The coronavirus pandemic is having a catastrophic financial impact on all types of businesses, especially mom-and-pop shops. To help ease some of the burden, the U.S. government announced a stimulus package (Paycheck Protection Program or PPP), setting aside $350 billion for small businesses. One would expect small businesses such as hair salons, restaurants, and dry cleaners, to apply for the relief funds, but reports are that multi-million dollar hedge funds want a slice of the funds as well.
Hedge funds applying for relief funds
A report from Bloomberg claims that many hedge funds claiming to be small businesses have applied for the bailout funds, which are primarily low-interest emergency loans. Some law and accounting firms are helping their clients by explaining to them how they could avail themselves of the Paycheck Protection Program.
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Many hedge funds have already filed the application, claiming that they have less than 500 employees, and thus, are eligible for the bailout funds. Hedge funds typically employ fewer people to ensure that the fund managers don’t have to split the fees with others.
Further, these hedge funds have certified that the ongoing financial uncertainty has made it extremely difficult for them to continue their operations. According to Bloomberg, many traders say that they are also a small business, similar to hair salons, restaurants, etc., and thus, could use the funds to support their business, which has lost money after global markets tumbled.
The Bloomberg report gave an example of a trading firm First New York. Donald Motschwiller, head of the trading firm, which manages about $3 billion in assets, told Bloomberg that he is unsure about applying for the relief funds. However, a few hedge funds managers that Donald talked to did not rule out taking a loan.
Former White House communications director, Anthony Scaramucci, who also owns a firm that invests in hedge funds, SkyBridge, argues that applying for the bailout funds is justified for some funds. Previously, he suggested that it does not necessarily mean that a business with the name, private equity or hedge fund manager, are superrich.
Hedge funds usually charge 2% fees for managing other people’s money, as well as taking 20% profits from their bets.
Should hedge funds get bailout funds?
The bailout package has triggered an intense debate on Wall Street about whether or not hedge funds should apply for the coronavirus relief funds, which objective is to help small businesses survive the crisis.
Many are of the view that even though hedge funds employ fewer employees (an eligibility criteria for small businesses), it does not mean they can claim the bailout funds. They argue that hedge funds are fully capable of operating remotely, unlike small businesses such as restaurants, salons and others that were forced to close down to limit the spread of the coronavirus.
Moreover, many hedge funds have made massive gains during the sell-off, while many were able to minimize losses because of hedging. For instance, billionaire Bill Ackman's Pershing Square converted $27 million into $2.6 billion by using credit default swaps and Universa Investments, a "black swan" fund, posted a return of over 4000% in the last quarter.
Similar views were expressed by Nate Koppikar, a partner at San Francisco-based money manager Orso Partners. Koppikar said hedge funds must not apply for the bailout funds meant for the small businesses, according to Bloomberg. As per Koppikar, hedge funds’ applying for the loan is a “complete abomination.”
Last week, Chamath Palihapitiya, chief executive of venture-capital firm Social Capital LP said that the coronavirus stimulus package is helping the ultrarich at the expense of the common workers.
“Just to be clear on who we are talking about. We’re talking about a hedge fund that serves a bunch of billionaire family offices. Who cares? They don’t get the summer in the Hamptons?” Palihapitiya said on CNBC’s Fast Money Halftime Report. “Who cares? Let them get wiped out.”
Lack of clear guidelines
Meanwhile, president and CEO of the Managed Funds Association (an industry trade group), Bryan Corbett, in a statement to Bloomberg said that though the managers are responsible for making decisions affecting their firm, they (industry trade group) have told the member firms that “we do not believe the money in this program was intended for managers general partnership interests."
It is not only the hedge funds that want to benefit from the bailout funds for small businesses. Reports are that profitable private equity firms are lobbying the Trump administration and members of Congress to tweak the rules so that they can benefit from the coronavirus bailout funds as well.
Reports of wealthy managers trying to benefit from the small business loans come at a time when the Trump administration is planning to add $250 billion more into the program.
Talking of whether or not hedge funds really need the funds, the current scenario, at least in theory, is apt for the hedge funds to select stocks. All major stock markets, such as the Dow Jones Industrial Average, the Nasdaq Composite Index and the S&P 500 index dropped by at least 20% from their February peaks, and are now in a recovery mode from the lows hit on March 23.
A point to note is that PPP provisions have clear guidelines that banks and insurance companies do not qualify for loans. However, there is no clarity on the hedge funds and proprietary trading shops. Some are also demanding complete transparency to make sure the taxpayer funds are helping those who are really in need.
Without oversight, this is what's happening with the $2 trillion coronavirus bailout: hedge fund managers are claiming relief funds as "small businesses." https://t.co/FJJf5vzrN7
— American Oversight (@weareoversight) April 14, 2020
The bailout program, which took off earlier this month, didn’t go as expected. Many business owners faced difficulties in filing the form due to technical issues and confusion about lending terms. On the other hand, if the Bloomberg report is to be believed, many hedge funds have used their legal prowess to apply for the bailout funds, which is on a first-come-first served basis.