Congress Shows Hedge Funds Some Love

The Waxman Witch Trial came to an abrupt halt as major hedge fund managers appeared before Congress. Though they were briefly asked about the systemic risks posed by hedge funds, Congressional members, Democrat and Republican, seemed to buy the argument that hedge funds pose far less systemic risk than the mainstream financial community.

Those managers present for the hearings were George Soros, Renaissance Technologies' Jim Simon, John Paulson Philip Falcone of Harbinger Capital and Ken Griffin of Citadel.

Another issue at stake was carried interest- A share of any profits that the general partners of private equity and hedge funds receive as compensation, despite not contributing any initial funds. This method of compensation seeks to motivate the general partner (fund manager) to work toward improving the fund's performance. Soros and Simons agreed that carried interest should be taxes as ordinary income, while Paulson, Falcone, and Griffin disagreed.

The hedge fund managers also supported more transparency, as long as that transparency applied only to regulators and not in " In the New York Times."

Democrat Jim Cooper noted, "The headline of this hearing is definitely Paulson vs. Paulson."

That seemed to be taking it too far for John Paulson who said, "I in no way want to be critical of Secretary Paulson," he said. "He's done a great deal for this country. He's willing to change his positions when the circumstances change."

I must say that while hedge funds are not primarily responsible for the current crisis, the sytemic risk posed by hedge funds is very real and should not be taken lightly.