Clinton and Obama: Hedge Fund Killers

Hillary Clinton and Barack Obama want to kill the entire public hedge fund industry. It's easy for them to take aim at wealthy hedge funds managers because it looks good to voters. However, what they don't seem to realize is that they're pushing a struggling economy closer to the brink.

The recent Iowa and New Hampshire caucuses have reminded stock market participants that Hillary or Barack will likely be the next U.S. President (check out the smart money at intrade.com), and they're both taking aim at the heads of publicly traded hedge funds. For example, Fortress Investment Group (FIG) and The Blackstone Group (BX) are two publicly traded hedge fund firms whose stock prices essentially fell off a cliff following the recent presidential caucuses. Why? Carried Interest Tax Reform.

Carried Interest is a portion of hedge fund managers' income, and it is currently taxed at a special lower tax rate. Both Hillary and Barack want to raise these taxes. However, raising the tax will do a lot more than simply hitting the pocketbooks of a few wealthy hedge fund managers. In fact, it could destroy an entire market industry.

Historically, Hedge Funds were only available to the extremely wealthy. However, the fortune of the "little guy" seemed to be improving in early 2007 when firms like Fortress and Blackstone IPO'd and became available to everyone. Unfortunately, the credit market woes and the shakeup for several high profile quantitative hedge funds have caused the entire industry to suffer.

The next shoe to drop may be Carried Interest Tax Reform. If the Carried Interest Tax is increased it will hurt the entire industry by decreasing profits and incentives for publicly traded hedge funds and by encouraging other hedge funds to stay private (i.e. they'll only be available to the extremely wealthy).

The U.S. market has been struggling in recent months, and the high cost of anti-hedge fund campaign platforms could help push us over the edge. No one has a crystal ball, and only time will tell what comes next (both FIG and BX are starting to gain back some of their recent losses due to a BX acquisition). As we approach the election, it will be very interesting to watch the stock prices of firms like Blackstone (BX) and Fortress (FIG).

Comments

[VennData:]

So, these guys have to pay the same rate as everyone else, and you think that will "Kill the entire industry?" What industry has been killed when the managers of that industry are forced to pay the same tax rates for their work as everyone else? Do you have any examples of this?

Mutual fund managers pay the same tax rates as everyone else and they haven't all "gone out of business."

Tax rates are much higher on the owners / managers in many European and Asian countries that have active hedge funds. You don't see them "going out of business."

You give no reason for this, you just state it. If they are still making profits, but paying the going income tax rate, what makes this industry so unique that the entire industry will "go out of business?"

This is such bull. Do you realize how lame these arguments are? How foolish they sound to people. What is the reason that these people will ALL stop investing in their hedge fund systems and PE formulas?

I say we try it and see.

2008 Jan 10 02:19 PM

[bayesian1:]

If I were a hedge fund manager there is no way I would go public if it meant a big increase in my taxes. Why not just stay private or move to another country?

2008 Jan 10 02:29 PM

[AQR:]

The first comment obviously comes from a Democrat.

2008 Jan 10 02:49 PM

[AQR:]

The first commenter is obviosly a Democrat.

2008 Jan 10 02:50 PM

[brooklyn91941:]

If you dont think that at least 2% management fees and 20% of the profits is enough incentive to operarte a hedge fund. I guess that Jim Simons only made $1.5 billion in 06 wasnt enough incentive either. This tax issue is a canard.

2008 Jan 10 03:00 PM

[helplessobs...:]

In the 1930s J. Paul Getty took control of the Union Oil Company, fired the board of directors, established a new board and called a combined meeting with company officers. The agenda had two items.
1. all company senior officers were fired - passed
2. former senior officers would be considered for re-employment the following monday at half their current pay - passed

All officers were given new contracts at a lower pay scale.

Getty's officers didn't run and I don't think the hedge fund managers will run if they have their tax rate increased.

2008 Jan 10 03:14 PM

[RichieRich1:]

Buffet said it best

"I've never seen anyone stop investing just because taxes are a little higher"

2008 Jan 10 04:13 PM

[cathompson:]

I went through a whole box of tissues when I read this.

2008 Jan 10 04:22 PM

[csb:]

This article is absurd. It makes the Democrats' argument for them; ie, there is no justification and all the proponents can do is assert the desired conclusion. Are these guys going to quit the business in a huff? And if they do, so what? Who gets hurt? Are these guys performing a service to society worth rewarding? Open your eyes to damage they have done!

Wake up! The party's over next January.

2008 Jan 10 04:43 PM

[Mark Hines:]

All,
Thanks for your comments. Admittedly, I tried to make this a controversial post to capture some attention (shame on me). However, I've gotten some very constructive and well researched comments to this topic on my original post at Vestopia.com/markh

2008 Jan 10 04:45 PM

[Mark Hines:]

I am re-reading some of the comments here, and I've got one thing to say...

Pa-leeeease. You guys all need to get real. Do you really want more money in the government's pocket instead of the private equity guys? The private equity guys actually allocate the money efficiently, stimulate the economy, create jobs, and everyone is better off. If you give it to the bureaucratic government they'll just P!$$ it away. This exactly why the lower tax rate exists in the first place... it's to give smart business people incentive to take risks and make the economy better.

2008 Jan 11 01:50 AM

[Malkiel:]

Do you have any reasoned arguments here, Hines, or are you just going to show how much of a brainwashed Reagan baby you are? This issue is strictly about hedge fund managers paying their fair share of personal taxes like anybody else, and none of them are going to stop doing what they do just because they have to pay a little more taxes on their outsized gains. As for government, government and the public sector serve the vital needs of the 95% of us who control only 5% of the wealth, who need everything from ambulances to paved roads, and is neither inherently bureaucratic nor inherently wasteful, especially at the local level. If you think corporate America is less "bureaucratic" and "wasteful" then you are truly brainwashed by ideology...

2008 Jan 11 04:32 AM

[Bobs your u...:]

Well first, I think its unlikely that HC is trying to kill the HF's. Her daughter currently works for one in NYC (or did). Furthermore, the there are several HF managers out there that outwardly support HK. Don't bite the hand that feeds you.....

You will find no love for HK from me. However the article somehow implies that the success of HF industry is reliant on the fact that they pay lower taxes. Well, if you work at a HF and the only reason you have people in your fund, is for the tax benefit, you should consider a new career.

Further, why should more HF's go public? Why is blackbox investing a good thing for the masses. I couldn't disagree more. I applaud Steve at BR for his IPO. -- A very wise man, who recently passed unexpectedly commented that when the HF sell, its probably NOT a good time to buy. WOW, he couldn't have been more right. So trust me, Steve wasn't selling shares out of his altruistic heart, to give the masses a piece of the promised land.... please.

I have no problem with HF's paying higher taxes, as it will help clean up the HF. Hopefully eliminate the one hit wonders and multitude of followers that masquerade as real HFs.

There is a reason that HF's were only ever used by the wealthy. The idea of opening them up to the masses is absurd and with the legal fallout, resulting from the mortgage debacle, I think you will soon see why.

2008 Jan 11 09:14 AM

[brooklyn91941:]

The author has to get a job on Larry Kudlow's show. If they had their way we would have unbreathable air, no highway system undrinkable water, poor old people. Sure there is govt waste, but to think that HF and PE mangers are a panacea to the economy is ludicrous. These were the guys that helped invent the toxic paper that is sloshing around the world and could bring about serious financial problems in this country.

2008 Jan 11 10:51 AM

[electric car:]

Are there records that private equity / hedge funds have created more jobs in the companies they have taken private? Or have they at least created more jobs in the hedge fund industry? Layoffs versus jobs data can resolve the issue of job creation. Perhaps there is a case for them by showing they kept jobs in the USA and avoided outsourcing. Unless the data argues the opposite.

If private equity partnerships with SIVs from China and the Mid East take ownership away from US investors there will be a case for the democrats to investigate taxability and national security issues.

I for believe that Blackstone's CEO Schwarzman overdid the PR stuff that led to the angst regarding the industry.

2008 Jan 11 12:15 PM

[Tim Eriksen:]

I'll believe the Democrats will eliminate carried interest when I see it. Schumer is out there raising millions from hedge fund managers. I don't think they are giving it just to be taxed higher. My bet is that it is a popular issue that the Democrats won't follow through on. They are just pandering for votes.

2008 Jan 11 01:31 PM

[eternitus:]

Just pandering for votes... On the personal taxes, these guys should pay the same rates as everyone else.

Taxing the public operating companies is another thing altogether. It seems ridiculous to me that we would tax these partnerships at a higher rate when the "little guys" finally get a chance to own these things, but not at the private level where only wealthy guys have access.

In addition, it seems like a monumental waste of time for congress to levy a tax a grand total of 3 companies (I think OZM is one), especially when it will be challenged in court by the companies on the basis of discrimination. Different corporate structures are taxed different ways (C-Corps, S-Corps, LPs, LLCs)... every company, public and private, has a right to chose whichever structure it wishes. What justification is there to single out a few successful companies and say that they aren't allowed to use a limited partnership structure, while some other public companies are?

2008 Jan 12 11:49 AM

[W David Ste...:]

Could destroy the entire hedge fund industry? Sign me up, bro...

2008 Jun 11 10:38 AM

[Rahul Sarin:]

The private equity has lost over 50% of my wealth! You call that efficient allocation of money! This is such crap!
What do the hedge funds do anyway... at the end they gamble with your money ...thats all! If they beat the benchmark, they take a bonus...but if they don't ...they still make their base salary. Both ways they are wining.
It doesn't harm them to take risks!




On Jan 11 01:50 AM Mark Hines wrote:

> I am re-reading some of the comments here, and I've got one thing
> to say...
>
> Pa-leeeease. You guys all need to get real. Do you really want more
> money in the government's pocket instead of the private equity guys?
> The private equity guys actually allocate the money efficiently,
> stimulate the economy, create jobs, and everyone is better off. If
> you give it to the bureaucratic government they'll just P!$$ it away.
> This exactly why the lower tax rate exists in the first place...
> it's to give smart business people incentive to take risks and make
> the economy better.

Feb 23 04:21 PM