Kynikos Associates’ Jim Chanos on March 13, 2007 in his testimony to the U.S House of Representatives discusses the coalition of private investment companies. Also see: Jim Chanos Testimony on Hedge Fund Strategies.
Testimony Of Jim Chanos
Chairman, Coalition Of Private Investment Companies
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U.S. House Of Representatives
Committee On Financial Services
Hearing On Hedge Funds
And Systemic Risk In The Financial Markets
March 13, 2007
Chairman Frank, Ranking Member Bachus, and members of the Committee on Financial Services. My name is James Chanos, and I am President of Kynikos Associates, a New York private investment management company that I founded in 1985.1 I am appearing today on behalf of the Coalition of Private Investment Companies (“CPIC” or “the Coalition”), whose members and associates manage or advise more than $60 billion in assets.2 I would like to thank the Chairman and Ranking Member for inviting us to participate in today’s important hearing.
The Coalition welcomes the attention of this Committee on our industry. Rapid growth in all alternative investment funds – whether they call themselves hedge funds, private equity or venture capital – has brought significant rewards to investors and the financial markets. But, to paraphrase the great Stan Lee, with great growth comes great responsibility. This responsibility derives from the industry’s more prominent role in various parts of the financial markets, its visibility in leading more activist shareholders who are willing to challenge management plans at public companies, and, perhaps most importantly, the trust placed in our managers to properly invest the assets of our investors, including pension funds and endowments – institutions whose ultimate beneficiaries are not themselves wealthy individuals.
Consequently, hearings such as this present a unique opportunity for our industry to explain the way it works, dispel some of the myths and misconceptions that surround it, and make clear our commitment to work with policymakers in the Congress and in the financial regulatory agencies, in order to improve those areas where the system of oversight may not be keeping pace with the growth of this sector.
Overview / Summary
CPIC would like to suggest a few ideas that may be useful in thinking about the issues associated with private pooled investment vehicles.
First, almost all private investment pools – whether a hedge fund, venture capital fund or private equity fund – share many common characteristics in terms of their disclosures to their investors and counterparties without detailed government mandates. Consequently, we would suggest that policymakers, instead of creating distinctions between these types of entities, treat all private pooled investment vehicles similarly, regardless of their underlying investment strategies. Even though we may all use the term “hedge fund” in the context of today’s hearing, the most accurate phrase is not “hedge fund” as much as “private investment company.”
Second, in terms of investment activity – the buying or selling of securities or commodities or derivatives or foreign currency – hedge funds are but one type of many market participants engaged in the same activity. For example, in order to gain the most complete understanding of the collateralized debt obligation (“CDO”) market – to use one of the examples from the letter of invitation – one should not focus solely on a single segment of the market but should look at all of the participants engaged in that activity. Looking at CDOs solely through the prism of hedge funds, without looking at banks, investment banks, insurance companies, and other types of dealers and investors will create a distorted picture of how and why that market operates as it does. A focus on the activity rather than the actor is more likely to yield the information desired by policymakers in assessing the appropriate level of oversight and regulation.
Third, the phrase “lightly regulated,” which typically is applied to hedge funds and other alternative investment vehicles, is somewhat misleading, as it really only applies to governmental regulation of the relationship between the fund (and its manger/advisor) and its investors.
See full Jim Chanos’ Testimony On Coalition Of Private Investments in PDF format here.