Hedge-Fund Managers Face Calls for Tighter Oversight
NEW YORK — DESPITE market turmoil late last week following the Mexican assassination and new revelations in the Whitewater controversy, April should be a good month for United States financial markets, says Christopher Castroviejo, managing partner of Parallax Partners, L.P., which oversees about $20 million in financial assets.
But Mr. Castroviejo does have long-range concerns these days. He says Wall Street's three-year bull market is in the ``ninth inning,'' and remains personally conservative, maintaining large cash positions for his investors and looking for stocks that are not sensitive to interest rates or that are not linked to the growth of the US economy. He is more concerned about deflation than inflation, saying that the Federal Reserve Board's new belt-tightening stance against inflation is misguided.
But he is most concerned about rising calls in Washington for more stringent oversight of people like himself.
Castroviejo is a ``hedge fund'' manager - one of a breed of financial risk-takers that since the mid-1950s have often been accused of putting global financial markets into turmoil with aggressive multi-billion dollar trades in equities and currencies.
Private and unregulated
Hedge funds are private and unregulated investment partnerships that control an estimated $75 billion in financial assets, largely from wealthy individuals; much of the money is from outside the US. By skillfully leveraging their assets the funds are believed to control publicly traded securities worth anywhere from $350 billion to $1.5 trillion. Two of the largest US-based hedge funds are the Quantum Fund, headed up by George Soros, and Steinhardt Partners, led by Michael Steinhardt.
Some US lawmakers believe hedge funds are partly responsible for recent gyrations in global financial markets.
Earlier this month Rep. John Dingell (D) of Michigan, chairman of the House Energy and Commerce Committee, and Rep. Edward Markey (D) of Massachusetts sent letters to federal regulators calling for tighter reporting rules for hedge-fund trading.
No hearings are currently planned, although they cannot be ruled out down the road, says Dennis Fitzgibbons, an aide to Mr. Dingell. For now, he says, ``we are waiting for the reply'' from the Securities and Exchange Commission (SEC) and the US Treasury regarding tighter surveillance of hedge-fund trading.
SEC Chairman Arthur Levitt Jr. has often expressed concerns about hedge-fund activities.
``There just hasn't been much [scholarly or investigative] work done on these funds over the years in terms of their impact on equity and currency markets,'' says long-time market analyst Perrin Long Jr. ``Most experts assume that they have far more of an impact on financial markets other than the stock market, and particularly unregulated markets, such as currency trading.'' In good years, Mr. Long says, they tend to turn in huge returns of 25 percent or more.
Castroviejo's Parallax Partners, is far smaller than such funds as Quantum and Steinhardt. It is also, he insists, ``very conservative.''
Established on Feb. 1, 1993, the fund in its first eleven months produced gross returns of 15 percent before assessment of fees, with a net gain of 10.5 percent, Castroviejo says. That beat the Standard & Poor's 500 index, which gained 8.5 percent during 1993. So far this year Parallax is up a little more than 2 percent, again beating the S&P 500, which has been in a roughly break-even stance since the start of the year.
A witty, nonstop speaker, with the energy of a young Jack Lemmon, Castroviejo admits having played currency markets, although he says he is not doing so now. Underscoring his conservatism, he maintained a 78 percent cash position last year.
Would Castroviejo favor tighter federal oversight of hedge funds? Hardly. ``Caveat emptor'' is his response, arguing that the hedge-fund market will correct itself if left alone.
Hedge fund managers are already showing greater caution, he says, in terms of trading practices, and investors are increasingly wary, choosing hedge funds more carefully.