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EDITOR’S TAKE: Hedge funds have popped traders’ pay bubble

This is the usually the season to start dropping subtle hints that unless your bonus meets expectations, you’ll be looking for alternative employment come the New Year. Blatantly, the annual bluff won’t work any more.

Not only is banking recruitment likely to remain depressed in early 2009, but threatening to leave for a hedge fund – a big driver of traders’ compensation for many years – no longer carries any weight.

Bloomberg reports that hedge funds experienced their worse monthly drop for a decade in September, hurt by losses on commodities and convertible arbitrage strategies. UK hedge funds are also reeling from their inability to access $70bn frozen in Lehman.

Banks’ compensation committees will also be aware that even if underpaid traders are able to migrate to hedge funds, they won’t be able to improve their financial position by doing so. This year’s poor performance has left nine out of 10 hedge funds below the high-water mark at which they’re able to charge the performance-related fees which have historically contributed to their very handsome bonuses.

The disappearance of hedge funds as a lever for jacking up pay will have a far more substantial impact on compensation than the FSA’s meekly worded request that banks moderate payouts according to risk and spread the load over several years,

For the next few years, most traders will have to accept whatever they’re given. Instead, it will be the turn of in-demand operations and risk staff to boost their remuneration by threatening to go elsewhere. When details of Lehman’s last-minute $100m bonus scheme emerged earlier this week, it was telling that $16m of it had been allocated to Benoit Savoret, the chief operating officer, who was threatening to leave for a rival. In testing conditions, it is managers rather than risk takers who get the buybacks. How times change.

Comments (11)

  1. sarah, so this is what you look like?

  2. Are hedge funds the next bubble to be popped? I have been in front office investment banking for 11 years now, never left for the buyside, but when I started in this business hedge funds were these exotic, esoteric companies run by PhDs. Not many of them about. Last 6 years has seen a mushrooming of hedge funds that has simply amazed me. I”m wondering – are they the next domino to fall?

  3. That is a vague approximation of my appearance. I may have had my hair cut since then.

    Sarah, Editor, eFinancialCareers Reply
  4. Sarah, are you flirting?

  5. In regards to your hair I would go long rather than short, but the that is just mine and most other mens opinion. When it comes to the top of the head anyway, the more hair the better.

  6. No, merely making conversation. Thank you for the advice Bob, I’ll be sure not to go for a tonsure.

    Sarah, Editor, eFinancialCareers Reply
  7. Hmmm, although I am pleased to put a face on Sarah’s very attractive and cheeky face….I’ll have to disagree with the article. (Sorry Sarah, nothing personal once again). I am not convinced about your report about sell side traders any assets being that much able to work/trade for a HF. Now or in the past. Hedge fund trading is much closer to advanced quantitative portfolio management with sound strategic or tactical asset allocation with “allegedly” sound risk management rather than just mere trading whatever the underlying is. Only sell side prop traders or some structurers at best would fit into the HF industry. In other words, the bulk of markets makers out there are not exactly a fit for HF. Savvy investment analysts, risk managers, researchers and portfolio managers able to look further than a Markowitz would fit. Your typical City Trader assuming he does more than just execution : Hmmmm. Very doubtful. Just my 2 cents though.

  8. Sarah, would you go for dinner with me anytime soon ? ; )

  9. Donald – I agree, it is mainly sell side prop traders who’ll lose the option to move easily to hedge funds and who won’t be able to use that to lever up banking pay. That said, hedge funds do employ execution traders, but the pay premium for someone who pushes buttons at the right time is negligble, so the impact here will be less.

    Sarah, Editor, eFinancialCareers Reply
  10. Sarah, sell side prop guys are a tiny tiny minority.
    I don’t have any figures to share but I’d say as an educated guess that out of the bulk of traders (all asset classes considered) working for banks in London : PURE prop desks guys might account for not more than 5% of the working trading force. If you add the guys having prop trading consent from their head of trading within specific limits serious enough to run prop trading strategies, then I’d say the figure jumps probably to 15% .
    Consequently : for these guys the “annual leave bluff” will still work to test the HF payroll despite HF having been hit very hard in 2008. But where I agree : it certainly won’t work for the 85 to 95% others.
    The remaining question being : can we really call traders these 85 to 95% others ? Not me, sorry.

  11. Hah, bank traders are usually bums when compared to HF, CFT. Just look at any trading fund ranking like IASG and you will see not one bank fund in the top 30 ! at least not when I last checked.
    The truth is that banks don’t need to rely on pure prop trading as their customer income is so huge. The pure “prop” stuff is there just to save face , so they can come on to CNBC and say ” oh yeah of ‘ course ‘ we do prop trading.

    One thing I’d like you guys feedback on is why are so many HF doing badly now ? Are we saying they all got caught long and couldn’t get out in time ?

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