Too big to fail — The Connecticut edition

January 25, 2016

By Alexander Soule

Updated 4:50 pm, Sunday, January 24, 2016

As General Electric on Friday reported $117 billion in 2015 revenue by staffers in its Fairfield headquarters and Stamford treasury division, already on the books was a far greater figure — $387 billion — amassed in quiet fashion last year at myriad offices throughout southwestern Connecticut.
The source? Investors in hedge funds and other pooled investment managers dotting the region from Greenwich to Fairfield and north to Sherman.
For a state reeling from the pending loss of at least 200 people and as many as 800 at GE — plus an unknown number more of GE Capital employees — Fairfield County’s shadow finance economy takes on additional heft heading into the 2016 legislative session that starts Feb. 3.
In their annual search for revenue sufficient to cover current and future expenses of the state, has Connecticut’s hedge fund sector become too big for lawmakers to fail? If Connecticut failed GE in its needs for a tech-friendly headquarters, the question extends to other moneyed sectors including hedge funds, which exert significant influence for the income tax revenue supplied to the state from their high-flying salaries and bonuses.

It is a wobbly tightrope, best illustrated in the 2012 case of Bridgewater Associates, whose planned waterfront headquarters for Stamford met vociferous opposition for the incentives the state extended the world’s largest hedge fund and for its displacement of a boatyard used by some city residents — despite the promise of more than 1,000 new high-paying jobs.

Two figures anchor either end of that tightrope: $387 billion, and the annual fees charged by funds that typically hover around 1.5 percent of the assets invested on behalf of clients, income that goes to Fairfield County’s enclaves of millionaires and billionaires who bear a significant portion of the state’s tax burden.

One person doing the math is state Sen. L. Scott Frantz, who at events last year throughout his districts in Greenwich, Stamford and New Canaan warned repeatedly of wealthy residents planning to make secondary homes in tax-friendly states their primary households with the intent of reducing their escalating tax burden in Connecticut. Frantz, who runs a fund himself in Greenwich called Haebler Capital, told Hearst that he knows four local residents who have established residency in Florida the past four months representing more than $22 billion in taxable net worth between them.
“The whole notion of people leaving for tax reasons has been solidified to a much higher degree than three months ago or six months ago,” Frantz said. “We’ve got a major — potentially catastrophic — problem on our hands, and that is that our tax base is disappearing in big chunks.”

In two of those cases, Frantz said he expects the hedge fund operations of individuals to travel south as well, not unlike the case of ESL Investments when founder Edward Lampert decamped for Miami in 2012 from Greenwich where he lived and ESL was based.

Compiled by Hearst from Securities and Exchange Commission Form D filings and amendments by local fund managers, the $387 billion figure is likely low given tendencies by some managers to report assets in jurisdictions outside Connecticut. While Fairfield County’s hedge fund sector is dominated by Bridgewater; the Greenwich hedge funds AQR Asset Management, Viking Global and Lone Pine Capital; and Chilton Investment, in Stamford, some 900 funds pooled nearly 58,000 separate investments in 2015.

Those totals include pooled investments by financial managers that are not hedge funds — Wilton-based Commonfund and the private equity firm Starwood Capital Group, to name a few — as well as a host of comparatively small managers far from the corridors of Greenwich, like Kevin Casey, in Sherman, founder of Casey Capital Management whose KC Gamma Opportunity Fund reported managing $30.6 million on behalf of 31 investors last year.

In a mid-January blog post on how assets are distributed among hedge-fund managers, Commonfund analysts John Delano and Kristofer Kwait noted the top-heavy tendency of capital to flow to large funds like Bridgewater and AQR, but said small and growing entities are important, often beating their larger peers in producing returns if having a more difficult time in landing clients due to the rock-star renown of their large brethren funds.
“It doesn’t mean that any of that is guaranteed by some magical, macro force of the universe,” said Chris Bruhl, CEO of the Business Councilof Fairfield County. “We have to get out there and earn it every day, eliminate the obstacles to it every day. … Taxes do matter.”
Estate tax
Globally, the capital managed by the hedge fund sector rose to $2.9 trillion in the fourth quarter of 2015, a 0.8 percent increase from the third quarter, according to Chicago-based Hedge Fund Research, with gains on investments more than offsetting a slight flight of investor capital, the first such instance in four years amid concerns about China’s economy and ongoing weakness in the oil sector.
Will Connecticut’s muscular financial sector take flight, and what are the ramifications for Connecticut if a percentage of that population does? In a 2014 study by the Connecticut Department of Revenue Services, DRS determined that the wealthiest 4,000 taxpayers in the state — those earning $2 million or more annually — shoulder fully 10 percent of the state’s tax burden, with the remainder apportioned among 1.5 million households.
If Frantz could wave one magic wand to convince wealthy residents to stay, he said it would be to eliminate Connecticut’s estate tax, which kicks in at $2 million. Speaking in late November at Fairfield University, Gov.Dannel P. Malloy said he plans to propose a revision to estate taxes, without providing immediate details.
In mid-January, Malloy addressed GE’s departure, repeating variations of the theme “this hurts” while saying Fairfield County and Connecticut have been on both the loading and receiving end of moving trucks during his years as governor and before. In those comments and at the November appearance in Fairfield before the Association for Corporate Growth, Malloy has made it clear that the significance of the loss is not lost on him, while offering no predictions on how the Connecticut General Assembly will respond.
“Clearly, financial services and others like being in Stamford,” Malloy said. “I was mayor of Stamford for 14 years; I saw companies come and I saw companies go. … We’re in the midst of making final decisions on some of our proposals, and I can assure you we will have a number of proposals on economic development issues.”