Skip to comments.Hedge funds lobbying with stealth
Posted on 06/24/2008 12:49:46 PM PDT by shrinkermd
Sometimes in Washington, stealth is more important than strength.
In recent years, hedge fund managers, who oversee those secretive and lightly regulated pools of billions of dollars of investment capital, have gotten increasingly worried about whether Washington will change tax rules for offshore investors.
Many hedge funds set up subsidiaries in the Cayman Islands and other low-tax locales so their investors can pay lower taxes on a certain amount of their activity. If Congress were to make a grab for that money by changing the tax rules governing the hedge funds, it could generate hundreds of millions of dollars in new taxes at the hedge funds expense.
Adding to their anxiety is the prospect of an unfriendly Barack Obama administration taking office in January and working in league with its Democratic allies on Capitol Hill. Lobbyists working for hedge funds feel a sense of increasing urgency to make progress now, while more sympathetic Republicans control the White House.
But how to argue their point in Washington? Typically, lobbyists would mount a large public relations campaign and aggressively push their message on the Hill. But it could be a tough political sell for often unpopular billionaire hedge fund executives to mount a high-visibility campaign to keep tax breaks in the Cayman Islands.
So instead, the Managed Fund Association, which represents hedge funds, is taking a different tack. Its quietly pushing for a tax ruling from the Internal Revenue Service and the Treasury Department that many feel could lay an important behind-the-scenes precedent in the offshore tax fight. The ruling itself would affect the ability of offshore funds to buy distressed debt in the United States.
(Excerpt) Read more at politico.com ...
It would be nice also to have an estimate as to taxes not collected by virtue of Cayman Island accounts.
Vigorously seeking information might be more important than any other effort. By the way, the number one PAC for Obama through March 08 was Goldman Sachs. Sounds like stealth is already here.
You think that's "something useful"? No offense but you should probably stick to a subject you know something about. Hedge funds are just another bogeyman.
So, if I vote for Barack Obama, I will be voting to tax hedge funds? I think not. This is disinformation intended to get people thinking that the moneyed Republicans are responsible for hedge funds. God, what I wouldn't give to have someone like Soros, democrat and founder of hedge funds, on the side of conservatism.
August 30, 2007
There was a time when debt was considered a boring investment, held primarily by institutions seeking predictable returns or a steady stream of interest payments. A recent study by the consulting firm Greenwich Associates shows how much that's changed.
Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market -- often among the most complex areas -- they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income trading, according to the survey.
The News: A study shows how important that hedge funds have become in debt trading -- they do nearly 30% of U.S. bond volume.
Doubled Up: The amount of trading doubled in just a year, the study by Greenwich Associates showed.
Impact on Investors: This isn't your father's debt. Hedge funds often focus on short-term goals, not the long-term holdings that other investors may prefer.That level, which reflected activity over a 12-month period through April, was double the amount of trading hedge funds accounted for the previous year. Greenwich found hedge-fund trading comprises 55% of U.S. activity in derivatives with investment-grade ratings, and also 55% of the trading volume for emerging-market bonds.
The rapid rise in hedge-fund trading underscores the changing nature of the debt markets. Unlike many mutual funds that look for stable returns or pensions and insurers that want steady, long-term holdings, hedge funds frequently seek short-term gains through numerous trades they can amplify with borrowed money.
"We've seen over the past 10 years a proliferation of products created to meet the needs of hedge funds," says Tim Sangston, a managing director at Greenwich Associates. "More and more of the growth in bond trading is coming from these kind of professional traders and investors."
In some corners of the U.S. debt market, hedge funds practically are the market. For instance, hedge funds generated more than 80% of the trading for derivatives with high-yield ratings, and more than 85% of volume in distressed debt, Greenwich found.
Hedge funds also accounted for a good portion of the trading in mortgage-backed securities, asset-backed securities, collateralized debt obligations and other parts of the debt market that have suffered recently as worries over subprime loans have spread.
Analysts say these debt instruments were developed primarily for sophisticated investors like hedge funds, which sometimes use these products to protect themselves. But the debt securities have also been peddled to pension funds and other institutions that may not completely understand them.
The survey involved responses from 1,333 institutions in North America, including mutual funds, insurance companies, pension funds, banks, brokerage firms' proprietary trading desks and federal agencies, Greenwich said. These investors were polled about their trading in 15 kinds of debt instruments. Overall, debt-market trading volume among the participants increased by 10% in the period, to $25 trillion, from the previous year.
WSJ URL: HERE.
By the way from another source: "the 2008 Hedge Fund Asset Flows & Trends Report  published by HedgeFund.net and Institutional Investor News estimates total industry assets reached $2.68 trillion in Q3 2007. According to the BarclayHedge Monthly Asset Flow Report, hedge funds received only $15 billion in October, the second-lowest inflow in 2007. Year-to-date hedge funds attracted $278.5 billion, three times year-to-date inflow into equity mutual funds.
I've spent the bulk of my career working for "10 Billion plus" hedge funds and have an intimite understanding of the industry. They don't "control" any markets.
Seriously, dont believe everything you read. You should go find some other bogeyman.
The issue is levarage. In addition to money invested into the fund by investors, a hedge fund will typically borrow money, with certain funds borrowing sums many times greater than the initial investment. If a hedge fund has borrowed $9 for every $1 received from investors, a loss of only 10% of the value of the investments of the hedge fund will wipe out 100% of the value of the investor's stake in the fund, once the creditors have called in their loans.
In September 1998, shortly before its collapse, Long Term Capital Management had $125 billion of assets on a base of $4 billion of investors' money, a leverage of over 30 times. It also had off-balance sheet positions with a notional value of approximately $1 trillion.
A more complete discussion of LTCM can be found: here.
The lack of information is the problem. Even a small hospital has a committee of surgeons that reviews the pathology reports of every single operation. In this way unnecessary and dangerous procedures are avoided. it would not be too much to expect better information as the sine qua non of policy.
"...On Thursday, two Bear Stearns executives surrendered to federal agents over charges that they had misled investors about the state of Bear Stearns hedge funds.
As night follows day, arrests follow financial scandals. Investors in those funds can't be unhappy about seeing their managers doing the perp walk. And the evidence certainly seems damning. Days before they delivered an upbeat assessment to their investors, the two execs were exchanging worried e-mails about the state of the funds. "I think we should close the funds now," one wrote. Instead, they reassured their worried customers. Only a month later came the now-infamous meltdown that eventually led to the fire sale of their 85-year-old firm.
You say the issue is disclosure, but the question really is who is entitled to that disclosure. You seem to feel that the government is entitled to it. I vehemently disagree. If you were arguing that the investors in the hedge funds are entitled to it, then I might be more persuaded, but they entered into a contract with the hedge fund. That's the time they should be talking about disclosure, and they often are, so they don't need the government for that either.
Seriously ... go find another bogeyman.
When LTCM and BS failed, they required intervention by the Fed. Apparently, the current view is they have their privacy but we have the responsibility if they fail.
Sooner or later someone will hold a hearing on the Hill and information will begin to flow. Then there will be enabling legislation designed to make hedge funds more transparent. Again, there need not be actual regulation.
Finally, someone will work up the courage to wonder, for example, how much George Soros and others save on corporate and personal income taxes by locating their businesses off shore. Not only the taxes, but is it really possible with no reporting requirements for our financial system to avoid periodic failure engendered by hedge funds?
Take some guts. Both parties have been subsidized by big time hedge fund contributors.
I might not know much, but I know I need to know more but transparency is completely lacking.
When you say: Not only the taxes, but is it really possible with no reporting requirements for our financial system to avoid periodic failure engendered by hedge funds? you only prove that you don't know the first thing about how our financial system works. Hedge funds are not an inherent risk to our financial system and anyone who knows how our financial system works already knows that. But clearly that group excludes you.
Hedge funds are private companies engaged in a legal business with other consenting parties. there are no shareholder to protect, no little old lady's being duped of their inheritance. They are entering into contractual agreements with informed parties who have the right to demand whatever disclosure they see fit. No law has been broken and the government has no business sticking their noses is.
The right way to solve this problem is not to put the government in further but to get them further out. They should have never done a thing for Bear. They should have let them fail like any other business, just like virtually everyone who was both informed enough to understand the actual issue and didn't have an axe to grind, said they should at the time. If they had let them fail the problem would probably have been over more quickly.
But a liberal like you always has a better idea. You would look at the government doing something wrong and think that it's an excellent reason to empower government to do even more things wrong.
On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. The funds were invested in thinly traded collateralized debt obligations (CDO) found to be worth less than their mark-to-model value. Merrill Lynch seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns might be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios. Richard A. Marin, a senior executive at Bear Stearns Asset Management responsible for the two hedge funds, was replaced on June 29 by Jeffrey B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers.
During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.
On August 1, 2007, investors in the two funds took action against Bear Stearns and its top management. The law firms of Jake Zamansky & Associates and Rich & Intelisano both filed arbitration claims with the National Association of Securities Dealers alleging that Bear Stearns misled investors about its exposure to the funds. This was the first legal action made against Bear Stearns, though there have been several others since then.
Co-President Warren Spector was forced to resign on August 5, 2007, as a result of errant trades that led to the collapse of two hedge funds backed primarily by subprime loans. A September 20 report in the New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses.With Samuel Molinaro's November 15 revelation that Bear Stearns was writing down a further $1.2 billion in mortgage-related securities and would face its first loss in 83 years, Standard & Poor's downgraded the company's credit rating from AA to A.
Matthew Tannin and Ralph R. Cioffi, both former managers of hedge funds at Bear Stearns Companies, were arrested June 19, 2008. They are facing criminal charges and are suspected of misleading investors about the risks involved in the subprime market. Tannin and Cioffi have also been named in lawsuits brought forth by Barclays Bank, who claims they were one of the many investors mislead by the executiv
Point is, Bear Stearns was a successful company that suddenly failed without warning because of a lack of transparency. The hedge funds it operated destroyed not just a few rich people, but thousands of shareholders who personally held the stock and thousands more who had the stock in their pension plan.
I know this is tough for a doctrinaire liberal like you to understand but more government regulation will not solve this problem it will only make it worse.
Well calling me names might be a form of argumentation in the higher reaches of private finance, but I was answering your point that only the rich would suffer losses.
Bear Stearns stock was still selling for $109 in January 08 and by the middle of March it was $76 before plunging to a final sale price of $10 (with Fed help)
The point remains there was no transparency in respect to either of the two hedge funds that failed. Indeed, investors assumed things were consistently better than they really were. Simply saying the corporate executives knew something is not the same as public knowledge.
Look, I know you're going to continue to believe that you understand this issue even though an expert in the industry with 20 years experience has told you time and again that you don't. I know that you don't care that the thing you're demanding makes no sense, and will cause far more harm than good for everyone involved in the financial markets. I know that you believe you have this whole issue dialed in because you read a couple of articles almost certainly written by people who didn't understand the issue either. But that's how it is with liberals, you all believe you know better than everyone. You all spend your lives correcting your doctor's diagnosis, and telling your lawyers that they don't understand the law. It's not about name calling, it's about understanding and properly identifying that "know it all" philosophy.
And because of that, I'm bothered that you think you can propose such a purely liberal idea on a conservative forum and think we're all so stupid as to let it stand unchallenged. Well I think I've effectively done that now. I think you come off as a guy who is sitting in coach trying to tell the pilot how to fly the plane. You look like a legend in your own mind.
So if you'd like to have the last word on this topic then by all means please go ahead. I'm through wasting my time trying to talk some sense into you.
Isn't little Miss Clinton, aka Chelsea , working for a hedge fund?
Two prominent Dems working for the dreaded hedge funds.