If your aspiration in life is to leave an investment bank for a high paying hedge fund, you're missing a trick. Hedge funds are passé. Hedge fund replication strategies, are not.
Goldman Sachs finally launched its hedge fund replicator earlier this month. J.P. Morgan launched one in September. Ahead of the game, Citi has had a hedge fund replication index since 2008, which was built it up in 2011 under Emanuele Di Stefano, the former head of investment strategies and hybrids structuring at Deutsche Bank.
Hedge fund replicators are typically based upon exchange traded funds (ETFs). Goldman's, for example, is an ETF providing exposure to the 50 U.S. stocks that appear most frequently in top hedge funds' quarterly filings. J.P. Morgan Asset Management has an ETF offering exposure to a range of hedge fund strategies, including equity long/short, event driven and global macro. ETFs are growing as hedge funds shrink. This month, the exchange traded fund industry globally grew to more than $3.2tn in assets under management, while hedge funds' AUM fell to $2.97tn.
As banks move into hedge fund replication, opportunities in the space are proliferating. Jobs are often located in banks' growing systematic trading groups. Goldman's hedge fund replicator was inspired by a research report by David Kostin and Ben Snider, its chief US equity strategist and his VP, but the firm has a systematic trading strategies team providing the quantitative underpinning for all its automated traded products. Last month, it recruited Quentin Cézard, an associate-level index structurer at SocGen, to its UK systematic trading strategies group. J.P. Morgan shifted Amber Ghadder, a cross-asset derivatives solutions professional, into its systematic trading strategies group in August. Morgan Stanley hired Marco Signoretto, a Deutsche Bank systematic equities trader who specializes in data driven trading strategies and machine learning, in the same month.
Augusta Aiken, a consultant specializing in quantitative fund management at Selby Jennings, says banks, trading houses, and fund managers are chasing the same kinds of people. "The whole systematic space is growing and there's been huge demand in the index-linked space; banks and fund managers are looking for people to run smart beta replication strategies."
The ideal recruits for these roles have a Masters or PhD in maths, statistics, or computer science, says Aiken. Compared to some other entry-level jobs in finance, the pay isn't huge: Aiken says salaries of between £60k and £100k ($124k) are standard in banking; bonuses, as usual, depend upon profitability.
A senior algorithmic trader at a European bank says hedge fund replication is the place to be. "It's a rapidly growing and very competitive space," he says. "Banks are creating these hedge fund strategies that are entirely algorithmic and investors are buying into them. Banks can sell their strategy and they can sell derivatives based upon it. Investors are wondering whether they're getting value for money investing in hedge funds and banks are stepping in and filling in the gap."