The usual trickle of bank traders wanting to leave their firms to start their own hedge funds has turned into a flood, according to a recent article in Britain’s Telegraph. Among them are traders from Goldman Sachs, BNP Paribas, Deutsche Bank and the former Wells Fargo.
In some cases the reason is tighter bank regulations following the financial crisis. There’s new legislation in the U.S. to clamp down on proprietary trading. Banks will have to ante up more capital to cover their risks. As a result, proprietary traders aren’t being given the freedom to trade as they once did.
What’s more, tighter oversight of compensation may prevent traders at banks from pulling in enormous bonuses, even when they do well but their bank has a bad year.
Still, the freedom of running your own show has considerable lure. There’s virtually no bureaucracy. The working environment of a hedge fund is entrepreneurial and perhaps more intellectually stimulating. And you can show up for work in a polo shirt and jeans.
Speaking of freedom, one of the bank refugees setting up his own fund is Greg Lippmann, the trader who helped Deutsche Bank make millions shorting the U.S. subprime mortgage market. Lippmann was profiled in great detail in the current bestseller by Michael Lewis, The Big Short. Lippmann has reportedly raised $1 billion for a new fund which he is calling “Libra Max”, which translates into “Maximum Freedom.”
Other newcomers to the hedge fund world may have more difficulty raising funds, though. Banks are more reluctant to seed hedge funds today. Institutional investors are committing fewer dollars. And the heavy redemptions and fund closures during the financial crisis have made it tougher than ever for smaller funds and new funds to raise investment capital.
To top that off, there’s a growing regulatory burden facing hedge funds both in the U.S. and Europe. Maybe the “freedom” to go off on your own isn’t all it’s cracked up to be.
What’s your take? Do you think the exodus of bank traders will continue or even increase? Add your comments below.