| Illustration by Joe McLaren |
By Lawrence Delevingne Have hedge fund managers who supported Democrats in 2008 thoroughly soured on the party in power? A vocal minority believes the Obama administration is out to get the country’s economic drivers—American businesspeople—and say that the private investment industry is being unfairly singled out.
Epitomizing the disenchantment with President Obama and the Democratic party is Dan Loeb of Third Point, whose second-quarter investor letter has been widely circulated for its scathing critique of an “increasingly worrisome landscape of new laws and proposed regulations” that promote “redistribution rather than growth” and are “contrary to free market ideals.”
Loeb worries about the general direction of the economy and rhetoric about the redistribution of wealth, but the most tangible complaint is a predictable gripe: taxes.
“Arguably unconstitutional Bills of Attainder, such as the special ‘Enterprise Tax’ proposed to be levied on hedge fund managers and other managers of private partnerships who wish to sell their management companies...send a vivid message that this administration is operating from a playbook quite different from the one we are used to as American businesspeople, a thought that chills all participants in these free markets,” Loeb wrote.
While reality is always more complicated than rhetoric, it’s clear that Loeb has plenty of company. “I have yet to chat with anybody who didn’t agree with Mr. Loeb,” says Michael Boland, founder and president of Dome Advisors, a political research firm that advises hedge funds. “These are smart people with lots of nerve endings, and there’s this unprovable sense that the Obama administration and the Democrats are out to get them.”
Maybe so, but the numbers don’t exactly follow the thesis: Democrats have still received more financial support from hedge funds this election year than Republicans. Hedge funds and their employees have given $6.3 million to federal candidates and parties so far during the 2010 election cycle, with more than half ($3.3 million) going to Democrats, according to the Center for Responsive Politics, a nonpartisan research group, as of August 22.
The industry’s lobbying arm, the Managed Funds Association, is also still favoring Democrats. The group has given $249,350 during the 2010 election cycle, with 57% of that going to the party in power.
High-profile individuals who raise money for one party or the other tend to get a lot of attention, which could be one reason why it looks like Republicans are gaining ground. In August AR broke the news that SAC founder Steven Cohen held a meeting with hedge fund managers in his Greenwich home during which Republican party operatives discussed how best to deploy campaign contributions and other support so that Republican candidates could win in the upcoming midterm elections. Attendees included Bruce Kovner of Caxton Associates, Paul Singer of Elliott Management and Daniel Senor of Rosemont Capital. All but Cohen are longtime conservatives.
“Now that Republican donors have been rediscovered, the industry’s support for one party [the Republicans] in 2010 may again be overemphasized,” says Andrew Lowenthal, a lobbyist and managing director of the Coalition of Private Investment Companies, a group formed in 2005 by James Chanos of Kynikos Associates. (Chanos is traditionally a big Democrat supporter, giving $7,200 to the party this year.)
Those in the hedge fund community frustrated with Obama and the Democrats hold what some argue might be termed incongruous positions. The national debt is too large, they say, but they don’t want their taxes increased to help reduce it. In a similar vein, they argue that the government is interfering too much in the economy, but last year’s government bailout of the banking industry fueled a banner year of hedge fund performance. And fat-cat rhetoric from Washington may have lumped managers in with all of Wall Street, but financial reform legislation was far more onerous on banks than on hedge funds, whose regulation increased only slightly.
Perhaps that’s why many in the industry are still giving big to Democrats.
Longtime progressive George Soros, founder of Soros Fund Management, has given $53,600 to Democrats in 2010 through June, according to Federal Election Commission records, including $20,000 to the Democratic Senatorial Campaign Committee and $2,400 to Senator Harry Reid (D-Nev.), the maximum allowed.
A spokesman for Soros, Michael Vachon, says Soros’ contributions are “guided by what he believes to be in the public interest, not by how legislation may or may not affect his personal economic interests.” To a large extent, that perspective separates Soros from most other hedge fund managers.
That said, Darcy Bradbury, a managing director at D.E. Shaw and chair of the Managed Funds Association, has given $23,700 to Democrats in 2010 through June, according to FEC records, including $15,000 to the Democratic Congressional Campaign Committee and $2,400 to Representative Carolyn Maloney (D-N.Y.). Bradbury is a longtime Democrat who served in the first Clinton administration.
Another Democratic stalwart, Tom Steyer, co-managing partner of Farallon Capital Management, has given $18,600 to Democrats in 2010 through June, according to FEC records, including $9,000 to the DCCC and $4,800 to Senator Barbara Boxer (D-Calif.).
And Senator Charles Schumer’s (D-N.Y.) reelection campaign has received from hedge funds more than double the amount donated to any other Senate candidate, taking in $491,249 during the 2010 cycle, according to CRP.
“Obviously, the rhetoric hasn’t been hugely helpful—people don’t like to be demonized,” says a senior Democratic House staffer who works on financial services issues. “But at the same time, most of these guys are lifelong Democrats, and they are good enough at what they do that they believe they can make money regardless of where the rules of the road are put down.”
Much of the anger from hedge funds has to do with the vilification of short sellers. Kynikos’s Chanos has said unfair blame for the financial crisis has been placed on hedge funds by Congress and the administration. “Hedge funds are being demonized once again for the failing of governments and regulators everywhere,” he said during a March interview with Bloomberg about speculators’ role in the European debt crisis. “We’ve seen this happen in subprime, we’ve seen this happen in the banking process; we’re now seeing it happen in the currency and sovereign debt crisis. Hedge funds are being attacked as causation; hedge funds are really the symptoms and not the cause.” However, financial reform legislation stopped short of forcing public disclosure of short sales (restrictions on short selling are being considered in the U.K.).
Likewise, during the 2009 government-orchestrated bailout of the auto industry, hedge funds were furious about Obama’s public attack on their industry. Cliff Asness, founder of AQR Capital Management, slammed the White House in a May 2009 letter, saying that “The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them ‘speculators’ who were ‘refusing to sacrifice like everyone else’ and who wanted ‘to hold out for the prospect of an unjustified taxpayer-funded bailout.’?” Those comments, Asness wrote, were “backwards and libelous.”
Most hedge fund managers, however, ended up profiting handsomely on their distressed auto debt, and the furor quieted down. One notable Republican donor, Elliott’s Singer, even supported the government at the time. “We are fully cognizant of the damage that has been done over the course of decades by incompetent managements, wrongheaded business plans and overpaid and underworked union members,” Singer wrote to investors in January 2009, supporting government intervention, “but now is not the time, in the midst of the biggest recession in decades, to teach them all a lesson.”
Other Democratic managers are supportive of President Obama—"he’s an awful lot more free market-oriented than [Loeb’s] letter would suggest,” says one—but are largely disengaged in the midterm. “I don’t really have a strong bias toward either side winning in November,” says the person, a prominent hedge funder who raised money for Obama in 2008 but hasn’t donated anything substantial to national candidates this cycle. “If Republicans end up taking back the House, that’s okay with me. I don’t have the passion for a Democratically controlled Congress that I did two years ago.”
So some have simply pulled their giving back. Loeb, for example, has given just $2,500 to federal candidates in 2010, $1,000 of which went to now-Senator Scott Brown (R-Mass.). That compares with $23,431 in 2008, when Loeb was a top bundler of individual donations for Obama in 2008, raising at least $100,000, according to watchdog Public Citizen. (See “Show me the bundlers,” AR March 2008.)
Lone Pine Capital founder Steve Mandel has given just $7,200 in 2010 through June but gave $53,100 in 2008, according to FEC records. Mandel was also a top Obama bundler, raising at least $100,000.
And Taconic Capital Advisors co-founder Frank Brosens has given just $6,800 in 2010 through June, but gave more than $110,000 in 2008, according to FEC records. Brosens was another major Obama bundler, raising at least $200,000.
The lack of passion—or the outright anger—appears to be mostly tied to taxes.
For starters, the tax cuts enacted by President George W. Bush are set to expire at the end of 2010, which would effectively raise the rate on those earning $373,650 or more—most hedge fund managers—from 35% to 39.6% if the Democratic plan not to extend them prevails.
Moreover, a September 16 Democratic proposal revived the push to tax hedge fund managers’ so-called carried interest as ordinary income—at a rate as high as 39.6%—rather than long-term capital gains rates (20% in 2011). This would primarily affect managers who make longer-term investments, such as distressed funds, and numerous previous proposals on the issue have failed.
“The Democrats haven’t even raised taxes yet—that’s when hedge fund managers will really get mad,” says Alex Vogel, a partner at Mehlman Vogel Castagnetti, a lobbying firm. “People vote with their wallets when their marginal tax rate is at stake—and it is.”
If carried interest wasn’t enough, a legislative attachment to the current proposal would tax the so-called enterprise value of a hedge fund if it were sold, a subject that already caused an uproar, as Loeb noted in his investor letter. There have been few sales of hedge funds since the crash of 2008, and the prohibitions on bank ownership in the new law would seem to make such deals less likely in the future. However, the recent announcement that York Capital Management is selling a 30% stake to Credit Suisse has once again put hedge funds into play (Jamie Dinan, the founder of York, was a top Obama fundraiser in 2008, personally giving $85,500 to Democratic committees, but has scaled back his contributions to Democrats in this election year too, spending only $7,200).
More broadly, the specter of taxation and its potential to slow economic growth—according to Republicans—has some managers scared about how to make money with their funds, given the financial uncertainty.
“Anyone in the hedge fund industry who supports the Democratic agenda right now is working against their own financial interest,” says Daniel Ripp, president of Bradley Woods, a political research firm that consults for large hedge funds. “From a political standpoint, this is a very unhealthy environment for the markets.”
Some hedge funds and their employees bear that sentiment out with their donations, either by switching allegiances outright or increasing support of Republican candidates. HBK Capital Management favored Democrats in the 2008 cycle, giving $243,456 (64%) to them, but a change in leadership at the top changed the political bent of the firm. After the departure of former chairman and managing director Larry Lebowitz, whose wife, Naomi Aberly, was a top Obama bundler, the firm moved to the right. HBK employees gave $151,536 (88%) in contributions to the GOP in 2010. Renaissance Technologies gave $97,161 (19%) to Republicans for the 2010 cycle, up from 8% in 2008 and 3% in 2006. Fortress Investment Group similarly has given $32,715 (15%) to Republicans so far in the 2010 election cycle, up from 11% in 2008 and zero in 2006.
Despite the Democrats’ detractors, the numbers don’t point to a major shift toward Republicans yet. “Hedge funds have taken a bit of a backseat role, but I don’t know it’s true that their giving has deteriorated,” says the Democratic staffer. “It’s not the ally people are looking for right now. But at the same time I’m sure they’re getting asked for their money.” AR
