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Corporate banking, prime broking, traders’ hedge funds: what actually went up in 2011?

Christmassy stuff

As we note in our accompanying article on the trials of the past twelve months, 2011 hasn’t been a particularly good year. One measure of this is that according to Bloomberg, more financial services jobs were lost in 2011 than in 2009.

But hey, it wasn’t universally bad. There were gradations of pain; some sectors of the market had pin pricks. These were them:

1. Some ex- investment banking traders’ hedge funds

As banks continued to pull back from proprietary trading, there were signs of many former prop traders setting up hedge funds. In London, figures from data provider IMAS show the number of FSA regulated ‘trading entities’ increasing throughout the year.

Source: IMAS

Meanwhile, Bloomberg points to various ex-commodities traders who are going the hedge fund route, including Todd Edgar and his team of BarCap commodities traders, Tim Jones of JPMorgan, Kieran McKenna of Credit Suisse, George Taylor of Credit Suisse and Gil Saiz of Goldman Sachs, to name but a few. Other bankers, such as Jonathan Sorrell from Goldman Sachs, opted to join existing hedge funds.

Not all ex-bankers’ hedge funds were successful however. Overall, 2011 was the worst year for hedge fund performance since 2008. Even Pierre Henri Flamand, the ‘star Goldman Sachs trader’ who started even driven fund Edoma Partners in late 2010, was down 3.79% for the year by late November.

2. Goldman Sachs

In some ways, Goldman Sachs didn’t have a great year: it made a loss of $0.84 per share in the third quarter, reduced pay for VPs and MDs in London  and announced plans to cut 1,700 staff globally.

On the other hand, after a terrible 2010, in which the bank was hit by the Abacus Fraud charges and acquired the vampire squid moniker, Goldman did at least emerge from 2011 intact.

Less promisingly, its share price declined 50% during the year. More promisingly, this wasn’t too bad compared to the 66% share price decline at Bank of America. And Goldman ended the year as global number 1 for both M&A deals and equity offerings. It also impressed people by pointing out that its managing directors have an average tenure of 12 years, that everyone else there has an average tenure of 5.5 years and that it still gets an average of 25 applications per job.

3. Prime broking

With the exception of Nomura, which decided to pull back from prime broking in March, prime brokers generally had a good 2011. Citi, HSBC and JPMorgan were all busy hiring for their prime broking businesses, often at senior levels.

JPMorgan launched its prime custody service to European clients in 2011, explaining that: “It’s a business that tends to be more stable than other areas and a bit less subject to volatility” and that prime broking-related accounts tend to generate higher revenues.

“A hedge fund that uses a bank as its prime broker will be tied into using that bank for its execution and other needs,” says Jesper Bang, the former of head of prime broking at Dresdner, who now runs a hedge fund in Switzerland, explained to us.

4. Corporate banking

Corporate banking also remained a big growth area as US universal banks recognised the potential for ‘leveraging the synergies’ between their corporate banking  and investment banking relationships.

In December, JPMorgan said it was on track to hire 260 corporate bankers this year and that it aspired for the corporate bank to provide an additional $1bn in annual pre-tax income by 2016.

5. Collateral management

As we noted in July, collateral management started transforming from a support and services function into a revenue-generating area. As high quality collateral became harder to come by, banks looked at using their collateral more efficiently in an increasingly regulated environment.

The Financial Times pointed out that growth in collateral management was leant momentum both by new capital rules and by centralised derivatives clearing. ‘Collateral transformation’ is the new thing: banks swap illiquid derivative products for more liquid products (cash or – historically – government bonds) for use central clearing  .

Morgan Stanley has around 100 people working in its collateral management business and said its OTC collateral management team was due to grow, “substantially” as new regulations are implemented.

6. Technical risk

Recruiters claimed technical risk (quant risk) professionals remained hard to come by. “Many organisations have recently initiated new programs to devise a more integrated approach to risk management,” said Kay Senior, operations director at Badenoch & Clark.  The most unobtainable candidates were apparently those with a PhD and programming skills and an understanding of particular securities.

7. Rainmakers in M&A

Initially at least, 2011 was a good year to be a rainmaker in M&A. Citigroup, Bank of America and HSBC all stepped forward and said they wanted to hire  senior bankers in M&A.

Some actually did. Citi revealed in June that it had hired 35 MDs in M&A during the year.  Many of them came from UBS, which hired 28 MDs in IBD of its own  and said it wanted to rebuild its franchise in 2012.

As the year went on, M&A hiring fizzled out a little, however. As concerns about the European situation intensified, deal activity declined substantially  in the second half. Nor was there very much optimism about a rebound in 2012.

8. Barclays Capital’s M&A team

 Meanwhile, all BarCap’s 2010 hiring in M&A appeared to pay off. By the end of the year, the bank ranked 3rd for UK M&A. This was a considerable achievement given it had never previously finished any higher than 8th

9. Consultants in accounting firms

2011 was a tremendous year for hiring in accounting firms – especially into Big Four Accounting firms’ consulting arms.

Hence, in August Deloitte declared it had hired a huge 3,300 people in the UK over the previous 12 months, KPMG said it wanted to hire 1,500 professionals every year until 2016 and E&Y said it wanted to hire 1,250 new people soon.

All of this excitement fizzled out a little in December following European Commission proposals to prevent Big Four accountants offering non-audit services, which would oblige them to spin off their consulting arms. Optimistically, this may not come to pass. More optimistically, spinning off consulting arms might require even more hiring as the standalone firms will surely need a more focused sales and marketing effort.

10. Insurance

Anecdotally, 2011 was also a biggish year for insurance-related hiring. The impetus was Solvency II, the new EU regulatory framework for the insurance industry, which began obliging insurers to pay more heed to things like market risk.

Mark Dainty, director of insurance-focused recruitment consultancy High Finance Group told us risk professionals suddenly became more popular in insurance firms as a result. “We are seeing the creation of a second line of defence (in insurers) with group level risk functions,” he explained. “Whereas the first line tends to be the traditional actuary who is liability-focused, Solvency II is clearly turning attention to the asset side of the equation and there is a whole new skills-set in demand.”




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