Bergen Community College Investment Group

Hedge Fund Managers to Testify in Washington

By LOUISE STORY
Published: November 12, 2008
Hedge fund managers usually shun the spotlight. But five of them, billionaires all, are about to come under the glare on Capitol Hill.

The money managers — Philip Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros — have been called by a House panel to discuss some of their trade secrets at a hearing on Thursday.

The topics are likely to include the managers’ use of leverage — the borrowed money that fuels investment returns on the way up but can be devastating on the way down — and the managers’ pay.

Also front and center will be the matter of oversight, one of the most contentious issues confronting the loosely regulated hedge fund industry. Regulation, or the lack of it, has been an issue since the 1990s, but it has come to the fore this year as questions have swirled about hedge funds’ role in the financial crisis.

Legislators want to know what went wrong on Wall Street, where hedge funds often play a huge part. The nearly $2 trillion industry manages money for some of the largest pension funds and contributes to the twists and turns of the markets. Hedge fund traders are among the highest-paid workers in finance, commonly making millions, and sometimes billions, a year.

The five managers to testify before the House Committee on Oversight and Government Reform were selected because they each earned more than $1 billion in 2007. They range from industry veterans like Mr. Soros, who is known for his liberal political views and donations, to traders like Mr. Paulson, who foresaw the problems in the subprime mortgage market and made billions betting against mortgage investments.

“Some experts call them the shadow banking system because they operate almost entirely unregulated,” said Representative Henry A. Waxman, Democrat of California, the chairman of the committee. “Very little is known about how they operate and the types of systemic risk they can generate.”

-What do you think was the effect of Hedge Funds in the current economic downturn?