hedge-fund managers are consistent Democratic donors.?

Question

Hedging Your Votes
Taxing questions.


Democrats have so far gotten the lion’s share of hedge-fund managers’ campaign contributions in the 2008 presidential money race — 75 percent, according to a Center for Responsive Politics/Absolute Return magazine analysis of the candidates’ first-quarter financials. Next week, when financials are due, we’ll know if the trend kept up in the second quarter. For now the more interesting question is: Will it continue after the Democrats raise taxes on private-equity and hedge-fund managers, as they appear determined to do?

Last Wednesday, the Senate Finance Committee held a hearing on “carried interest” — the percentage of a fund’s returns that its managers keep as compensation. This comes after 14 House Democrats proposed a bill that would more than double the taxes that fund managers pay on these fees. Your typical fund manager takes around two percent of the fund’s value as a fee for managing the money, and on this he pays regular income tax of up to 35 percent. In addition, he keeps around 20 percent of the returns on the fund’s investments — on this he pays the capital-gains tax rate, which President Bush cut to 15 percent in 2003. These funds are quite large, in the billions, and generate outsized returns, so these guys have been in the news lately for their astronomical take-home pay.

Now the Democrats want their cut. They say it’s not fair that these managers pay such a low rate on so much income. They want them to pay the regular income-tax rate — 35 percent.

Here’s where things get weird. Typically political parties crack down on the other party’s donors, not their own. But unlike their financial brethren in the greater securities/investments community, hedge-fund managers are consistent Democratic donors. While the industry overall only shifted its giving to the Democrats in 2006 when a power-shift looked all-but-certain, CRP/Absolute Return data show that hedge funds have favored Democrats for longer and by wider margins. In 2006 hedge funds gave 69 percent of their campaign cash to Democrats (the industry overall was more closely divided at 53-45). They gave 67 percent to Democrats in 2004. In 2002, it was 84 percent.

As mentioned above, first-quarter filings from the 2008 presidential candidates show that the funds continue to favor Democrats. Connecticut Senator Christopher Dodd received the most — close to $350,000 — which reflects the large number of hedge funds in his state as well as his position as chairman of the Senate Banking Committee. John Edwards came in second with over $190,000. Almost all of that money came from the Fortress Investment Group, which also paid him close to $500,000 in consulting fees last year. (Edwards told the Associated Press that he took the job “primarily to learn” about financial markets and their relationship to poverty.) Hillary Clinton came in third, followed by Rudy Giuliani and then Barack Obama.

A top Republican fundraiser I talked to simply didn’t believe these numbers could be accurate. He pointed to a number of high-profile hedge-fund managers who have given to Republicans, such as Paul E. Singer, a founding partner at Elliott Associates and major Giuliani backer. When I asked him to assume that the numbers were correct for argument’s sake, he said, “Then it would be the stupidest thing I could imagine.”

Evidence that hedge-fund giving runs counter to the sector’s best interest also comes from the fact that the Managed Funds Association, which represents hedge funds in Washington, directs most of its giving to Republicans. In 2004 the split was 68-32. Even in 2006, with the rest of the industry trending Democratic, the MFA favored the GOP 57-41.

CRP executive director Sheila Krumholz says, “The Managed Funds Association is a good example of a business association giving for more pragmatic reasons, based on its legislative agenda and more in the general interest of these firms. Yet many companies,” she says, “even members of the association, give 100 percent to Democrats.” Avenue Capital Group, D.E. Shaw, Farallon, Fortress, and yes, Soros Fund Management are among the major Democratic donors who populate the association’s membership list.

One can think of several reasons why hedge-fund giving is so at odds to what one would perceive to be the best interest of the industry. First, most hedge funds are located in blue states and therefore represented by Democrats. It probably makes sense for these managers to give to a Chris Dodd, a Hillary Clinton, a Nancy Pelosi, even if they don’t share their ideologies. That could skew the data. But a closer look at the giving patterns of some of the top donors finds political contributions spread out over a large number of Democratic candidates and PACs. Thomas F. Steyer, senior partner at Farallon Capital Management in San Francisco, gave $1,000 to Nancy Pelosi (and $5,000 to her PAC), sure. But he’s given tens of thousands more to other Democrats, running the gamut from the hawkish Joe Lieberman to the very liberal Russell Feingold. Not all hedge funds are located in blue states, either. David Bonderman, a big Democratic donor, runs the Texas Pacific Group from Fort Worth, Texas.

Second, one could argue that influential lawmakers from both parties support higher taxes and more regulation on hedge funds, so it doesn’t matter whether they give to Republicans or Democrats. Iowa Republican Charles Grassley, ranking member on the Senate Finance Committee, has long favored forcing hedge funds to register with the Securities and Exchange Commission, something they argue they shouldn’t have to do. And in a statement at Wednesday’s hearing, Grassley defended the idea of raising taxes on publicly traded partnerships like Fortress and Blackstone.
But this explanation is also lacking. It is the Democratic party, not the GOP, that seeks to roll back Bush’s investment-friendly tax cuts on dividends and capital gains. Carried interest and hedge-fund managers are merely the softest targets in what promises to be a broader Democratic attack on the Bush tax cuts. The fundamental logic — that the investor class is overcompensated and ought to pay more — is the same.
Listening to the Democratic vs. the Republican candidates for president provides an even clearer demonstration of the difference between the parties. John Edwards, ardent student of the industry though he may be, has come out in favor of higher taxation and increased regulation of private-equity and hedge funds. And Thursday the New York Sun reported that Barack Obama has also come out in support of doubling taxes on publicly traded partnerships. Hillary Clinton, who along with Chuck Schumer represents Wall Street in the Senate, is the only holdout so far (a spokesman told the Sun she is still “evaluating” the issue). This bit of politically-motivated reticence aside, the Democrats’ track record on taxes speaks for itself. By any measure of common sense, a smart man would bet on the GOP to keep taxes low and capital deregulated.

Finally, there’s the Soros factor. But while this can partially explain large discrepancies in past cycles, particularly 2004, Soros’s pocketbook was silent during the first quarter of 2007, and the Democrats dominated anyway.

What’s left is the explanation offered by CRP’s Krumholz: “I sense that, for these individuals, a lot of them are ideologically allied with the Democrats possibly in spite of economic interests that would seem to favor a Republican alliance.” In other words, it’s Thomas Frank’s What’s the Matter With Kansas, only in reverse. Hedge-fund managers tend to live near the top of cosmopolitan, culturally liberal societies. They tend to find Republican positions on embryo-destroying stem-cell research and gay marriage to be nothing short of primitive. They tend to be extremely bright and thus prone to the fallacious idea that if more people like them ran the government, they could solve just about any problem with a new government program. They can afford higher taxes.

Unfortunately, the rest of America can’t. Investment capital is the lifeblood of business expansion and job creation, and the idea that Congress can’t find offsets in the bloated federal budget and must raid Wall Street for more money is preposterous. I know — no one deserves to have their taxes raised quite like these extremely well-compensated benefactors of the party that seeks to destroy them. However, as usual, it’s up to conservatives to know better.

Answer 1

Sounds plausible. Special Interests of every kind tend to give to both sides - but give more heavily to the side they expect to actually win.

Answer 2

Typically, hedge fund strategy is to short the market. Doesn't it make sense then, if you want the market to fall so you as a hedge fund manager can maximize earnings within the fund, contributing to the party that would likely cause just that to happen is probably a good use of your political contributions?

Answer 3

They're "hedge" fund managers and they're smart enough to hedge their bets, 2008 is the Dems year why would they not put their money behind a winning horse, now let's exclude 2008 and look at where the money's gone in prior years or would that be stealing the wind from your cut & paste sails

Answer 4

don't you love how Republicans only think about money when they vote... and it just COMPLETELY blows their mind when someone votes for other issues...

love of money...

you guys should read the book you brandish so much...