Part of an ongoing series on Alden Global Capital and Digital First Media

By Julie Reynolds

Hedge funds that buy newspapers ‘are not doing this because they have a warm glow about owning socially useful enterprises devoted at least partly to serving the common weal.’

American Journalism Review

  1. Most U.S. newspapers are now controlled by investors who know little about the business of news

Once upon a time, U.S. newspapers were owned by families. Often very wealthy families. Some had a passion for journalism and the public’s right to know and others, not so much.

Then, creeping toward the end of the last century, newspapers were owned by the heirs of those rich families, who along with outside investors formed Big Media Companies.

Think Gannett, Knight-Ridder, Hearst, Freedom, McClatchy, Belo. Thus began the era of layoffs, cost-cutting and wage freezes as investors in those companies demanded higher profits. Unfortunately, this demand came just as the Internet was drawing away readers and advertisers.

Then those big media companies either collapsed, pulled back from the newspaper business, or redefined themselves as new media enterprises.

Finally, in the past five years or so, along came the hedge funds — or in the case of Alden Global Capital, the “vulture funds.” And yes, that’s actually a term used in the financial community.

  1. Hedge funds are different

So what exactly is a hedge fund anyway? A hedge fund is a partnership put together for the purpose of investing. It buys and sells “assets,” which are generally companies or shares of companies, in a highly strategic manner. Private equity firms, on the other hand, reorganize and sometimes invest in companies. Both aim to make a profit.

As to how this all works for investors, here’s a good definition from International Business Times:

The managers, collectively, are the ‘general partner.’ Outside investors like pension funds and wealthy individuals — the ‘limited partners’ — fork over hefty sums, trusting the partnerships to grow their wealth… After a time, the original pension funds and wealthy individuals get their money back — plus whatever gains the investments accrued, minus fees.

  1. The big fat tax loophole

I won’t try to explain the next part in my own words. If you want to skip this explanation and jump below to what it means for you, the DFM worker, I understand. But here’s International Business Times’ version of how an important tax code “quirk” benefits the partners in private equity and hedge funds:

In both cases, the fee structure usually looks something like ‘2-and-20’: The general partner takes an automatic 2 percent cut on the investments, plus an additional 20 percent incentive fee of whatever additional gains they realize over benchmarks.

The 2 percent is treated like ordinary income and taxed accordingly. But the 20 percent incentive fee is often deemed ‘carried interest.’ Through a quirk in the tax code, incentive fees are allowed to be taxed a rate some 20 percent less than they would as income.

Although incentive fees are structured to reward investment managers for their hard work, the income is treated as “capital gains,” not earnings derived from labor.

Capital gains are simply the appreciation of any asset you own that gets more valuable. If you buy a share of XYZ Corp at $20 and sell it next year at $30, you will owe a 20 percent capital gains tax on that $10 difference.

By characterizing the carried interest fee as a capital gain — and not a fee for a service rendered — hedge fund and private equity managers successfully avoid much higher income taxes, which max out at 39.6 percent.

If your brain isn’t exploding yet, I’m impressed.

What this boils down to is that Alden partners’ income isn’t taxed the same way your income is.

You work, get paid, pay taxes.

They find investors, get paid, pay less taxes. Or fewer. You get the point.

  1. Vulture funds are even more different

In Alden’s case, profiting from the buying and selling of assets means looking for “event-driven opportunities.”

What’s an event-driven opportunity? Think bankruptcy, natural disaster, economic collapse, or, in the case of the U.S. newspaper industry, just a bevy of “distressed” businesses. These types of investments are called vulture funds, and they also invest in struggling countries.

“Vulture Funds are financial speculators looking to profiteer from countries in debt crisis,” states the UK-based vulture fund watchdog coalition, Jubilee Debt Campaign. “From Zambia to Congo to Peru, they’ve swooped to demand full payment plus interest for debts they’ve bought up for pennies (on) the pound.”

Why invest in things the rest of us would call bad investments?

Because you can buy them very, very cheaply. If they recover, as Alden seems to hope its investments in Greece will, you’ve made a nice bundle. But it can get more complicated. Some vulture funds will buy a country’s debt and then sue the country to force it to pay the debt, plus interest. To be fair, we don’t know if that’s how Alden’s “Hellenic strategy” works because its only public document on the subject, a 2015 brochure for prospective investors, doesn’t say.

However, the Jubilee Debt coalition says it analyzed Greece’s “bailout” loans and investments and found that more than 90 percent of the money “has been used to pay off reckless lenders, with less than 10 percent of it reaching the Greek people.”

  1. OK, so what’s all this got to do with newspapers?

In the case of distressed businesses, if investors don’t believe the companies will recover — or don’t care — they can slash expenses in order to increase profits for a short period of time, then get out while the gettin’ is good.

This last scenario is essentially how most analysts describe Alden’s strategy with DFM newspapers.

As news business consultant John Morton foresaw in the American Journalism Review in 2011, hedge funds that buy newspapers “are not doing this because they have a warm glow about owning socially useful enterprises devoted at least partly to serving the common weal. They are in it because they perceive a chance to make a lot of money a few years down the road.”

In other words, hedge funds don’t care about the long haul, nor do they feed and nurture distressed businesses in hopes they’ll persevere. Their aim is to buy low, and if they can’t sell high, extract as much profit as possible before they dump and move on.

All of this is why we’ve seen impossibly high ads sales quotas, circulation outsourcing, layoffs, pay freezes and newsroom expense cuts at our DFM papers.

  1. This affects communities, too

The trickling down, of course, doesn’t stop with DFM workers. Communities are seeing less coverage of, well, pretty much everything. Evening city council meetings don’t get covered thanks to early deadlines imposed because the paper is copy-edited and printed hundreds, even thousands of miles away. That’s called consolidation.

Community events don’t get covered because there aren’t enough reporters to go around. Papers that once reported on several cities have dropped entire towns from their coverage areas.

As the watchdogs disappear, the window for public corruption opens.

Think this is an exaggeration? Media observers often cite the scandal of the City of Bell, Calif., where officials gave themselves hefty raises and allegedly committed voter fraud while they thought no one was looking. Though there was no local paper, Los Angeles Times reporters eventually did get wise, and seven city officials were convicted on graft and corruption charges.

What they almost got away with in Bell is not unique. When I worked at the Monterey County Herald, (now re-named the Monterey Herald, for reasons you’ll soon get), we reporters heard complaints from residents of the small town of King City that police were illegally towing and confiscating cars. Lots of them. But due to reporter layoffs, our paper wasn’t covering South Monterey County anymore. The allegations went unreported for several years. It wasn’t until the district attorney announced the arrests of nearly half the King City Police Department that we, along with national media, jumped on the story.

This wasn’t our editor’s fault, or even his boss’s fault. It was the fault of someone higher up the food chain who decided that newsroom cuts to increase investor profits were the only thing that mattered at DFM papers.

And that’s why understanding hedge funds matters.

Even more important, it’s why #newsmatters.