The House Committee on Oversight and Government Reform held hearings on the role of hedge funds in the financial crisis and whether they should be more strictly regulated.
The committee heard testimony from five prominent hedge fund managers, including George Soros, and four academic experts. "Currently hedge funds are virtually unregulated," said committee chairman Henry Waxman, D-Calif. "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."
He noted that over the past decade hedge fund holdings have reportedly increased more than five-fold to over $2 trillion. Waxman also pointed out that the hedge fund managers testifying before his committee earned an average of over a billion dollars annually but still enjoyed certain tax breaks, including the ability to treat the vast majority of their earnings as capital gains.
"That means that at least some portions of their earnings could be taxed at rates as low as 15 percent," he said. "That's a lower tax rate than many school teachers, firefighters or plumbers pay."
Soros (pictured) testified that hedge funds would be "decimated" by the financial crisis and would need to shrink their portfolios by 50 to 75 percent. He also warned, "A deep recession is now inevitable and the possibility of a depression cannot be ruled out."
He agreed that financial engineering should be more strictly regulated and that new investment products should be approved by regulators. However, he warned against taking regulation too far. "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," he said. "The bubble has now burst and hedge funds will be decimated. It would be a grave mistake to add to the forced liquidation currently dislocating markets by ill-considered or punitive regulations."
Separately, accounting firm Rothstein Kass released the results of a survey it conducted of hedge fund managers, and found that 98 percent of them believe the new administration is likely to increase regulation of the hedge fund industry. Eight-four percent anticipate increased regulation of asset valuations and counterparty risk.
Nearly 77 percent of respondents agreed that the overall impact of the new administration on the hedge fund industry would not be positive. Under half of the survey respondents indicated that increased regulation would affect their capital-raising efforts. Nearly 84 percent of hedge fund managers believe that regulatory compliance costs will make hedge funds more costly to operate.
