The world’s most prominent hedge fund managers – Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros, who earned on average more than $1 billion each last year – expressed Thursday before the House Oversight and Government Reform Committee their support for more oversight and greater transparency (one of the most contentious issues facing the unsupervised and unregulated hedge fund industry) in the world of credit default swaps [CDS], complex derivatives largely blamed for the global financial crisis.
The $1.6 trillion industry, that became hugely profitable and powerful in recent years, manages money for some of the largest pension funds, endowments and wealthy investors and often contributes to increased volatility in the stock and bond markets. The House panel, chaired by Representative Henry A. Waxman (D-Calif.) was attempting during the today’s hearing to assess the role and implications of hedge funds or the shadow banking system – as some experts call them, in the financial crisis and the types of systemic risk they can generate.
The fund executives offered their views on the situation and voiced their support in creating a new central exchange or clearinghouses to provide transparency for the secretive industry. They differed however, on whether the industry contributed in the events precipitating the financial crisis and cautioned against government overreaching.
Philip Falcone, senior managing partner of Harbinger Capital Partners, said in his prepared testimony he was in favor of greater transparency and better reporting in the hedge fund sector, but he stressed the fact that the behavior of institutions in several financial sectors, combined with the SEC and the Federal Reserve’s hands-off approach to highly leveraged investment banks and CDS market, contributed to the recent crisis. In Falcone’s view, “the hedge fund sector was not among them.”
Mr. Falcone also defended a payment structure that gave him and the other managers before the committee incomes of about $100K an hour last year. He said:
“This is not the case where managers take huge bonuses and stock options while the company has failed.” [CT]
Falcone, explained that funds often receive 20% of profits generated for investors.
George Soros, chairman of Soros Fund Management – said in his testimony that “hedge funds were an integral part of the financial market bubble which now has burst”. He added that the “hedge funds will be “decimated” by the current financial crisis and forced to shrink their portfolios by 50-75%.”
Mr. Soros predicted in written testimony that “a deep recession is now inevitable and the possibility of a depression cannot be ruled out.”
The managers said they did not object to having hedge funds report their positions to regulators, as long as the positions remain confidential. Ken Griffin, who founded Citadel Investment Group, a $15 billion firm based in Chicago said that making the information public would be “the equivalent of the government having Coca-Cola (KO) divulge its secret formula.”
Mr. Griffin’s Citadel Investment Group is facing a difficult year as his flagship Kensington and Wellington hedge funds are off nearly 40% through early November.
Hedge funds, which are delivering their worst-ever recorded returns this year, have been blamed for contributing to the downfall of two major U.S. investment banks and for having pushed stock prices to lower levels in the recent weeks.
As policy makers in Washington consider overhauling the rules that apply to mortgage originators, rating agencies, bankers and investors – hedge funds, which are virtually unregulated, may now be forced to face new requirements for the disclosure of their trading methods.