Summers has ties to prominent hedge fund By: Eamon Javers November 28, 2008 12:08 PM EST
On the same day Lawrence Summers was announced as President-elect Barack Obama’s top White House economics adviser, the veteran economist said he would resign as the part-time managing director of one of the nation’s largest and most successful hedge funds, D.E. Shaw & Co.
But even as Summers takes the lead of economic policy thinking for the Obama White House, which has promised to be one of the most open and transparent in history, neither the Obama transition team nor D.E. Shaw would say exactly what Summers had done in his two years of work for the $36 billion hedge fund, or how much he has been paid.
In a press release issued Monday, D.E. Shaw said only that Summers had been working on “various strategic initiatives, high-level research and advising the executive committee on the overall business.”
Whatever he did for the hedge fund, Summers seems to have impressed his bosses.
“As citizens, we’re delighted that President-elect Barack Obama has selected Larry Summers to head the National Economic Council," said D.E. Shaw managing director Max Stone in the statement. “Larry is an enormously gifted economist, and has already made major contributions to this country as a public servant, a researcher, and an academic leader.”
As a treasury secretary under President Bill Clinton and a former president of Harvard University, Summers would have been enormously valuable for the hedge fund that prides itself on bringing together top talent from a wide range of backgrounds.
D.E. Shaw was founded in 1988 by David E. Shaw, a former computer science professor at Columbia University, and is known as a major “quant” fund that specializes in using advanced mathematics and computer software to generate trading strategies.
The aggressively nerdy firm brags that its 1,600 employees include the 2003 U.S. women's chess champion, a life master bridge player, a “Jeopardy” winner, as well as writers, athletes, musicians and former professors. One early employee was Jeff Bezos, who went on to greater renown as the founder of Amazon.com.
In 2007, Shaw personally earned an estimated $210 million, reports Alpha magazine, and he spent a chunk of it on contributions to prominent Democratic politicians during the 2008 presidential cycle, including more than $3,000 to Barack Obama and $6,000 to Hillary Rodham Clinton, according to the Center for Responsive Politics.
Overall, the hedge fund’s employees skew heavily Democratic, contributing more than $200,000 to political candidates in the 2008 campaign cycle, according to the center. Only $2,000 of that went to a Republican: Sen. Pat Roberts of Kansas.
The hedge fund also has gotten much more involved in Washington policymaking in recent years, contributing to the Managed Funds Association, the trade group that has led the charge on resisting increased regulation and taxation of hedge funds in Washington.
In 2007, the fund sold a 20 percent stake to Lehman Brothers, which filed for bankruptcy in September.
One knowledgeable hedge-fund observer says Summers’ work at D.E. Shaw partly involved conducting research into emerging markets – those volatile but potentially lucrative stock exchanges in remote areas of the world.
It’s not clear exactly what Summers would have been interested in. But a recent area of interest among hedge funds has been identifying ways the switch to electronic markets will create new liquidity on those exchanges, providing arbitrage opportunities for savvy American investors who can use the newly sped-up processes to take advantage of mismatches in prices.
Summers, the observer said, provided valuable research to the firm. “This wasn’t a vanity job,” the observer said. “The Lawrence Summers connection makes sense – their approach is to get the best and brightest and figure out what to do with them.”
The firm’s core specialty is in statistical arbitrage, which involves buying and selling huge numbers of stocks in very short amounts of time, ranging from mere seconds to several days. But how they make those decisions is very closely held information.
“That’s where they get very secretive and squirrely and won’t tell you what they’re doing,” the observer said.
A spokesperson for the Obama transition team declined to say what Summers had done for the hedge fund and how much he had been paid. But the Obama camp likely knows the answers, since the vetting questionnaire for applicants for administration posts requests tax returns and other detailed financial information, including the applicant’s net worth, real estate holdings, business partnerships, even gifts.
Lightly regulated hedge funds are not required to file detailed information on their financial performance with the Securities and Exchange Commission. So, it’s difficult to estimate how well or poorly D.E. Shaw has weathered the global financial crisis in recent months.
One person familiar with the industry says that investors generally believe that the firm has not had a disastrous year – which stands in stark contrast with many funds that have seen their value plummet. “Basically they are riding out the storm – so far,” the expert said.
Executive compensation and lavish perks have become a hot-button issue in the midst of the economic calamity. In recent days, the insurance giant AIG announced that its CEO will accept only $1 in annual salary in the wake of that firm’s taxpayer bailout.
And the Big Three automakers hinted that their CEOs won’t use their private jets next week to travel to Washington and plead for a government bailout, a symbolic response to criticism of their use of the jets to commute to the last round of congressional hearings.