Hedge Funds Getting It From All Sides... Or Not

To hear it from one side, private equity and hedge fund managers are under a veritable siege. There's the politicians, pushing them with newfound populist zeal to pay more taxes on their earnings. There's the regulators, suddenly ratcheting up enforcement to make an example of them. There's the market, making a mockery of tried-and-tested investment strategies with its insane volatility. And, of course, there's the clients, squeezing them to lower fees at the worst possible moment. Yes, to hear it from one side, one would imagine the world of hedge funds is the kind of hair-whitening, ulcer-causing, nerve-destroying life that would make military test pilots and undercover narcotics agents crack.

But to hear it from the other side -- from the private equity and hedge fund managers themselves -- everything is fine and dandy. Although earnings are down with the wider equities market, things will calm down, as they always do. And more importantly, while returns have been poor, clients are still knocking at the door, cash in hand.

At the top of the list for the doomsayers: taxes. It's not only the evergreen rumblings from critics of the federal tax structure, which lets asset managers pay a capital gains tax substantially lower than the corporate rate (and average personal rate), but now, cities and states and other countries are getting in on the manager-bashing fest.

In Britain, growing support for a Tobin tax, which would shave a small percentage off each equity transaction, is seen as potentially eating into profits. Meanwhile, in New York City, where many of the hedge funds operate, the Department of Finance is mulling doing away with a tax loophole that exempted certain asset managers from a 4 percent unincorporated business tax.

Regulators, particularly an increase in enforcement actions this year by the Securities and Exchange Commission, also seem to be a newfound-cause for worry. The SEC said it had undertaken 146 actions against investment advisers in fiscal 2011, a 30 percent increase over the previous year. That increase came as the agency beefed up its enforcement unit overseeing investment managers. There was the recent case of former fund manager Raj Rajaratnam, who is beginning an 11-year federal prison bit for trading on insider information, even though his actions are arguably no worse than those of a certain former Treasury Secretary.

All this wouldn't be an issue, of course, if the markets were cooperating and the clients were happy. But hedge fund managers are having no such luck. According to the Dow Jones/Credit Suisse Core Hedge Fund Index, assets in actively-managed hedge funds were down 7 percent from the beginning of the year up to November 30 (for the same period, the S&P 500 is down 0.8 percent). Clients are none too happy about that. A survey of hedge fund clients recently cited in the Dow Jones Newswires noted the overwhelming majority, 97 percent, believe the fees being charged by their equity managers caused their interests to be misaligned.

So, is this the world of alternative asset management now: being hounded by the taxman and the federal regulator while trying to keep angry clients from screaming at you as your investments tank? Well, according to the hedge fund managers, no.

Some, like famous fund chief John Paulson, have been forced to issue apologies, although it seems that has only occured when investments have significantly underperformed the wider market.

But most are putting a brave face when talking about their annus horribilis. The founder of one of London's largest funds, for example, recently told the Financial Times he supports the idea of a well-designed Tobin tax. In the U.S., Dan Och, the chairman and chief executive of publicly-traded fund Och-Ziff Management (NYSE:OZM) says in a banking conference his managers "haven't seen any pressure whatsoever" and business was growing.

Even Paulson, while apologizing, is doing so all the way to the bank. According to CNNMoney, fewer than 8 percent of his investors say they are pulling out their funds, and others, perhaps with nowehere else to park their money, are trickling in the door.

Hedge fund managers take note: for every one of your peers that goes to prison, it seems, three get to win the lottery.