« Back

July 11, 2007 -- Hedge funds and private-equity firms are set to come under attack today as three separate groups of Washington policymakers hold hearings to consider cracking down on the fast expanding, lightly regulated sector.

The hearing causing the most heartburn among venture capital, private-equity and hedge-fund honchos involves a proposal to ratchet up the federal income taxes alternative asset management firms pay.

The increased scrutiny from Washington comes as hedge funds and private-equity firms have been racking up spectacular profits.

Giving momentum to calls to end the favorable tax treatment private-equity firms and hedge funds have long enjoyed was the Blackstone Group's recent initial public offering on the New York Stock Exchange, which made billions for the firm's founders overnight.

The Senate Finance Committee, headed by Max Baucus (D-Mont.), has pulled together five experts to testify at today's hearing.

Speculation is heating up that lawmakers may try to sneak through the legislation mandating higher taxes by piggybacking it to a proposed law to fix the Alternative Minimum Tax, which might get passed later this summer.

Hedge funds and private-equity firms are starting to mount serious lobbying to thwart the effort.

The National Venture Capital Association, noting that Starbucks, Microsoft and Google got off the ground with VC seed money, argues that more onerous taxes could discourage innovation.

"Their argument is, Those people are getting rich because they've got loopholes," said Emily Mendell, vice president of strategic affairs for the NVCA. "But the reality is this is always the way it's been. We basically say, It's worked for years, so why change it?"

Meanwhile, the House will hold two separate hearings on hedge funds, with Barney Frank (D-Mass.) looking at risks posed by the light regulation of the hedge-fund industry and Dennis Kucinich (D-Ohio) examining whether small investors should be exposed to the risk of investing in private-equity firms and hedge funds.

Those two hearings come in the wake of a few recent blowups in the hedge-fund world.

« Back