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Money Man

Barack Obama: Hedge-fund candidate

In the cast of 2008 Democratic contenders, Barack Obama is playing the role of the "grassroots candidate." In the first quarter of 2007, depending on how you cut it, he tied or bested Hillary Clinton in total funds raised, but he blew her away in number of donors, 100,000 to 50,000, indicating more people giving smaller donations--in other words, significant grassroots support.

But, even as Obama plays the people's choice by building his war chest in two- and three-figure increments, he is also relying on a growing cadre of young, eye-poppingly rich hedge-fund and private-equity managers to keep him at the head of the money primary. During the first quarter he nearly doubled Clinton's take from private-equity firms--$85,350 against $47,900, according to the magazine Private Equity Hub--and, with $479,209, he placed first among candidates from both parties in giving from investment banks, many of which run their own hedge funds and private-equity operations (Rudy Giuliani, the runner-up, got $473,442).

While all the candidates are flocking to these new pots of financial wealth, it's no surprise that the Wall Street Wünderkinder are passing on the establishment names to back Obama. After all, the Illinois senator is precisely the sort of investment they like to make: new, risky and anti-establishment--" the unproven investment," noted BusinessWeek--but with an enormous upside potential, and, with it, enormous political returns. Which, given their deep pockets, is great news for the Obama campaign. Whether he wants to be known as the hedge-fund candidate is a different question.

Going into the new year, it looked like Clinton had the Democratic finance world sewn up. Not only had her husband been working its halls for 16 years, but over the last seven she has meticulously built relationships with some of the most established figures in the investment community: storied giants like Thomas Lee, Roger Altman, and Steve Rattner, all of whom made a name for themselves during the heady years of leveraged buyouts and investment banking in the 1980s.

But a lot has changed since the Clintons first started making friends on Wall Street. Hedge funds have exploded, from a $40 billion industry in the late-'80s to about $1 trillion today. Private-equity funds have grown from about $95 billion in 1999 to $550 billion today. In fact, it's somewhat inaccurate to lump them with "Wall Street" in the first place--though many are owned by banks like J.P. Morgan and Goldman Sachs, their edgy investment strategies rebel against the stolid, conservative tradition of the New York finance world.

So while Clinton has relied on long-standing ties to relatively old money, Obama is pitching himself to the younger generation, many of whom are in their 30s and 40s, making them too young to have joined in the "Barbarians at the Gate" corporate raids of the '80s. His inner circle of financial backers includes such Gen-Xers as Eric Mindich, of the hedge fund Eton Park Capital Management (once the youngest partner in Goldman Sachs history); Josh Steiner, managing principal of the private-equity firm Quadrangle Group; and Jamie Rubin, son of former Treasury Secretary Robert Rubin and a partner in One Equity, J.P. Morgan's private-equity fund.

These stars--what New York magazine calls the "baby bundlers"--are helping Obama tap into Wall Street's fabulously rich elite. His most recent catch is the relatively gray-haired Paul Tudor Jones II (he's 53). Head of the $15 billion Tudor Management hedge fund, Jones is holding a 500-guest event for the candidate at his Greenwich, Connecticut, mansion later this month. The event will mark Obama's entry into the hedge-fund winners' circle: Greenwich, the toniest of New York exurbs, is home to more than 100 hedge funds--and, as one observer told the Financial Times, "The whole of Greenwich is backing Obama."

But still, it's strange to see someone so young and so, well, liberal raking it in on the Street. As recently as the 2004 election cycle, Wall Street giving was split 60-40 Republican-Democrat. But Democrats began to reverse those numbers in the first quarter of 2007 and, given past trends, look likely to push their stake even higher. Republicans, Wall Streeters say, have become too focused on red-state cultural issues that run against their own cosmopolitan ethos, even as they have failed to keep the country's financial house in order. Nor does it hurt that, thanks to Bill Clinton and Robert Rubin, Democrats appear less anti-business than they once did.

That said, why Obama, and not Hillary? After all, not only is she the wife of the greatest living political rock star, but she is Wall Street's junior senator. And, to be sure, she does have a number of older, established hedge-fund managers and private-equity tycoons in her circle: Alan Patricof, head of Apax Partners and, at 72, one of the grandfathers of the private-equity game, was her 2006 Senate campaign finance chair and remains one of her biggest fundraisers. But the tide of support, especially among the younger crowd, is clearly against her.

The most obvious reason is generational. For the baby boomers, Obama is too young, with dues still to be paid; for the Gen-Xers, dues are irrelevant--they didn't pay any, so why should their candidate? To them, experience is less important than ideas and charisma, and Obama speaks directly to those concerns. Not only is he fluent in the post-cold war, hyper-wired world in which they have always operated, but his international background--black father, white mother, raised in Indonesia and Hawaii--connects with their own globalized worldview more easily than Clinton's, who, despite her gender, still seems to stand for the old-line, establishment Democratic Party, split between aging white men and entrenched special interest groups.

There is also a more Machiavellian element to these young turks' support. Precisely because the Clinton dynasty has been around so long, the door to her innermost fundraising circles--and thus influence and possible White House posts--is largely closed. The top jobs in a hypothetical Hillary Clinton White House aren't exactly taken, but they're not available to newcomers, either. Obama's door, on the other hand, is wide open. So it's no surprise that while Wall Street stalwart Rattner is a big-time Hillary backer, his right-hand man at Quadrangle, Steiner, is going with Obama. The same is the case with Jamie Rubin, the son of Clinton's economic consigliore Robert. "If we all lined up for Hillary, we wouldn't have even gotten into the anteroom, let alone seats at the table," one of Obama's young fundraisers told New York. "But that's not how it is with Barack. We're already at the table."

Of course, hedge-fund and private-equity managers don't dish out money for their health: An industry that once studiously avoided politics is now rushing into it. Jones' Tudor Investment recently became the first hedge fund to start a political action committee, while both the Private Equity Council and the Managed Funds Association are intently lobbying Washington.

That's because for many, Washington is a perilous place right now; they fear an economic downturn could inspire politicians to cast them as scapegoats. Already, Congress is considering legislation to tax hedge-fund returns as income rather than capital gains, which could more than double the industry's IRS bill. The Securities and Exchange Commission is debating a requirement for hedge funds to register with the government (a step recently taken by Japan). And the Department of Justice has been looking into possible collusion among private-equity firms. All of which has the industry nervous--and eager to get friendly with future Oval Office occupants.

To his credit, in February, Obama co-sponsored legislation that would, among other things, require hedge funds to set up anti-money-laundering programs. But it's a relatively soft regulation and one that gives little sense on where the candidate stands on tougher questions facing the industry. Will Obama be willing to take them on if elected--no small thanks to their efforts? Given the rapid rise of the industry and its potential to revolutionize American capitalism, it's a question worth asking.