Report: Exodus Of Prop Traders To Hedge Funds Expected To Continue

Feb 3 2011 | 7:24pm ET

Proprietary trading desks at large banks have always been a source of talent for hedge funds and that’s not a trend that’s going to disappear anytime soon, according to a new report from the folks at Infovest21.

Among the successful hedge fund managers who started out as prop traders are Dan Och of Och-Ziff, Eddie Lambert of ESL Investments, Eric Mindich of Eton Park Capital Management and Dinakar Singh of TPG-Axon Capital. In fact, says Infovest21, prop traders account for most of the largest-ever hedge fund launches.

Sampling of Largest Hedge Fund Launches

Key Man

Hedge Fund Date Estimated Assets at Launch ($B) Prop Trader?
Raanan Agus/Ken Eberts Goldman Sachs Investment Partners 2007 7.0 Y
Jack Meyer Convexity Capital 2006 6.0 N
Dinakar Singh TPG-Axon 2005 5.0 Y
Erich Mindich Eton Park 2004 3.5 Y
Gordy Holterman and Derek Dunn Overland Relative Value 2010 3.5 Y
Pierre-Henri Flamand Edoma Capital 2010 1.3* Y
Arvind Raghunathan Roc Capital Management 2009 1.0 Y
Andrew Hall Astenbeck Hall Capital 2010 1.0 Y

 *includes commitments.

“The exodus from prop desks to hedge funds has gone on for over the past 10 years,” says Infovest21 President (and report author) Lois Peltz, “Throughout the years, however, different motivations have pushed prop traders to hedge funds. For example, in 2008 and 2009, a number of investment banks pared proprietary trading following losses during the financial crisis. Prop traders left for hedge funds in 2009 in an effort to escape increased oversight of compensation and trading constraints.” author of its just-released special research report on the topic.

Since 2010, prop traders have beensqueezed out of large investment banks due to the Volcker rule provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act. First announced in January 2010, President Obama signed the Act into law in July 2010.
While a number of prop traders have already joined hedge funds or are in the process of starting their own, more spin outs are expected.

Some say the best traders have already been picked off. “The most marketable go first. Goldman’s Principal Strategies Group is  done— they are all done. Goldman took them off the payroll on December 31, 2011. They are no longer employees unless they transferred into another role in Goldman. Many were offered other roles,” says a former Goldman employee.

But as others point out, there are more proprietary traders than at Goldman Sachs.  “If regulation continues on the trend it has been, it is inevitable that more prop traders will emerge from banks in 2011. Some investment banks have been quick off the mark, others have not. Most are waiting to see specific rules elaborated by regulators and then they’ll make their decision,” says  the head of a seeding operation.

An equity analyst observes that where the law is clear, the investment banks are adhering i.e. closing down the units or spinning them off. However, where ambiguity exists, they’re holding off in that regulators may take a broader approach.

“Many talented prop traders are still left. Not all banks have closed their prop desks—it may take a number of years for some banks to be in compliance,” says a principal at a multi-strategy platform.

Bank of America’s proprietary fixed income desk is one of the large remaining prop desks that hasn’t yet announced plans to spin off or close. Bank of America got the desk when it bought Merrill Lynch.

Sampling of Top Traders Who Have Recently Started Hedge Funds

Former Prop Trader

Hedge Fund Former Investment Bank
Shafiq Karmali Cypress Lane Capital Goldman Sachs
Tan Maruyama Round Rock Capital Goldman Sachs
Simon Mansfield SM Investments Goldman Sachs
Eric Mandelblatt Soroban Capital Goldman Sachs
Pierre-Henri Flamand Edoma Capital Goldman Sachs
Mark Carhart Kepos Capital Goldman Sachs
Morgan Sze Azentus Capital Goldman Sachs
Daniele Benatoff/Ariel Roskis TBD Goldman Sachs
Stephen Jamison Jamison Capital Morgan Stanley
Charlie Chan Charlie Chan Capital Partners Credit Suisse
George Taylor TBD Credit Suisse
Arvind Raghunathan Roc Capital Deutsche Bank
Boaz Weinstein Saba Capital Management Deutsche Bank
Wang Bing Nine Masts Capital Deutsche Bank
Gregg Lippman Libre Max Deutsche Bank
Curtis Adams Ovington Capital Mizuho

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