SPECIAL REPORT
Powerful Private Companies
Dalio: out of the shadows BY ALEXANDER SOULE
casoule@westfairinc.com
I
f there were any doubts about the power Ray Dalio wields via the $100 billion-plus in assets managed by his Bridgewater Associates in Westport – time to put that doubt to rest. Time magazine included Dalio on its list of the 100 most influential people in the world, among several moguls who include Warren Buffett, IBM Corp.’s Ginni Rometty, Facebook’s Sheryl Sandberg and Apple’s Tim Cook. If that quartet is regularly in the public eye, Dalio’s inclusion marks a symbolic first of sorts in which privately held hedge funds in Fairfield County and elsewhere are joining the mainstream of American business, despite their ongoing penchant for secrecy. As Dalio showed up at this past winter’s Davos economic summit, SAC Capital Advisors founder Steve Cohen made a public bid to put his own vast wealth into play by buying the Los Angeles Dodgers, ultimately getting beaten out by an investment group led by Magic Johnson. In a statement published by Time, former Federal Reserve Chairman Paul Volcker said Bridgewater’s vast assets are not enough to qualify Dalio for Time’s list, citing more his leadership in financial circles. “What matters more is that he has strong and a bit unorthodox convictions about the workings of the economic machine,” Volcker wrote. “Ray was, for example, one of the first to recognize the risks of the excessive indebtedness and leveraging of the U.S. and some European economies. I have seen the respect Ray commands and the influence of the Bridgewater research. His strong support for Federal Reserve actions during the financial crisis,
considered dangerous by some, is a case in point.” Hedge fund chiefs have gained influence over the past few years. The Center for Responsive Politics points to 2007 as a milestone year when hedge funds ramped up their political organization and funding in response to increased governmental scrutiny. That year, Greenwich-based Tudor Investment Corp. became the first hedge fund to form a political action committee, according to Federal Election Commission data cited by the Center for Responsive Politics. In the 2008 election year, the organization tracked $19 million in political donations from hedge funds and their key employees, quadruple the amount four years previous with Democrats increasing their share to two of every three dollars of that amount. Stamford-based SAC gave nearly $650,000 in 2008, sixth among hedge funds that year, with Tudor, Bridgewater and AQR Capital Management also in the top 20. Still, Democrat U.S. Rep. Jim Himes has raised little money from hedge funds in the current election cycle, with Greenwichbased Lone Pine Capital the top industry donor with a $5,000 contribution. Some 30 corporate and organizational donors have given more to Himes, led by $22,000 from donors affiliated with Goldman Sachs Group Inc. Those with Goldman Sachs connections have given triple that amount to Christopher Meek, however, who is running for the Republican nod to square off against Himes this fall. As of 2012, four hedge funds were in the top 10 for the investment industry, with Shumway Capital the only one ranked in the top 10 with some $750,000 in political contributions in the 2012 fiscal year.
HEDGE FUND POLITICAL CONTRIBUTIONS Two-year election cycles, with party breakdown CYCLE
AMOUNT
DEMS
GOP
2012
$12.1 million
32%
68%
2010
$11.7 million
49%
51%
2008
$19.1 million
67%
33%
2006
$5.8 million
76%
24%
2004
$4.8 million
61%
39%
2002
$4.0 million
71%
29%
2000
$2.5 million
78%
22%
1998
$1.4 million
54%
46%
1996
$1.6 million
48%
52%
1994
$725,000
35%
65%
1992
$700,000
87%
13%
1990
$125,000
84%
16%
$64 million
60%
40%
TOTAL
Data includes individual donations by hedge fund employees Source: Center for Responsive Politics
Hedge funds go to market with JOBS Act BY JANICE KIRKEL
jkirkel@westfairinc.com
W
hen President Obama signed the JOBS (Jumpstart Our Business Startups) Act on April 5, freeing hedge funds to do more marketing and advertising may not have been what he had in mind. And when Congress was creating the legislation, they were not thinking of hedge fund managers, but tech startup companies in Silicon Valley “who rely on the same exemptions from registering securities as hedge funds do,” said attorney Bart Mallon, a co-founder of Cole-Frieman Mallon & Hunt in San Francisco. “Congress wants more money going into startups, so they’ll hire and create products, so Congress’ intent was to make it easier for them to raise capital. An unintended consequence of that is hedge fund managers get a break as well.” Mallon said this is simply because of how securities laws are set up. Tech startups and hedge funds have similar structures in certain respects. The JOBS Act opens up a new source of funding for small companies and startups known as crowdfunding. Companies can raise as much as $1 million a year without having to do a public offering – a step requiring state-by-state registrations that can cost thousands of dollars. One goal of the JOBS Act is to make it easier for startups to raise capital, thus helping
companies grow and hire. With respect to crowdfunding, which is the act of raising capital through a greater number of smaller investors, the JOBS Act eliminates the requirement that those investors be accredited. The securities law definition of an accredited investor is someone who has a net worth of $1 million exclusive of his primary residence. Since a larger number of smaller investors will now be involved, companies are being allowed to use more methods of reaching potential investors. This is likely to change what we see and hear about hedge funds in the mass media. Numerous hedge funds in Fairfield and Westchester counties contacted by the Business Journal said they do not comment in the media on their business plans. But Mallon said the expected increased visibility of the hedge fund industry as a result of the JOBS Act may go a long way toward changing the public perception of hedge funds as secretive, unregulated investment vehicles for the wealthy. “I think when you see more managers out there discussing programs,” said Mallon, “there will be more knowledge with respect to the investing public. Right now mutual funds are viewed as vehicles that more retail-type investors can be investing in. Most hedge funds are close to being mutual funds, but are more private in nature,” he said. Robert Heim, one of the co-founders of the law firm of Meyers & Heim and a former assistant regional director of the
Securities and Exchange Commission in New York City, said he thinks the law will have the most effect on “new and smaller hedge funds that have traditionally been shut out of the more formal institutional capital-raising process.” But he said that it remains to be seen how many new investors that hedge funds will be able to attract. “The truth is there are still a relatively small number of qualified investors for hedge funds. I think investors will be more concerned about a manager’s track record and the risk controls hedge funds have in place. I don’t think the larger hedge funds will use it because they are traditionally available to institutional investors.” Since there will be more advertising and marketing by hedge funds, some of it may be unscrupulous, say Heim and Mallon. “There definitely is the potential for abuse,” said Heim, “that’s why Congress included a provision requiring the SEC to promulgate rules to prevent investor abuses.” And, said Mallon, those rules, due in the next three months, will be created by an overworked, underfunded SEC. “Who will police these people, where is the budget for that?” he asked. “The SEC will be in charge of policing these companies. Where does the manpower come from to do this? They already are mandated to engage in rulemaking from the Dodd-Frank Act and they’re not even close to doing what they’re supposed to have done with that. Now we’re putting more on their plate.”
FAIRFIELD COUNTY BUSINESS JOURNAL • Week of May 7, 2012 13