Morgan Stanley’s quantitative proprietary trading desk will become an independent hedge fund firm late next year.
The process-driven trading group will be spun off as PDT Advisors at the end of 2012. All of the group’s roughly 60 employees are expected to join the new firm, which will be led by PDT chief Peter Muller.
Under the agreement reached between Morgan Stanley and Muller, Morgan Stanley will pull its own capital from the group over the next year as PDT begins to raise money from outside investors. The Wall Street giant will have an option to retain a preferred stake in PDT Advisors—and likely will, according to published reports—and will probably serve as its prime broker. PDT will acquire some assets from Morgan Stanley as part of the deal.
The spin-off will bring Morgan Stanley into compliance with the Dodd-Frank financial overhaul law, which bars banks from proprietary trading and forbids them from investing much of their own capital in hedge funds and other alternative investment funds.
With the exception of a tough 2007—which it shared with most quant. funds—PDT has posted consistent returns for Morgan Stanley since Muller set it up in 1993. In some years, the group was responsible for a quarter of the firm’s total earnings.
“PDT has generated an enviable track record with Morgan Stanley since its inception in 1993,” Morgan Stanley CEO James Gorman said. “We are delighted to continue our partnership with PDT as it looks to expand its business by taking on third-party investors.”
Morgan Stanley has already spun off its hedge fund unit, FrontPoint Partners.