Many hedge funds were relieved last week when the Obama
administration's financial-overhaul plan included no big surprises or
threats to the lucrative, secretive industry.
It isn't clear exactly why hedge funds escaped their worst fears.
But one factor might have helped: The hedge-fund industry has been
spending a lot more time and money in Washington during the past few
2008, major hedge funds and their trade groups spent $6.1 million
lobbying Washington, up from $4.2 million in 2007 and nearly seven
times the $897,000 average from 2003 to 2006. The growth rate in
hedge-fund lobbying far exceeds the 38% increase for the overall
financial-services industry between 2006 and 2008, according to figures
compiled by the Center for Responsive Politics, a research group that
tracks political spending.
The lobbying push marks a shift for the $1 trillion hedge-fund
industry. In the past, hedge funds usually stayed off the radar screen,
often reacting after congressional or regulatory proposals were made.
Now they are playing offense, meeting with lawmakers and regulators in
hopes of convincing them that hedge funds are important cogs in the
financial markets and weren't responsible for the continuing financial
Hedge funds have "learned from their mistakes," says Daniel Clifton,
an analyst with research firm Strategas Research Partners LLC. "They
want to get their message out," hoping to temper the view in Congress
that they are "greedy."
The hedge-fund industry is making no secret of its higher profile.
Heavy political hitters now working for the industry include Richard
Baker, the former Republican representative from Louisiana hired last
year as president and chief executive of the Managed Funds Association,
the main hedge-fund trade group. MFA recently recruited a former staff
member of Sen. Charles Schumer (D., N.Y.) to help advance its agenda on
details of how regulation would work.
"You name a senior member of the [House] financial-services
committee or the [Senate] banking committee, and I or a member of my
staff have been in that office within the past six months," Mr. Baker
The new approach was evident as the Obama administration pieced
together its financial-regulation proposal. In meetings with
representatives of the Federal Reserve, hedge-fund representatives said
they would be less likely to participate in government programs to buy
bank assets if they were subjected to extensive disclosure requirements
as part of the regulatory changes, a person familiar with the
The meetings were part of a broader effort by the Fed to gain
feedback from investors on a variety of issues, according to a person
close to the situation.
Hedge funds faced intense scrutiny from lawmakers and regulators
last fall amid short-selling and swaps activity that helped drive down
already battered financial stocks. Hedge-fund paychecks surpassing $1
billion last year became a lightning rod for criticism. There was more
bad blood when some hedge funds that were creditors of Chrysler Corp.
showed reluctance to go along with the government's restructuring plan
for the auto maker.
The White House's overhaul includes subjecting all hedge funds to
registration with the Securities and Exchange Commission for the first
time. Many hedge funds already are registered, following earlier
efforts by the SEC and lawmakers.
Tougher rules feared by hedge funds aren't in the proposal, such as
requiring documentation of all trades or provisions that would force
hedge funds to lower fees charged to investors. Such fees often have
included a 2% management fee and a 20% cut of the fund's profits.
President Barack Obama is pushing for the Federal Reserve to have
oversight of hedge funds if they are deemed to pose a systemic risk to
the financial system. That would put some of the largest hedge funds on
the same regulatory level as giant banks such as J.P. Morgan Chase
& Co., Bank of America Corp. and Citigroup Inc.
The MFA called the Obama plan "intelligent" and said it supports the principles of the president's proposals.
In the first quarter, the trade group spent $750,000 on lobbying, up
14% from a year earlier, according to an analysis by The Wall Street
Journal of U.S. Senate records documenting lobbying of federal agencies
and both houses of Congress. The hedge-fund industry's overall spending
was about $1.6 million, down 4% from 2008's first quarter.
One of the biggest hedge-fund lobbyists is Citadel Investment Group,
which spent a total of $1.9 million from 2007 through the first quarter
of this year, records show. The Coalition of Private Investment
Companies, a group led Jim Chanos, founder of hedge fund Kynikos
Associates, spent $1.1 million on lobbying in the same period.
Mr. Chanos testified before Congress this year on regulatory reforms
in the financial sector and attended President Obama's announcement of
regulatory changes on Wednesday.
In an email, Mr. Chanos confirms the spending figure and his
attendance at last week's announcement but didn't comment further. The
White House declined to comment.
As President Obama's proposals are translated into legislation in
coming weeks, the hedge-fund industry's lobbying muscle will likely
face its biggest test yet. Hedge funds are bracing for additional
disclosure requirements from Congress. Some hedge-fund representatives
have begun meeting with members of Congress and their staff members,
hoping to convince them that stricter disclosure requirements would be
Sen. Jack Reed (D., R.I.), who recently introduced a hedge-fund bill
similar to the Obama plan, said the White House's approach provides a
- 186 Financial Services, Insurance and Banking
- 208 Regulation