Private equity powers the candidates

Eschewing scrutiny

Besides trying to throw the debate on how their personal income gets taxed, hedge-fund managers hope to ward off attempts in Washington, D.C., to complicate their lives with more rules.

Right now, hedge funds -- which managed $2.5 trillion in assets -- are more lightly regulated than mutual funds or brokerages. And they want to keep it that way. But many critics, including Rep. Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, believe that loose oversight of the industry is just an accident waiting to happen.

That's because many hedge funds borrow large amounts to place concentrated bets on derivatives or other financial instruments, which could blow up and cause serious collateral damage to their lenders or others. The collapse of Long-Term Capital Management in 1998 came close to setting off a chain reaction that threatened the global markets until it was bailed out.

Robert Steel, the undersecretary of the Treasury in charge of domestic finance, says the administration policy is to rely on the vigilance of those who lend money to hedge funds to keep us all out of trouble. Gene Sperling of the Center for American Progress questions whether this is enough, because lenders care most about their own risks and not about potential risks to the whole financial system.

Bad returns?

If, from the perspective of private-equity shops and hedge funds, Democrats consistently come down on the wrong side of these issues, why are they giving Democrats so much more money than Republicans?

"They're not getting the appropriate return on their investment," quips Morris Reid of Westin Rinehart, a public-relations and political-consulting company. Yet contributions from private equity and hedge funds continue to favor Democrats 1.4-to-1.

• Talk back: Will candidates’ campaign and personal finances affect your vote?

The answer may be that private equity and hedge funds already have Republicans on their side. So it's the Democrats they have to influence to get their way. Or their giving could just be part of a bigger trend. Overall, donations to Democratic presidential candidates outpace Republican contributions by a ratio of 1.5-to-1.

There may be some investing intelligence in the increase in political donations by private-equity shops. According to one recent study, you can expect market-beating performance from the stocks of companies that give more to political campaigns, especially those of Democrats. So though some observers took the recent initial public offerings of Blackstone and Fortress as a sign of the top of the market in their line of business, their robust campaign contributions may suggest otherwise.

At the time of publication, Michael Brush did not own or control shares of any companies mentioned in this column.

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