The Volcker Rule is a specific section in the Dodd-Frank Wall Street Reform and Consumer Protection Act that prohibits proprietary trading by United States Banks and restricts these banks from sponsoring or investing in hedge funds. Banks will have to fully comply with the Volcker Rule by July 21, 2014 and this is impacting the career path of investment professionals.
Triple-effect crippling bank traders
Banks are also adapting to the higher capital requirements mandated by the Bank for International Settlements, Basel and global economic slowdown fueled by Europe’s sovereign debt-crisis. Thus the triple-effect of Basel requirements, global economic slowdown and Volcker Rule has hampered larger banks’ ability to allocate capital to their trading desks. This has vastly reduced the risk taking ability of their traders.
Exit of high profile bankers
These developments have accelerated the exit of many of the high profile investment bankers. These bankers now see better opportunities at hedge funds that seek to profit in markets where bank lenders are retreating. Thus a new trend has emerged — high profile Wall Street bankers are now looking for opportunities in hedge funds which are not as regulated as banks.
Lower cash bonus at banks
Since last year, the cash bonuses payable by larger banks have been capped. It has been reported that the cash bonus at Barclays, UK is capped at 105,000 USD (65,000 GBP), while at Bank of America it is pegged at 150,000 USD. Similarly the cash bonus limit at Deutsche Bank, Frankfurt is 131,000 USD (100,000Euros), while at Morgan Stanley, New York it is restricted to 125,000 USD.
Larger bonus to Hedge Funds Traders
According to Options Group, the New York executive recruiting firm, hedge funds are now offering managing director level trader salaries of about 200,000 USD to 250,000 USD.
Unlike banks, the hedge funds typically pay 50 percent or more of bonuses to their highest earners in cash, opines Johnson Associates, a leading New York-based compensation consulting firm.
According to a recent online survey conducted by eFinancialCareers.com, employees at largest investment banks have got an average salary hike of only 3 percent last year, while smaller investment banks and fund managers were respectively paid 14 percent and 13 percent higher.
Better career opportunities
During the first quarter of 2012, investors have allocated over 16 billion USD into hedge funds with the total capital invested in the global hedge funds industry galloped to a record 2.13 trillion USD.
Though Wall Street banks previously offered greater job security and higher volume of business, the recent developments have hampered their growth and bonus pay-out potential. Hence it has become a buyer’s market for hedge funds and the people working in hedge funds have now figured out how to trade in the new world.
A great opportunity has been thrown open to hedge fund professionals due to (a) change in the banks’ regulatory landscape, (b) uptrend in the interest shown by investors in hedge funds and (c) increased pay-package in the hedge funds industry. This exodus of high-profile Wall Street bankers heading to hedge funds seeking better career opportunities is likely to continue.
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