Research
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.
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