds. It concluded that systemic risk was best addressed through aggressive monitoring of the major financial banks and investment banks that do business with hedge funds and it determined that the S.E.C. was working well to protect unsophisticated investors from investing in hedge funds by raising the wealth standard to qualify to invest in a hedge fund.
Not everyone agreed with the report’s conclusions. “You are talking about milk toast — go out and do good deeds,” said Mr. Tittsworth, describing the President’s Working Group study.
Corralling the hedge fund industry toward the purpose of educating Washington — and donating money, arguably a more effective tool of persuasion — has proved to be no easy task. The M.F.A. has tried to lead the way, and today has 1,300 members including 60 of the top 100 hedge funds, according to Robert Aaron, chairman of the group.
But even its role as representative for the industry has been a rocky one. In 2003, when the S.E.C. proposed a rule to require that hedge fund managers register, the M.F.A. engaged in what critics called a scorched-earth policy, insisting that hedge funds would move offshore and that liquidity in the system would evaporate.
Many hedge funds say that they face tough standards from their investors — sophisticated institutions like endowments and pension funds — and that revealing information about their trading strategies would be a violation of intellectual property rights.
But other funds that were registered, or that thought that registration was a reasonable first step, balked at the resistance to registration put up by the M.F.A.
When in 2004 the S.E.C. passed the registration rule, the association was left in a tough spot. “It was the worst of all worlds,” said one industry lobbyist who asked not to be identified. “At least in the past the industry’s take-no-prisoners approach resulted in initiatives being killed.” The industry, it seemed, proved to be just as secretive as perception had suggested.
(Mr. Aaron, who was not the chairman of the M.F.A. during the registration issue, noted that most of the association’s members are now registered.)
In 2004, Mr. Chanos testified before a Senate hearing on hedge funds and proposed a middle-ground approach: in exchange for having hedge funds exempt from audits, the funds would agree to provide the S.E.C. with all the critical data needed to determine the size and scope of hedge fund activity.
The proposal failed but others in the industry expressed their support for his view. In late 2005, Mr. Chanos founded the Coalition for Private Investment Companies. To avoid any conflicts of interest, the group would not give money as a group to politicians, and so it could be effectively bipartisan. “Our members think the M.F.A. does a tremendous job as a trade association — my own firm is a member of the M.F.A.,” Mr. Chanos said. “But I do believe there was room for another voice in the public policy debate."
A goal, Mr. Chanos said, was equal treatment for all alternative investors and getting regulators to focus on activities that worry them, not just the groups engaged in them.
Since Mr. Chanos founded the coalition, another lobbying group has surfaced, this one with the intent of reviving the registration requirement. Kenneth D. Brody, co-founder of Taconic Capital Advisors and the former head of the Export-Import Bank during the Clinton administration, hired the Rich Feuer Group, a group focused on financial services issues.
The groups say they agree on most issues and they are working together more. “The consolidated effort will grow but individual efforts will continue to take place,” Mr. Aaron said. “We welcome that.”