Hedge funds and private equity: a hedge fund manager's perspective

Freakonomics gets some great responses from a hedge fund manager. No respectable senator can claim any longer (though really, they never could) that there's a good reason to exempt hedge fund managers from taxation.

Excerpts below ...

Freakonomics Blog � Your Hedge Fund Questions, Answered

Q: (1) Do you think the Senate proposal [to raise taxes] really could cause a flight of the industry overseas, as Ben Bernanke hinted?

A: First, let me state the obvious: there is no public policy reason for hedge fund and private equity managers to pay a lower tax rate than teachers, doctors, or lawyers. ..

... let’s not kid ourselves — the tax code is a gift to the industry...

... from a fairness perspective, it is a no-brainer. The notion that the most profitable industry in the history of mankind (I hyperbolize, but on a per-person basis, this might in fact be true) requires a lower tax rate to take risk and make investments, simply does not square with logic. I know of no manager who would stop working or stop investing as a result...

Q: I’m curious as to what degree the emergence of hedge funds has changed business strategy....

.... Often, companies go private when activists chase management into the arms of LBO shops willing to put a level of debt on corporate balance sheets that public investors would find imprudent. As the economy slows or credit markets tighten, these companies will have trouble making their debt payments, and — just as the LBO boom in the 1980s burst — lenders and possibly private equity investors will be left holding the bag...

Q: Do you believe that hedge funds provide a social good? ...

.... What specific benefits to society as a whole are provided by hedge funds? I do believe that, starting with the 1980s bull market, we have seen a society-wide reallocation of human resources. And it is unfortunate that the “best and the brightest” no longer seem to want to go into government or medicine or teaching (I did say I’d be generalizing here), and instead seem to gravitate to the best-paying professions. In other eras, I believe that was not the case to the degree it is today. Hedge funds didn’t make this happen — back in the 1980s and 1990s it was the investment banks that siphoned off the talent — but the industry has certainly made matters worse...

I chose the quotes that I found most interesting, but our manager also says that hedge funds, once they become available to retail investors, will be competitive alternatives to conventional mutual funds.