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Congress scrutinizes hedge fund industry
Rep. Waxman examines 'virtually unregulated' hedge fund industry, in House committee testimony featuring industry player George Soros.
CNNMoney.com staff writer
Last Updated: November 13, 2008: 12:25 PM ET
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More VideosNEW YORK (CNNMoney.com) -- A congressional committee scrutinized risks in the hedge fund industry on Thursday to determine whether further regulation is needed.
"Currently, hedge funds are virtually unregulated," said Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform, in opening statements. "They are not required to report information on their holdings, their leverage, or their strategies. Regulators aren't even certain how many hedge funds exist or how much money they control."
Waxman said the industry is "growing rapidly," increasing five-fold over the last decade to exceed $2 trillion. He said he was concerned that hedge funds, like other sectors in the financial market, could "blow up."
"We also know that some hedge funds are highly leveraged," he said. "They invest in assets that are illiquid and difficult to price and sell rapidly."
Congressional testimony features speakers from the industry, including George Soros, chairman of Soros Fund Management, John Alfred Paulson, president of Paulson & Co., James Simons, president of Renaissance Technologies, Philip Falcone, senior managing partner of Harbinger Capital Partners, and Kenneth Griffin, chief executive officer of Citadel Investment Group.
Waxman said that each of the witnesses earned, on average, more than $1 billion in 2007, but are taxed at rates "as low as 15%," which he described as a "lower tax rate than many school teachers, firefighters or plumbers pay."
Lately, the industry has taken a downturn, in conjunction with the international economic crisis and plunging stock markets.
Hedge fund assets plunged $100 billion in October, and $60 billion of that loss was from investor redemptions, according to the AP, which cited a report from data provider Eurekahedge. The AP also said hedge fund assets totaled $2.497 trillion at the end of the third quarter, citing data provider HedgeFund.net.
"Hedge funds were an integral part of the bubble which has now burst," Soros said in his testimony. "But the bubble has now burst and hedge funds will be decimated. I would guess that the amount of money they manage will shrink by between 50 and 75%."
Soros also said that "appropriate regulation needs to be devised," but he warned against "going overboard with regulation."
"Excessive deregulation has inflicted enormous losses on the general public and there is a real danger that the pendulum will swing too far the other way," said Soros. "That would be unfortunate because regulations are liable to be even more deficient than the market mechanism itself. That is because regulators are not only human, but also bureaucratic and susceptible to political influences."
Another witness, professor Andrew Lo, director of the Massachusetts Institute of Technology's Laboratory for Financial Engineering, suggested that regulators foster increased transparency within the financial industry and create a special public relations team to convey financial information to the general population.
"To the average American, the current financial crisis is a mystery, and concepts like subprime mortgages, CDOs, CDSs and the seizing up of credit markets only creates more confusion and fear," said Lo.
First Published: November 13, 2008: 10:44 AM ET
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