The passage of the Volcker Rule in July is having its effect on hedge funds. The Volcker Rule limits banks from making risky bets with their own capital and from investing more than 3 percent of assets into hedge funds or private equity firms.
There’s already been talk that major banks such as Goldman Sachs and Morgan Stanley may spin off their in-house, proprietary trading groups into independent hedge fund firms.
Now we’re reading how some hedge funds and broker-dealers are positioning themselves to lure proprietary traders who may be thinking of leaving their bank positions. However, as an article in Advanced Trading points out, they’re not likely to jump ship until the new year, in order to collect their bonuses this year.
One firm, First New York Securities, a registered broker-dealer based in New York and London that employs 250 proprietary traders, is positioning itself as the smart alternative for proprietary traders who want even better tools. . “We have the ability to provide technology that the bulge-bracket banking firms may not be inclined to give their traders,” says First New York managing partner Donald Motschwiller. His firm has access to the markets via its own execution capabilities. Whereas traders at bulge-bracket firms may have access only to an in-house execution platform.
Pressure from the new legislation may also give hedge funds a chance to hire talent in areas they haven’t covered before. For example, a hedge fund can go from being long-short equity to multi-strategy immediately, with a few strategic hires. It could also help balance out the cyclical nature of some of their strategies. Though the shift to multi-strategy would increase the firm’s risk management requirements, notes Eric Bernstein, COO at Sophis, a provider of cross-asset-class risk management systems.
Jeffrey Wecker, president and CEO at Lime Brokerage, a high-volume agency broker, is quoted as saying the new legislation is “absolutely fueling” spin-offs from larger banks. His firm caters to high-frequency trading and other black-box trading strategies.
Other firms, such as Chicago-based HTG Capital Partners, sees opportunities for programmers who’ve previously working at the proprietary trading desks at banks. “If a person feels they have a strategy and feels they can trade an account and make money at it, we’re open to hearing the proposal,” according to Chris Hehmeyer, CEO at HTG. He notes that programmers who’ve spent years coding the algorithms behind these trading systems may find opportunities at new firms even more lucrative than the traders.
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