Hedge Funds Are Piqued by White House

By JENNY STRASBURG Hedge-fund managers are showing rare public outrage against the Obama administration, saying that it has wrongly rebuked investors necessary to salving the financial crisis. Fund managers caught in a dispute over Chrysler LLC with the government "generally have been anonymous for fear of going on the record against a powerful president," said one recent letter from Cliff Asness, who runs the $20 billion asset-management firm AQR Capital. Mr. Asness's remarks capture what many fund managers say they feel but would never say publicly: They have been disappointed by the Obama administration, left detached from a leader to whose party they gave 70% of their overall campaign donations during the 2008 election, according to data compiled by the Center for Responsive Politics. That has made them say they are less willing to support government initiatives aimed at luring private capital back into the economy. The effort by hedge funds to be heard was on display Friday in Washington, when the Managed Funds Association and the Coalition of Private Investment Companies, the two biggest U.S. hedge-fund lobbying groups, were among those who met with Treasury Secretary Timothy Geithner to talk about financial regulation, according to people familiar with the meeting. View Full Image Associated Press "But while many stakeholders made sacrifices, some did not. In particular, a group of investment firms and hedge funds that hoped to hold out for a taxpayer-funded bailout. …I don't stand with them. I stand with Chrysler's employees and their families and communities." -- President Obama, from an April 30 speech Hedge-fund chiefs and lawyers said they considered it a sign of progress that they were even invited to such a meeting, though nothing concrete came from the discussion, said people familiar with the matter. Hedge funds have historically shied from the spotlight, hoping to avoid the attention of regulators, politicians and the general public. But as the industry is beset by asset declines, political barbs and the Madoff fraud scandal, Mr. Asness and others say the approach is too passive. "Hedge funds really need a community organizer," Mr. Asness quipped in the three-page letter, pointedly signed as "Unafraid in Greenwich, Conn." The letter seems to capture the broader tensions between the government and private markets. In many ways, both sides need each other to help restore the U.S. economy. But the exact approach for achieving that has revealed a clash in both style and philosophy. Last month, funds representing a minority of Chrysler creditors resisted the government's restructuring plan, in which they were asked to accept a deeply discounted return on their secured loans. Eager to implement the deal, President Barack Obama in a late April speech called the holdout hedge funds "speculators" that were "refusing to sacrifice like everyone else." Hedge funds argued that the restructuring plan favored unions, while trampling the funds' rights as lenders under long-established bankruptcy law. "Let's also mention only in passing the irony of this same president begging hedge funds to borrow more to purchase other troubled securities," wrote Mr. Asness, 42 years old, whose firm wasn't directly involved in the Chrysler situation. He isn't the only one complaining. Paul Singer, who heads the $13 billion hedge fund Elliott Associates, has also written a letter to investors with criticisms of an array of big government programs. "The programs as structured are overly complicated and loaded with features that will produce costly delays in getting the process of deleveraging under way," Mr. Singer wrote. "Let's not forget that false assumptions, unrealistic prices and high leverage got us into this soup in the first place." Two of the biggest such programs, the Term Asset-Backed Securities Loan Facility and the Public-Private Partnership Investment Program, aim to draw private fund managers to buy up such assets using government-backed loans. Hedge funds could make sizable profits on the programs. But the so-called PPIP has been a frequent source of hedge-fund disgruntlement since it was unveiled in late March. Now that the government's "stress tests" of 19 of the biggest U.S. banks are complete, those banks have been told to raise a combined $74.6 billion as a capital cushion. The government is looking to private funds to help. "You definitely need private money in there, and hedge funds have a significant amount of capital to bear," says Joseph Vitale, a banking and regulatory lawyer at Schulte Roth & Zabel in New York. Some hedge funds have said that a key part of PPIP could unfairly benefit Allianz SE's Pacific Investment Management Co. and BlackRock Inc. among a handful of large asset-management firms seen as more politically connected. Pimco didn't respond to a request for comment, and BlackRock declined to comment. "The programs, identified by innocent sounding acronyms like 'PPIP,' 'TARP' and 'TALF,' are rapidly changing, confusing and interwoven," Mr. Singer wrote. He said the programs could cause taxpayers losses while resulting in "concentrated large profits reaped by a small group of anointed gatekeepers." The message from the Obama administration is that hedge-fund managers are, in large part, whining in order to gain more advantage in the toxic-assets programs. The Treasury hasn't yet named fund managers or said how many will qualify to participate, so it is saying hedge funds are protesting before full details are known. The conflicts come after hedge funds spent record amounts on lobbyists and made $16.9 million in campaign contributions in 2008, in large part hoping to stave off tax increases and regulatory changes, according to the Center for Responsive Politics. Write to Jenny Strasburg at jenny.strasburg@wsj.com