How hedge funds make so much money

This only one of many ways they use to get inside information or peddle influence.

Massive windfall for them...at our expense:


Hedge Funds Hire Lobbyists for Inside Tips on U.S. Legislation

By Kristin Jensen, Mike Forsythe and J.D. Salant

March 16 (Bloomberg) -- Former U.S. Senator John Breaux, who retired in January, is still walking the halls of Congress. Instead of brokering deals with lawmakers, he's serving as a pipeline for a New York hedge fund.

Breaux, a Louisiana Democrat, is one of a growing cadre of lobbyists being hired by U.S. hedge funds to provide instant tips on the progress of potentially market-moving legislation, from the settlement of asbestos lawsuits to allowing oil drilling in an Alaskan refuge. It's a legal way of letting investors benefit from information gleaned from private conversations with lawmakers and aides. And it's a new twist in Washington lobbying because it has nothing to do with influencing laws or policy.

``Anything that affects a company's profitability from a legislative standpoint is information that's important,'' says Breaux, 61, who works for both the Clinton Group Inc. hedge fund in Manhattan and Patton Boggs LLP, Washington's top lobbying firm by revenue.

Hedge funds, which often pursue high-risk, high-yield investments for wealthy clients, are taking on lobbyists such as Breaux to provide political intelligence that allows the funds to buy and sell company stock on information before it's widely known.

The practice is taking place under the radar, because federal disclosure rules only require a person to register as a lobbyist and disclose clients when active efforts are made to affect legislation. And hedge funds aren't interested in talking about it: Companies among the 25 biggest funds, including the Clinton Group, which has no connection to former President Bill Clinton, declined to comment for this story.

`Everything Is for Sale'

``It's a burgeoning area of work,'' says Tony Podesta, 61, a Democratic strategist, lobbyist and the brother of John Podesta, a former chief of staff to President Clinton. Tony's firm, PodestaMattoon, has a hedge-fund client he won't name. ``They would have a different view of this if we had to register,'' he says.

Federal rules prohibit Breaux from lobbying former colleagues for at least a year. There's nothing stopping him from a lunch, cocktail, workout or phone call to Capitol Hill that might yield a tradable tip for a hedge fund.

``In Washington, everything is for sale,'' says Gary Ruskin, 40, director of the Portland, Oregon-based Congress Accountability Project, a group founded by consumer and political activist Ralph Nader that monitors congressional ethics. ``That includes investment advice.''

Taking Risks

Banks and mutual funds have hired lobbyists and employed Washington staff for years. What sets hedge funds apart is their ability to act instantly on news and to employ trading options that allow them to make money whether stocks rise or fall. Hedge funds can take risks that mutual funds, entrusted with retirement savings, typically don't. These methods include short sales, which allow them to borrow securities in anticipation of paying for them when the price drops.

Lobbyists such as Breaux and Podesta use the connections they made while working in the government to get information or insight that's not readily available to most investors, such as whether a bill is going to reach the Senate floor or whether lawmakers are far from a compromise.

Podesta, a former counsel to Senator Edward Kennedy, a Massachusetts Democrat, raises money for Democrats. So does his wife, Heather, a Washington lobbyist with Blank Rome Government Relations LLC. That gives them an avenue to power brokers.

Podesta says he talks to his hedge-fund client about every other week, providing tips or responding to requests on what a bill or new government regulation means. Recently, one investor group asked him about legislation that would ban U.S. companies such as Tyson Foods Inc. and Swift & Co. from resuming imports of Canadian cattle because of concern about the spread of ``mad cow'' disease.

Boosting Egos

``My answer was it probably will pass -- and it probably won't ever end up in law,'' he says. He was on track: The Senate passed the bill March 3 even as the White House issued a statement that President George W. Bush would veto it.

Jonathan Slade, 46, a Washington lobbyist whose clients include New York-based investment firm and hedge fund GoldenTree Asset Management LP, takes advantage of Wall Street's prestige on Capitol Hill. Slade says he likes to set up conference calls and meetings between congressional staffers and the hedge fund executives. It helps boost Washington egos, he says.

``They think it's cool talking to someone on Wall Street, especially if it is a big player,'' says Slade, who spent four years as a congressional aide before becoming a lobbyist in 1986 and is now a principal with the Washington-based Cormac Group. ``They ask them, `What's Wall Street saying?' They love that.''

`Nuance'

Lawmakers and congressional aides are free to share details on legislation with people they know, except on such matters as intelligence and homeland security. Stricter rules exist at agencies such as the Bureau of Labor Statistics, which releases U.S. unemployment figures and bars employees from divulging numbers before they become public.

Lobbyists sometimes act as translators for hedge fund managers, guiding them through the ``nuance'' of Washington politics, says Alex Vogel, former chief counsel to Senate Majority Leader Bill Frist and co-founder of Mehlman Vogel Castagnetti Inc., a Washington lobbying firm.

``Hedge fund managers are very good at understanding the way Wall Street reacts to things,'' Vogel says. ``They are not as adept at understanding how Washington reacts.''

One focus for hedge funds is a $140 billion asbestos proposal by Republican Senator Arlen Specter of Pennsylvania. The bill would compensate U.S. victims of disease caused by asbestos exposure and halt as many as 300,000 pending lawsuits that have bankrupted 70 companies, including W.R. Grace & Co., a Columbia, Maryland-based maker of chemicals and building materials.

`Truth Squad'

Slade says he acts as GoldenTree's ``truth squad'' on asbestos, counteracting overly optimistic assessments about the chances of a settlement from companies that are trying to win over investors.

Last June, Slade, using a network of relationships he's built among lawmakers, staff and other lobbyists, told GoldenTree the settlement wouldn't pass Congress in 2004. That was three months before Frist publicly declared the legislation dead.

Specter says he plans to reintroduce the legislation in the current session.

``Wall Street constantly overreacts or under reacts to information,'' Slade says. ``Legislation is a nine-inning game. The bill being introduced is like the second or third inning. Until you see X, Y, and Z, you can't take any of this seriously.''

Gambling on Bonds

GoldenTree, which manages about $6.5 billion, won't comment. ``Sorry, can't help,'' Chairman Leon Wagner said in an e-mail.

Right now, investing in the bonds of one of the bankrupt asbestos-products makers such as Toledo, Ohio-based Owens Corning, the largest U.S. insulation producer, is risky because there's no guarantee the bonds will pay out. A hedge fund might take the gamble, for example, of buying an Owens Corning note, due in 2009, that Friday was selling for 63 cents on the dollar on a bet that a settlement will allow companies to recover and pay their debts.

The hedge funds that have contacted lobbyist Steve Elmendorf, 44, who helped run Senator John Kerry's campaign for president, have told him they don't care which way the settlement goes, as long as they are prepared.

``They want to know whether to buy or sell,'' says Elmendorf, who has a hedge-fund client he won't disclose. He works for Bryan Cave Strategies LLC, a unit of Bryan Cave LLP, a St. Louis-based law firm.

`In the Loop'

Hedge funds using lobbyists for information should be aware that some firms may have ``a dog in the fight'' -- other clients pushing for a particular legislative outcome, says Robert Johnston, managing director for equity research at New York-based Medley Global Advisors, which advises Wall Street clients including hedge funds.

``There's no question that lobbying firms are very much in the loop on the key issues -- they're actually shaping the legislation,'' Johnston says. ``It's probably wise to try to get lobbyists on all sides of the issue.''

Some hedge funds are looking for more than information on the direction of a bill. Among the largest funds, at least 10 have hired firms to lobby to try to influence the outcome of a policy or bill, according to registrations compiled by Washington's PoliticalMoneyLine, an independent group that tracks campaign finance and lobbying.

Chicago-based Navigant Consulting Inc. says it's lobbying for the asbestos settlement for Dallas-based HBK Investments LP and three New York-based firms, D.E. Shaw & Co., Elliott Associates LP and Och-Ziff Capital Management Group.

Navigant reported $400,000 in fees within 12 months working for the funds and six other clients, lobby registration documents filed with the Senate show.

Soros Fund

``We felt we could play a useful role on the legislative front for companies that supported asbestos-reform legislation,'' Navigant lobbyist Rick Farrell says. ``We believe there will be a successful outcome on the legislation this year.'' HBK, Shaw, Elliott and Och-Ziff declined to comment.

Wilmer Cutler Pickering Hale & Dorr LLP, a Washington- and Boston-based law firm with more than 1,000 attorneys worldwide, filed to represent Chicago-based Citadel Investment Group LLC and billionaire George Soros's Soros Fund Management LLC on hedge- fund regulation.

Greenwich, Connecticut-based Tudor Investment Corp. and New York-based Moore Capital Management LLC have their own Washington offices.

For Breaux, Slade and other lobbyists, working with hedge funds is a welcome break. They don't have to push people to move or kill a bill.

``You are not paying me to lobby,'' Slade says. ``You are paying me for information.''

To contact the reporters on this story: Kristin Jensen in Washington kjensen@Bloomberg.net Mike Forsythe in Washington mforsythe@bloomberg.net Jonathan Salant in Washington jsalant@bloomberg.net
Last Updated: March 16, 2005 00:01 EST