The hedge fund industry is expected to see a wave of new launches in the next year by traders who have lost their jobs at investment banks or who have left in search of better pay.
The start-ups are expected despite the unimpressive performance of other new ventures and questions about where they will find new capital to finance them.
New rules banning U.S. banks or those with U.S. subsidiaries from risky but potentially profitable proprietary trading are also encouraging some traders to make the move.
Mitt Romney's U.S. presidential election defeat means little chance of the wider regulatory bill being repealed, as he had promised.
"If you consider what's going on for (banks) at the moment from a compensation point of view, plus the increase in regulation and impediments to expressing risk...then working at a hedge fund looks like a compelling option at the moment," said David Barenborg, a portfolio manager at BlackRock (BLK.N) Alternative Advisors.
Among the most prominent names who have tried to launch this year are JP Morgan's Mike Stewart and Deepak Gulati, Citi's former head of proprietary trading Sutesh Sharma, and Nomura's Borut Miklavcic, who gained approval from Britain's Financial Services Authority for his LindenGrove Capital this month.
Other traders away from the proprietary businesses, such as so-called "flow" traders, who engage in market-making transactions for clients, are also leaving banks.
Antoine Cornut, a former head of flow-credit trading for Deutsche Bank, is setting up his own credit-focused hedge fund Camares Capital, two people familiar with the launch said.
Investment banks across the globe have slashed hundreds of thousands of jobs since a market peak in 2007, as tougher regulations and weak dealmaking force them to cut costs. UBS said last month it was winding down its fixed income business and cut 10,000 jobs.
Banks are also under pressure to cut bonuses and benefits, reducing the incentive to stay on at a bank with the promise of a more lucrative job elsewhere.
PROP DESKS SHUTTING
Proprietary trading, or trading with the banks own money, can closely resemble trading in the hedge fund business and has turned out big profits before the financial crisis.
But the U.S. Dodd-Frank bill, introduced under President Barack Obama, includes a ban, known as the Volcker rule, on proprietary trading because it is risky.
Under that rule, U.S. banks or banks with U.S. subsidiaries or branches - most major European and Asian lenders - were banned from betting with their own capital from July this year, but given until 2014 to comply.
Many banks were quick to dismantle their "prop" desks ahead of the rule, but others have taken a wait-and-see approach and may now have to make big cuts. This will likely mean several new launch attempts in the first quarter of next year.
"We will definitely see some new spin-outs over the coming year as most banks continue to plan ahead," said Daniel Caplan, European Head of Global Prime Finance at Deutsche Bank, which has worked with several of the major launches to come out of banks since the 2008 financial crisis.
He expects the next year will herald more start-ups in credit - one of the top performing and most popular sectors in 2012 - because many of the big ones so far have focused on trading equities.
The average credit hedge fund is up almost 9 percent this year, beating the average hedge fund's 4.3 percent, data from industry tracker Hedge Fund Research shows.
CAPITAL QUESTION
There is no guarantee traders will be able to raise sufficient capital to launch their own funds, however.
The bulk of the money flowing into the industry since the financial crisis has gone straight to the biggest names, leaving start-ups struggling.
Bank traders have instead found themselves snapped up by the big, established hedge funds - an offer some who fail to get planned launches off the ground will likely take.
Moreover, many of the biggest new ventures have failed to make their backers money.
Edoma Partners, set up by a former senior proprietary trader at Goldman Sachs and one of the most hyped launches since the financial crisis, said earlier this month it was shutting down after just two years, hit by poor returns and investor exits.
As I stated last week when I went over third quarter 13F filings of top funds, these are tough times for even the best hedge funds. In fact, these are tough times for all active managers, with one US study showing that active managers do have a better track record in recessions, but the study concludes that “active portfolio management fails to add value above the higher costs it imposes on investors.”
As far as bank traders are concerned, the very best of them will move to start their own operation or, far more likely, join an established hedge fund. Saijel Kishan, Miles Weiss and Jesse Westbrook of Bloomberg report, Brevan Howard on Hiring Spree Makes Comeback in New York:
Brevan Howard Asset Management LLP, Europe’s second-biggest hedge fund, is rebuilding in the U.S. after largely pulling out during the 2008 financial crisis.
The $39 billion firm, run by billionaire Alan Howard, is seeking traders for its New York office after adding 14 people to its U.S. unit in the past five months, four people familiar with the matter said. Among those recently hired by London-based Brevan Howard are Don Carson, who ran Credit Suisse Group AG’s U.S. dollar swaps desk, Josh Bertman, a mortgage trader from the Zurich bank, and strategists from Deutsche Bank AG.
Brevan Howard, whose U.S. unit expanded to 16 people last month from two in June, is hiring as Wall Street banks shrink or eliminate trading desks and hedge funds struggle to profit from Europe’s sovereign-debt crisis and other global economic trends. The firm, whose main fund is on track for its second-worst year, is expanding to gain more insight into U.S. markets, attract traders and give employees the opportunity to relocate to New York, said one person with knowledge of the matter, who like the others asked not to be named because the information is private.
“Expanding in New York at this time is a smart move given how there’s a lot of blood on the street as banks and hedge funds cut talent,” said Gustavo Dolfino, president of New York- based recruitment firm WhiteRock Group LLC. “Some of the hot strategies right now include global macro and commodities.”
A spokesman for Brevan Howard declined to comment.
Seeking Talent
Brevan Howard is a macro hedge fund, which seeks to profit from broad economic trends by trading everything from currencies to commodities. Such funds posted an average 0.9 percent loss this year through October, according to data compiled by Bloomberg.
Brevan Howard’s Master Fund, which has never had a losing year since its 2003 inception, returned about 1.8 percent through Nov. 9, according to a person briefed on the returns. Its worst year on record was a 1 percent gain in 2010.
Carson was hired last month, and Bertman is set to join after leaving Credit Suisse in October, people with knowledge of the hires said earlier this month. Giles Coppel, a former trader at hedge fund Tudor Investment Corp., is listed as the head of trading in a registration filed by Brevan Howard’s U.S. unit.
Vinay Pande, who was chief investment adviser at Deutsche Bank, was scheduled to join the hedge fund’s New York office last month, heading a team of three researchers. David Gilbert, an attorney in Brevan Howard’s London office, became chief operating officer of the U.S. subsidiary in September, filings show.
Midtown Office
The firm also hired Shelley Goldberg, a former commodities strategist at Nouriel Roubini’s Roubini Global Economics, said another person with knowledge of the matter.
Worldwide, Brevan Howard employs about 430 people, of which 110 are directly involved in investing. Apart from London and Geneva, Brevan Howard has offices in Hong Kong, Tel Aviv, Washington, Sao Paulo and St. Helier in the island of Jersey, according to its website. Its New York offices are on Madison Avenue, in midtown Manhattan.
Howard, 49, whose personal wealth was estimated at 1.4 billion pounds ($2.2 billion) by the Sunday Times in April, relocated in 2010 to Geneva from London, joining other hedge- fund managers who moved to Switzerland after the U.K. government announced plans to raise taxes on top earners.
Founders’ Departure
The first part of Brevan Howard’s name is made up of the initials of founding partners. Chris Rokos, the “R” in Brevan, left the firm in August. James Vernon, the former chief operating officer and the “V”, left last year, and Jean- Philippe Blochet, the “B”, left in late 2009. The remaining co-founders are Howard and Trifon Natsis.
Brevan Howard’s U.S. operations were cut back in 2008, and many of those who worked in the U.S. were given the option of moving to London, according to two former employees. The downsizing included an office in Connecticut, which employed former traders from RBS Greenwich Capital Markets who focused on interest rate products, including U.S. government bonds and derivatives, for the firm’s master fund, another former employee said.
Brevan Howard’s main investment-advisory unit claimed an exemption from U.S. hedge-fund regulation in March of this year and formed a new U.S. unit a month later that is subject to oversight by the Securities and Exchange Commission. BlueCrest Capital Management LLP and Winton Capital Management Ltd., the third-biggest and fourth-biggest European hedge funds, are registered with the SEC. Man Group Plc, Europe’s largest hedge fund, has had a registered U.S. unit since 2000.
U.S. Unit
According to a June 8 filing with the SEC, Brevan Howard “envisaged” that the U.S. unit registered with the SEC would initially manage about $300 million on behalf of the master fund run out of London. The unit, Brevan Howard US Investment Management LP, was slated to open in July, according to the document. In August, Brevan Howard’s U.S. unit amended its registration to say that the net assets totaled $800 million.
Brevan Howard, which is regulated in the U.K. by the Financial Services Authority, previously spun off a mortgage trading operation run in the U.S. by David Warren, a former managing director and chief operating officer in Morgan Stanley’s mortgage-backed securities department.
Warren in March 2009 set up his own firm under the name DW Investment Management LP. The firm manages money exclusively for Brevan Howard partnerships, including the Brevan Howard master fund and the Brevan Howard Credit Catalysts fund, and is on the same floor of a New York office building as Brevan Howard’s U.S. unit. DW’s assets under management totaled almost $4 billion as of March 15, according to a government filing.
‘Friendliest Market’Indeed, US investors can't get enough of hedge funds. I think Brevan Howard is on the right track hiring top traders away from banks. I just wish they opened up offices in Toronto and Montreal so I can introduce them to top talent in Canada.
While Warren controls investment decisions, Brevan Howard’s compliance department monitors DW’s daily trading activity, according to documents filed with the SEC. Brevan Howard also establishes all arrangements for the custody of securities in funds managed by Warren’s firm, and has the ability to prescribe risk mandates, the filing says.
Brevan Howard had also registered a brokerage unit in New York that helps raise money from American investors. About 64 percent of the money invested by pension plans and other institutional investors in hedge funds comes from North America, while Europe accounts for 24 percent, according to Preqin Ltd., a London-based research firm.
The firm is currently looking to the U.S. to raise money for a three-year-old currency fund. It filed an Aug. 9 private- placement notice with the SEC to raise an unspecified amount of assets for its Macro FX fund. The filing allows a hedge fund to raise money without going through the SEC’s registration process for securities, based on the regulator’s view that potential investors are sophisticated and able to fend for themselves.
“Fundraising is tough at the moment but easier in the U.S. than the rest of the world,” said Daniel Celeghin, a partner at Casey Quirk & Associates LLC, a Darien, Connecticut-based firm that advises asset managers. “U.S. investors are the friendliest market to hedge funds right now.”
How many Canadian traders/ managers can survive the cut-throat environment at Brevan Howard? Very, very few. I can count them on one hand but there's definitely talent worth approaching here and these individuals would fit perfectly with Brevan Howard or other large hedge funds looking for true alpha talent.
As Canadian banks follow their global counterparts and retrench from proprietary trading and hedge fund activity, opportunities are opening up here for hedge funds to hire talented traders/ investment managers. I personally believe banks shouldn't be in the hedge fund business. Their myopic focus on short-term results isn't conducive for hedge fund investments and as Soros rightly noted, there's no alignment of interests.
Apart from hedge funds, pension funds should be seeding top alpha talent. Unfortunately, in this conservative environment where everyone is "de-risking," not many pension funds have an appetite to seed anyone. But some are getting creative with external managers and mandating seeding activity to experienced shops like Blackstone.
Below, KKR & Co., the buyout firm founded by Henry Kravis and George Roberts, hired nine members of Goldman Sachs Group Inc.’s U.S. principal-strategies group for a new hedge fund. Bloomberg's Cristina Alesci reported this back in October 2010.
And Jack McDonald, chief executive officer of Conifer Group, talks about the outlook for the hedge-fund industry. He speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Market Makers." LionTree Advisors LLC's Aryeh Bourkoff also speaks.
Finally, Bloomberg News' Kelly Bit discusses hedge fund compensation. She speaks with Deirdre Bolton on Bloomberg Television's "Money Moves."
