Congress probes hedge fund industry

Rep. Waxman examines 'virtually unregulated' hedge fund industry, in House committee testimony featuring industry player George Soros.

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By Aaron Smith, staff writer

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NEW YORK ( -- 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. "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."

The industry is "growing rapidly," increasing five-fold over the last decade to exceed $2 trillion, Waxman said. He added 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," Waxman said. "They invest in assets that are illiquid and difficult to price and sell rapidly."

Among those testifying were 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

"Hedge funds were an integral part of the bubble." 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, like the other hedge fund managers, agreed that increased regulation could be beneficial, 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.

But when more transparency was discussed, Simons of Renaissance Technologies, Soros and other hedge fund managers expressed concerns about releasing particular investment details to the general public.

"The fund-specific information should not be released publicly, which could do more harm than good," said Simons.

He said that rating agencies, not hedge funds, are the culprits that contributed to the burst bubbles that lead to the economic crisis.

"In my opinion, the most culpable [are] the rating agencies, which allowed sows' ears to be sold as silk purses," said Simons.

He suggested that major bond holders sponsor a new non-profit rating agency to provide a more accurate read on the markets. To top of page

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