When Barack Obama assumes the presidency in January, he will take the helm of a government that seems all but certain to tighten regulations on hedge funds. “Obviously we will have to have a lot more transparency in the financial services sector — including hedge funds,” Senate Banking Committee chairman Christopher Dodd told Alpha magazine in early November, echoing what many of his Democratic colleagues are saying — and it’s the Democrats who will soon be running Washington.
Richard Baker, president and CEO of the Managed Funds Association, the industry’s lobbying group, notes that the extent of whatever crackdown occurs may depend on how deeply the country falls into recession. “Everything is going to be focused on economic recovery, and we would make the case that our members’ innovative investment skills are essential to a rapid recovery,” he says. Baker adds that if Christmas retail sales are good — although that seems increasingly unlikely — and if oil prices continue to decline, the new administration may not be as regulatory-minded as it might otherwise be.
This may be only wishful thinking. Denise Valentine, a hedge fund analyst for the Aite Group, points out that Obama has called for closer regulation of offshore funds. Specifically, he has questioned whether managers should be allowed to continue to pay the capital gains tax rate on so-called carried interest — the typical 20 percent performance fee they charge — rather than income tax rates, which are higher. He is also co-sponsor of the none-too-subtly-named Stop Tax Havens Abuse Act, which has not passed Congressional muster but has implications for hedge funds and may well be enacted in some form in 2009. It’s worth remembering too that in an April debate with New York Senator Hillary Clinton, Obama cited Alpha’s 2008 ranking of the best-paid hedge fund managers, using it as an example of why the tax code should be changed.
Obama has many like-minded allies. New York Senator Charles Schumer, for instance, chairman of the Senate Finance Committee, in October called for greater hedge fund transparency so that regulators can have a better idea of what’s going on. And Representative Henry Waxman, who presided over a mid-November hearing on the hedge fund industry in which the top five earners in Alpha’s ranking testified, has called for more regulation. Much of what happens will be influenced by Obama’s picks for Treasury secretary and Securities and Exchange Commission chairman.
