Hedge Funds Sell Republican Party Short, Invest in Democrats

2005-07-14 00:06 (New York)

By Michael Forsythe

July 14 (Bloomberg) -- Employees of New York hedge fund D.E.Shaw & Co. have given at least $148,050 in political donationssince January 2003, U.S. government records show. Every penny hasgone to the Democratic Party or its candidates.

While D.E. Shaw's preferences stand out in the Republican-leaning financial-services industry, the company is hardly aloneamong hedge funds. People who work at the top 50 funds ranked byassets have directed 62 percent of donations to Democrats sinceJanuary 2003, a Bloomberg News review of campaign-financedisclosures shows. In the wider banking and securities industry -- the biggest backer of President George W. Bush in the 2004election -- 53 percent of donations went to Republicans.

Donations from hedge funds, which totaled $5.5 million amongthe top 50, are growing faster than those of banks and otherinvestment companies. And Democrats are reaping the most gains,in part because of the nature of the industry.

Hedge funds, loosely regulated private investment pools thatare designed to profit in any market environment, often don'tdepend on government policies to make money, says Barry Colvin,president of Rye, New York-based Tremont Capital Management Inc.,which invests in hedge funds. That allows fund managers to lettheir donations be driven by issues unrelated to their business,such as education or foreign affairs.

``If they thought of themselves as business owners, thenthey'd be worried about the things that business owners areworried about,'' such as taxes, so they might support moreRepublicans, says Colvin. ``Since they're agnostic to theeconomic environment, they might even make more money in a high-tax environment.''

Asset Managers

Adds Colvin: ``Most of them don't think of themselves asbusiness owners, rather as asset managers.''

The Democrats also have an edge because the industry iscentered in party strongholds such as New York, Chicago and SanFrancisco, and employs many former academics, who are among theparty's most loyal constituents.

``Our firm tends to hire a disproportionate number ofanalytically oriented individuals who might otherwise haveaccepted faculty positions at a university,'' says David Shaw,chairman and founder of D.E. Shaw. ``And academics havehistorically tended toward the progressive rather than theconservative end of the political spectrum.''

While employees of Morgan Stanley were Bush's biggestcorporate backers in the 2004 election, Democratic presidentialnominee John Kerry counted the faculty members of the Universityof California as his biggest supporters, according to theWashington-based Center for Responsive Politics, a nonprofitgroup that tracks donations.

Math Professor

Among the ranks of academically inclined Democratic hedge-fund supporters is James Simons, founder of East Setauket, NewYork-based Renaissance Technologies Corp., which gave 97 percentof its money to Democrats. Simons was a math professor at theState University of New York at Stony Brook and has a doctoratefrom the University of California at Berkeley.

Shaw himself holds a doctoral degree in computer sciencefrom Stanford University and was on the faculty at ColumbiaUniversity from 1980 to 1986.

Managers of hedge funds are gaining fund-raising clout.Donations from the top 50 firms, as ranked by InstitutionalInvestor's Alpha magazine, shot up 92 percent between the 2002elections and last year's presidential contest, according todisclosure statements filed with the Federal Election Commissionin Washington. The securities industry as a whole increased itsgiving by 51 percent, according to figures from the Center forResponsive Politics.

Soros and Singer

The figures exclude the more than $27 million that GeorgeSoros, founder of New York-based Soros Fund Management LLC, gaveto groups allied with the Democrats before the 2004 election, aswell as more than $2.1 million given by Paul Singer, president ofNew York-based Elliot Management Corp., to Republican-linkedgroups. The size of those contributions would skew othercomparisons.

The number of hedge funds has more than doubled to about8,000 since 2000, and assets invested with them topped $1trillion for the first time in the first quarter of this year,according to Chicago-based Hedge Fund Research Inc.

``Certainly, the hedge-fund industry is a much largerindustry than it was four years ago,'' says Hassan Nemazee, whowas Kerry's New York finance chairman last year. ``There was morefocus placed on them this time.''

Biggest Contributors

The biggest contributors, excluding the donations by Sorosand Singer, are at New York-based Moore Capital Management, where18 employees donated a combined $1.06 million. Of that, 95percent went to Democrats or groups that support them.

Louis Bacon, chairman of Moore Capital, gave at least$961,000 last year to the League of Conservation Voters, anhistorically nonpartisan organization that supported Kerry'spresidential bid.

``For me, the litmus test is the environment,'' says Bacon.``Any other political labels are less important.''

Other firms tilting toward Democrats include San Francisco-based Farallon Capital Management, with 98.6 percent of donationsgoing to Democrats, and New York-based Perry Capital ManagementInc., which gave 99 percent of its $206,500 in donations toDemocrats since January 2003.

Influential Lawmakers

While hedge-fund donations were a small fraction of the $91million given in 2004 by the securities industry, they've becomethe biggest donors to some of the most influential lawmakers.

New York-based Cerberus Capital Management LP's employeesare the largest donors to the political-action committees ofSenate Banking Committee Chairman Richard Shelby. The AlabamaRepublican is the top recipient of hedge-fund money after Kerryand Bush, getting $110,500 since 2003, Federal ElectionCommission records show.

Other Republican-leaning firms include Dallas-based MaverickCapital Ltd., which gave 78 percent of its contributions to theparty and its candidates, and New York-based Caxton AssociatesLLC, whose employees directed 98 percent of their $265,261 indonations to Republicans.

Elliot Management's employees gave 97 percent of their$788,700 in donations to Republicans. Elliot's managers were thesecond-biggest corporate donors to the Republican SenatorialCampaign Committee in 2004, after Goldman Sachs Group Inc.

Excluding Soros's 2004 contributions, the percentage ofmoney going to Democrats from the top 50 funds declined to 62percent for the 2004 elections from 68 percent before the 2002contest, according to FEC records. Employees at the top 50 firmscontributed at least $156,855 to Kerry's campaign, compared with$142,850 for Bush.

More to Republicans?

As the hedge-fund business grows, it will give more toRepublicans, predicts Mallory Factor, founder of New York-basedmerchant bank Mallory Factor Inc. That's partly because theproliferation of hedge funds will drive down returns, and newentrants will depend more on ``pro-growth'' Republican policiesto do well, says Factor.

``The big guns, the guys that have made a lot of money, anumber of them have been Democrats,'' says Factor, who raised atleast $500,000 for Republicans in 2004. ``The guys that arewrithing it out and starting new funds are going to theRepublicans.''