Snooki, J-Wow and Sammi are spinning off from Jersey Shore
Proprietary trading desks at banks are history due to the Dodd-Frank Act’s Volcker Rule, named for former Federal Reserve chairman Paul Volcker, which bans banks from making speculative trades with their own money. Star traders lead the exodus.
When Pierre-Henri Flamand and Morgan Sze launched their own hedge funds, they had a very big leg up — they’d been senior proprietary traders at Goldman Sachs. This helped them to raise billions of dollars for their funds.
But it’s easier to launch an emerging fund with the reflected glow of Goldman than to run it. Edoma Partners, started in November 2010 in London, is reportedly lagging behind rivals this year. The $1.8 billion fund, which makes bets on corporate events like mergers, bankruptcies and restructurings, was down 0.85 percent at the end of the first quarter, bringing its losses since inception to 3.1 percent. Goldman in 2010 depicted its proprietary trading as contributing about 10 percent of revenue.
According to the Credit Suisse Global Survey of Hedge Fund Investor Appetite and Activity, long/short equity and event-driven strategies saw the largest year-on-year declines in appetite, after a highly publicized, challenging year for both in 2011. “Our results also indicate the growing appeal of new or ‘emerging’ managers,” the report notes, adding that interest in hedge fund launches and seeding opportunities has gained momentum, leading to larger initial ticket sizes and to more experienced portfolio managers taking the leap and striking out on their own. “Investors remain highly selective, focusing on pedigree and the institutional quality of the business.”
At J.P. Morgan, all prop desks have been transitioned to asset management. The bank is expected to seed the group with around $2 billion. At UBS, prop desk traders announced intentions to become a hedge fund in February, to start an Australia-based global macro hedge fund called MST Capital, to be led by Gerard Satur, current head of UBS macro strategic trading, former Morgan Stanley proprietary trader Jeremy Hooper and Matthew Mulcahy, a former Pimco executive.
Morgan Stanley is set to spin off its in-house quantitative Process Driven Trading unit by the end of 2012, retaining an option to buy a preferred stock position in the new company — PDT Advisors — for undisclosed terms. “PDT has generated an enviable track record within Morgan Stanley since its inception in 1993,” James Gorman, CEO of Morgan Stanley, told the press last January. The PDT unit has had only two down quarters since it was started in 1993. “We are delighted to continue our partnership with PDT as it looks to expand its business by taking on third-party investors.”
“If the bank likes a particular individual and his strategy, and if what he ran for them made money, when the prop desk is spun out, there’s a good possibility that the emerging fund will be seeded by the former employer, which will take a piece of the general partnership or management company,” says Richard Heller, a partner at Thompson Hine Investment Management Group.
“It’s a known risk and a modest investment for the bank,” he notes. His firm writes “side letters” for seeders. “As long as you disclose in offering documents that the seeder is getting a different fee structure,” this is perfectly legitimate. Banks also may be looking at the fees they can garner from becoming prime brokers to the new funds.
“As far as the bigger launches, it’s difficult for them to perform right away; they need time,” says Adam Guren, chief investment officer and co-founder of Hunting Hill Global Capital, which itself launched in February. Guren spent time at a prop desk, not with a bank but at First New York Securities, a privately held shop. “It was a mentorship where I was learning how to run a prop desk,” he explains.
“For one thing, when they were at their prop desks at banks, they had access to a lot more information,” Guren says. “And it takes six months to a year to see that your new business is running properly so that performance starts to pick up.”
“Flows go to organizations with the best brands,” says Donald Steinbrugge, managing partner at Agecroft Partners, in Richmond, Virginia. “The high-profile proprietary trading desks represent a small minority of hedge fund launches and are attracting a lot of money.”