Obama Plan Could Help, Hurt Hedge Funds, P.E.

Jan 25 2010 | 3:21pm ET

Steering clear of hedge and private equity funds is at the heart of President Barack Obama’s proposal to rein in banks and cut down on systemic risk, but experts are divided on how the rules, if adopted, would affect the alternative investment industry.

On the one hand, the bar on banks from owning, investing in or sponsoring hedge funds or p.e. funds, combined with a ban on proprietary trading, could cut down on the competition for top talent and trading opportunities. On the other, banks are major players in the p.e. sphere and, while relatively minor direct investors in hedge funds, the institutions do manage more than $180 billion in funds of hedge funds. There are also fears that the Obama plan would negatively impact the prime brokerage industry.

“Although the full implications of Obama’s statement remain unclear, the potential disruption that such widespread reform could bring to the alternatives industry is significant, and could affect hundreds of banking institutions in the U.S. investing in alternatives,” Tim Friedman of research firm Prequin told The Wall Street Journal.

Private equity seems to have the most to lose: Banks have raised 60 buyout funds in the last four years, with a combined $80 billion, according to Prequin. Those banks still have $50 billion in uncommitted capital in those funds, and in the process of raising 18 new funds seeking about $18 billion. Goldman Sachs alone has some $27.2 billion in “dry powder,” and is likely to be the hardest hit by the new rules.

“There is going to be less private equity competition in the market as capital will be more expensive,” Tim Snyder of British buyout shop Electra told the Journal. “Where it is going to have an effect is that banks are not going to be investors in funds.” Currently, according to Prequin, banks account for about 9% of money invested with p.e. firms.

Accounting firm Grant Thornton has something of a different take.

“For those players that are captives and still part of banking groups, the writing appears to be on the wall,” the firm’s Paul Cooper told Reuters. That writing reads, “spin out.”

For hedge funds, the implications are somewhat less clear. If the “Volcker rule,” named for its chief champion, former Federal Reserve Chairman Paul Volcker, becomes law, it would likely accelerate the longstanding trend of top traders joining hedge funds or founding funds of their own.

Of course, hedge funds don’t only compete with prop. desks for talent, they also battle for returns.

“For some strategies, particularly many arbitrage-related and quantitative strategies, fewer parties chasing the same trades will improve margins and hence profits,” Odi Lahav of Moody’s Investor Services told Reuters.

But some hedge fund players say they fear the rules would hurt liquidity and damage the relationship between hedge funds and their prime brokerages, which, more often than not, are the big banks.


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Chicago-based independent futures brokerage and clearing firm R.J. O’Brien & Associates (RJO) has hired industry veteran Daniel Staniford as Executive Director, responsible for the firm’s institutional business development in New York and London.

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