Several leading hedge fund managers told Congress Thursday they support a new central exchange to try to foster greater transparency in the hazy world of credit default swaps.
But the managers stopped short of advocating a significant increase in federal regulation of hedge funds -- complex investments partly blamed for the global financial crisis and that operate mostly outside of government supervision.
"Proper regulation is critical, but the best regulation is created with an eye toward unleashing opportunities, not limiting possibilities," said Citadel Investment Group Chief Executive Kenneth Griffin. "We must solve the serious issues we face but in a way that does not stifle the best innovative qualities of our financial markets."
Mr. Griffin was one of five hedge fund managers who testified before the House Oversight and Government Reform Committee, which examined the role that hedge funds played in the recent financial market crisis.
Committee Chairman Henry Waxman, California Democrat, held the hearing to examine the role of hedge funds in the current financial crisis, and the risks some critics say they pose to the financial system. Hedge funds hold an estimated $2.5 trillion in assets.
The fund executives said they support the creation of public exchanges or clearinghouses to provide transparency for credit default swaps.
"An open and transparent market for these transactions would reduce confusion and improve understanding, as well as help with valuation issues," said Philip A. Falcone, senior managing director of Harbinger Capital Partners Funds.
Billionaire investor and liberal activist George Soros said Wall Street turmoil will cause the hedge fund market to shrink 50 to 75 percent. "The bubble has now burst and hedge funds will be decimated," he said.
But Mr. Griffin added that regulation must be done in concert with Congress, the regulators and industry officials. "Our markets are complex and they must be well understood if they are to be well regulated," he said.
James Simons, president of Renaissance Technologies, denied that the hedge fund market contributed to the current financial market turmoil.
"Hedge funds by and large have made an important contribution to the financial industry, and -- are unlikely as a single glass to be a substantial contributor to systemic risk," he said. The hedge fund managers called to testify, including Mr. Soros, each earned on average more than $1 billion annually in an industry that became stunningly profitable and powerful in recent years.
Rep. Elijah Cummings, Maryland Democrat, said he was appalled that tax law allows the five managers to treat a vast majority of their earnings as capital gains, meaning that some portion of their earnings are taxed at rates as low as 15 percent -- a lower rate than what most school teachers pay.
Hedge funds, vast pools of capital, have grown explosively in recent years while operating secretively and with scant government supervision. They have lured an increasing number of ordinary investors, pension funds and university endowments, meaning millions of people now unwittingly invest in hedge funds indirectly.
This article is based in part on wire service reports.