On October 16th the House Oversight Committee will be holding a hearing to discuss the regulation of hedge funds in the financial markets. Five fund managers have been invited to testify:
John Alfred Paulson, President, Paulson & Co., Inc
Paulson, #78 on the Forbes 400 list of Wealthiest Americans, made much of his money early this year when betting against the housing market:
He made this fortune by outsmarting Wall Street's top financial institutions. Unlike Citigroup, Bear Stearns, Lehman Brothers and Merrill Lynch, he predicted that the sub-prime mortgage industry would collapse - and he placed a huge bet on a downturn in home loans.
George Soros, Chairman, Soros Fund Management LLC
Soros is a wealthy philanthropist and political activist who played a major role in the financial crisis of 1992. With regards to the current financial crisis he has urged the US government to take a great stake in banks:
The U.S. Treasury, rather than using federal dollars to buy up toxic mortgage bonds, would be better off making a direct equity investment in the banks. This in turn would spur reluctant private investors to step in again.
Longer-term, Soros said a plan was required to grapple with the underlying root of the financial crisis: falling home prices. This should include a broader plan for mortgage renegotiations that might help stem the tide of foreclosures, which according to RealtyTrac jumped 27 percent in August from one year earlier.
Asked about suggestions by certain lawmakers to alter the way banks value certain assets, or so-called mark-to-market rules, Soros said that would be a terrible idea.
"The pressure to do this is very great but actually it would probably make it more difficult to recapitalize the banks because you wouldn't know what's inside," Soros said. "Transparency is very desirable."He does, however, favor measures that would boost the insurance caps on the guarantee offered by the Federal Deposit Insurance Corporation, or FDIC, saying that some of the money set aside for the bailout could be channeled toward bolstering the funds available for that guarantee.
Philip A. Falcone, Senior Managing Director, Harbinger Capital Partners
Falcone manages two major funds totaling over $18 million and also made much of his fortune betting against the sub-prime last year. Even he, however, is not immune to the current crisis:
Mr. Falcone, 46 years old, who manages a total of $21 billion, is still up 4% on the year as of the middle of this week. That puts him ahead of many of his biggest competitors, who are in the red. But his dropoff has been precipitous.
"In a year like this I can't think about the gains that I've given back; I can only think about that I'm still up for the year," said Mr. Falcone in an interview this week. "While we've taken our risk down, our portfolio is still well positioned to profit in the months ahead."
Rival traders are watching Harbinger closely for further signs of weakness. Rumors circulate almost every week that the fund is closing -- talk that often gets back to Mr. Falcone. He called it "preposterous" on recent phone calls with investors, according to people familiar with conversations.
"When I hear market talk that I'm liquidating some of my core positions, it's comical," Mr. Falcone said in the interview. "When people ask me, can I ever have a year like I did last year, I say that to be up 115% or 176% would be difficult for anybody to reproduce in any market."
James Simons, Director, Renaissance Technologies LLC
President of arguably one of the world's most successful hedge funds, Simons is also an active philanthropist and economist.
Studied math at MIT, then Ph.D. from UC, Berkeley. Deciphered codes for U.S. Department of Defense during Vietnam; taught math at SUNY Stonybrook after war. Founded Renaissance Technologies 1982. Quantitative hedge fund uses complex computer models to analyze and trade securities. Fees as high as 5% of assets, 44% of profits. Worth the price: a $2.5 million investment in his funds in 1990 would be worth $1 billion today. Hires Ph.D.s over M.B.A.s. Vowed to retire in 2005, can't walk away. Raised $25 billion for institutional fund RIEF in 2006; so far performing below expectations.
Kenneth C. Griffin, CEO and Managing Director, Citadel Investment Group
Griffin is a self-made billionaire who founded the Chicago-based Citadel, which is now one of the most successful hedge funds in the world.
The breakdown happened, Griffin contends, when big investment banks gambled away money and jobs during the late great credit boom. The bosses let all those young gung-ho traders take far too many risks and now everyone is paying the price.
But the answer is simple, in his view. The entire industry needs to overhaul its thinking and, believe it or not, perhaps even accept greater regulation.
Wall Street might expect that attitude from an outsider, one of the after-the-fact naysayers with a grudge against capitalism. But Griffin, the baby-faced founder of the Citadel Investment Group, the $20 billion hedge fund, is quite the opposite. And he, too, is frustrated about the mess in financial services.
"As an industry, we have a responsibility to manage risk in a way that is prudent," Griffin said matter-of-factly.