Five of the world’s richest and most powerful hedge fund managers will face a US Congressional panel on Thursday that wants to know if the secretive industry poses risks to the financial system.
John Paulson, George Soros, Philip Falcone, James Simons and Kenneth Griffin were scheduled to testify at the House of Representatives Committee on Oversight and Government Reform about the role of hedge funds in financial markets and their regulatory and tax status.
Committee Chairman Henry Waxman, a California Democrat, asked the men to testify because each earned more than $1 billion each last year. The hearing, due to begin at 1000 ET (1500 GMT), is the latest in a series Waxman is holding to investigate the causes and effects of the financial crisis.
The hearing comes at a time when several lawmakers have suggested the loosely regulated $1.7 trillion industry will face new regulations. Hedge funds, which are delivering their worst-ever returns this year, have been widely blamed for helping bring down two major US investment banks and for having kicked stock prices lower in the last weeks. Several fund managers said they were relieved not to have been called to appear before the committee, which demanded that each witness supply details about the funds in advance.
Waxman asked the five fund managers to give the committee a list of all funds controlled, total assets under management, private placement memos, reports to investors and documents about each fund’s position in credit default swaps. He also requested documents describing the level of risk associated with the hedge funds and details about how much each man was paid in recent years.
The big paychecks received by top Wall Street executives were criticized by Waxman at recent hearings about American International Group Inc and Lehman Brothers Holdings Inc, key players in the US financial crisis. Another issue likely to arise at the hearing is a recent government action that hedge fund managers say took away an important trading technique and resulted in heavy losses.
Two months ago, US financial regulators at the Securities and Exchange Commission briefly forbid money managers from shorting roughly 1,000 financial stocks, or betting the stock price of these companies would decline. The average hedge fund has lost 15% this year, according to Hedge Fund Research and some individual managers have lost a lot more than that. Heavy losses, coupled with investors’ demand for their money back, will likely kill off hundreds of the industry’s estimated 9,000 portfolios this year, industry experts said.
Soros Fund Management chairman George Soros, a billionaire philanthropist who is said to have earned $1 billion by betting against the British pound in 1992, said last month he expects the global financial crisis to cut the hedge fund industry to as little as one-third its current size.
Paulson & Co’s John Paulson, one of the first investors to bet housing prices could decline on a national basis last year, is making money this year, even as some of the others who will testify are nursing losses.
Kenneth Griffin’s Citadel Investment Group is facing a difficult year as his flagship Kensington and Wellington hedge funds are off 38% through early November. (Reuters)