Usually when I’m getting ready for work in the morning, we have the radio tuned to the local NPR station. Mostly it’s background noise but every now and then a key word or phrase will cause me to slow down and listen. One of those key phrases is “hedge fund,” and today it felt like I was hearing it every five minutes.
That’s because NPR’s “Morning Edition” program featured not one, but two separate stories on hedge funds. The first was an interview with Sebastian Mallaby, a senior fellow in International Economics at the Council on Foreign Relations and author of the book “More Money Than God: Hedge Funds and the Making of a New Elite.”
In the interview, host Deborah Amos picks up on the apparent theme of Mallaby’s book (which I have not read) by leading in to the conversation with this: “This is a book about finance, but you’re talking about some very eccentric people who are able to, in some ways, game the American financial system. Tell us about one of them.”
Mallaby opened with a story about Alfred Winslow Jones and how he had run undercover missions against the Nazis in the 1930s. Jones had gone to Germany ostensibly to work for the state department but instead fell in love with an anti-Nazi German activist. He signed up for the Marxist Workers School in Berlin. “So the father of this hyper-capitalist, financial vehicle actually had flirted with Marxism in his youth,” Mallaby said.
But when Mallaby interviewed people who had worked for Jones, none of them knew about his past life. This secretive trait became a recurring theme for Mallaby as he looked at more hedge fund managers. “So that kind of instinct for being under the radar has characterized hedge fund managers ever since,” Mallaby said.
He also touches on what I have always thought is the best part of the hedge fund industry, which is that it is essentially made up of entrepreneursâ€”mostly small businessmen taking a chance on their own ideas. He cites the example of James Simons. “If you take James Simons of Renaissance Technologies, who emerged as the highest earning hedge fund titan in the 2000s, this is not a guy who took orders from on high very nicely,” Mallaby said. “He never wears socks, he sort of, you know, drives his car at all kinds of speed, This is the kind of personality who is both free-thinking independent, self-reliant, a bit maverick, a bit crazy, who goes and becomes an entrepreneur, and that’s what the industry is full of.”
Later in the interview, talk turns to hedge fund regulation. Mallaby said he thinks larger hedge funds should be regulated like investment banks, “because that is effectively what they’ve become,” but that smaller funds should remain unconstrained by regulation.
On John Paulson and others making a killing betting against the mortgage bubble, Mallaby said the bets weren’t wild; they resulted from serious and well-funded research.
Then, a short time later, NPR ran a story reported by John Ydstie about machinations on Capitol Hill to change the carried interest tax rate.
Ydstie interviewed Len Burman, a fellow at the Brookings Institution and a professor at Syracuse University. Burman called the tax break on carried interest “a huge windfall to some of the best-off people in society.”
Jeffrey DeBoer, president of the Real Estate Roundtable, said hiking the tax rate on carried interest to 35 percent from 15 percent would hurt mostly real estate partnerships, and by extension construction workers. According to NPR, “with more than one in four construction workers unemployed and the commercial real estate sector struggling, now is not the time to raise the tax rates paid by real estate developers.”
“Those people hire construction workers,” DeBoer told NPR. “They hire all kinds of other people around the projects. And this proposal, again, discourages that kind of activity.”