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Excerpt from just-released Special Research Report:
Prop Traders Expected to Continue

Proprietary trading desks at large banks have always been a source of talent for hedge funds. Many successful hedge fund managers had been proprietary traders – Dan Och of Och-Ziff, Eddie Lambert of ESL Investments, Eric Mindich of Eton Park Capital Management and Dinakar Singh of TPG-Axon Capital to name a few. In fact, prop traders account for most of the largest-ever hedge fund launches.

Sampling of Largest Hedge Fund Launches

Key Man Hedge Fund Date Assets at Launch ($B)
Jack Meyer Convexity Capital 2006 6
Dinakar Singh TPG-Axon 2005 5
Eric Mindich Eton Park 2004 3.5
Gordy Holterman and Derek Dunn Overland Relative Value 2010 3.5
Pierre-Henri Flamand Edoma Capital 2010 1
Arvind Raghunathan Roc Capital 2009 1
Andrew Hall Astenbeck Hall Capital 2010 1


The exodus from prop desks to hedge funds has gone on for over the past ten years. Throughout the years, however, different motivations have pushed prop traders to hedge funds. For example, in 2008 and 2009, a number of investment banks pared proprietary trading following losses during the financial crisis. Prop traders left for hedge funds in 2009 in an effort to escape increased oversight of compensation and trading constraints.

In 2010-11, prop traders are being squeezed out of large investment banks due to the Volcker rule provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act. First announced in January 2010, President Obama signed the Act into law in July 2010.

While a number of prop traders have already joined hedge funds or are in the process of starting their own, more spin outs are expected.

Some say the best traders have already been picked off. “The most marketable go first. Goldman’s Principal Strategies Group is done – they are all done. Goldman took them off the payroll on December 31, 2011. They are no longer employees unless they transferred into another role in Goldman. Many were offered other roles,” says a former Goldman employee.

But as others point out, there are more proprietary traders than at Goldman Sachs. “If regulation continues on the trend it has been, it is inevitable that more prop traders will emerge from banks in 2011. Some investment banks have been quick off the mark, others have not. Most are waiting to see specific rules elaborated by regulators and then they’ll make their decision,” says Patric de Gentile-Williams, chief operating officer of FRM Capital Advisors, a seeding operation.

Brad Hintz, an analyst with Sanford C. Bernstein & Co, says that where the law is clear, the investment banks are adhering i.e. closing down the units or spinning them off. However, where ambiguity exists, they’re holding off in that regulators may take a broader approach.

“Many talented prop traders are still left. Not all banks have closed their prop desks – it may take a number of years for some banks to be in compliance,” comments Greg Racz, principal at Hutchin Hill Capital, a hedge fund that offers a platform to managers.

Bank of America’s proprietary fixed income desk is one of the large remaining prop desks that hasn’t yet announced plans to spin off or close. Bank of America got the desk when it bought Merrill Lynch.



White Papers in 2011 Series

Evolving footprint of hedge funds/fund of funds
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Managed accounts, UCITS and other innovative structures - how they're developing and being used
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Institutional interest and allocation in hedge funds
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Hiring trends - Roles and positions in demand
Release date: Quarter 4. $500



Surveys in 2011 Series

Changing profile of funds of funds (e.g. business lines, client profile, assets under management, managed accounts, fees and other terms etc)
Release date: Quarter 1. $500



Institutional investor views on hedge funds, funds of funds, managed accounts, etc
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Family office/Foundation views on hedge funds and funds of funds
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Hedge fund or fund of funds compensation survey (Survey includes back office and executive positions)
Release date: Quarter 4. $700 each





Special Research Reports in 2011 Series

Proprietary Trader Spin-Offs
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Case studies of "Branding" in hedge fund/fund of funds community
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Doing due diligence on the managers' service providers
Release date: Quarter 3. $500




Developments in seeding and incubation
Release date: Quarter 4. $500



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