Fortress worries about Obama’s plans and other new rules…
Last Thursday, we had the spectacle of five top hedge fund managers testifying on Capitol Hill. Several Congressmen honed in on the current tax code which allows hedge fund partners (and other partnerships) to be taxed at a lower rate because of the rules on carried interest. At last week’s hearing, George Soros and Jim Simons agreed that the rules should be revised. John Paulson, Philip Falcone and Ken Griffin offered several conditions.
The folks at Fortress Investment Group (FIG) weren’t on that panel, but that same day they reported its first quarterly loss since going public in February 2007 and announced that redemptions were running around 25%. But it was some of the new disclosures in the 10Q they filed that piqued my interest.
While the warning about the potential change in the tax code in terms of carried interest has been in previous filings, the last line was new:
If legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our equityholders are required to pay, thereby reducing the value of our common units and adversely affecting our ability to recruit, retain and motivate our current and future professionals. Senator Barack Obama, the President-Elect, has publicly stated that he supports similar changes to the tax code.
Also new was a warning of the increased attention on hedge funds by members of Congress and the additional regulation that this could bring. Among the concerns singled out was the SEC’s rule on short-selling, which expired last month, though companies are still required to file the Form SH until next August: “Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.”
Of course, given Fortress’ performance — the stock has declined a whopping 93% since February 2007 — new regulations seem like the least of their problems.
Image source: NYSE
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Posted in Tags: 10Qs, hedge funds |
 4 Comments » |
November 19th, 2008 at 12:18 pm
While a few hedge fund managers might have agreed on changing the ‘rules’ landscape for the hedge fund industry, the congressional hearings made a few things very clear:
1. HF managers (or atleast those that were represented in the hearing) put the blame for the financial crisis squarely on the shoulders of the ‘regulated industries’ (read ‘banking industry’).
2. Infact Mr. John Paulson when asked whether he supported regulation for the hf industry, went on record to say that he completely supports additional regulation for the troubled industries.
There is no doubt in my mind, that little remarks in filings aside, these and others from the hedge fund industry will not submit to regulation tamely.
-Tejus
November 20th, 2008 at 2:29 pm
….such legislation would materially increase the amount of taxes that we and possibly our equityholders are required to pay, thereby reducing the value of our common units and adversely affecting our ability to recruit, retain and motivate our current and future professionals.”
If this is the best argument they can come up with, then they ought to fire Richard Baker. Carried interest is income, plain and simple, and it should be taxed as such.
November 20th, 2008 at 5:57 pm
@ John: Agreed: seems a bit far-fetched to make that argument given where the stock is currently trading at.
November 21st, 2008 at 10:46 am
hedge funds should be regulated out of business. They are nothing but organized crime. No one can consistently beat the market without consistently breaking the law.