The investment banking-to-hedge-fund parade stumbled quite seriously last week when it emerged that the fabled hedge fund set up by Pierre Henri Flamand, former head of prop trading at Goldman in London, was closing down. Flamand, who was a partner at Goldman Sachs and clearly performed very well within an institutional environment, initially raised $2bn. By October 18th this was down to $1.2bn and by the time the fund closed, it was down to $850m. Investors redeemed their money due to poor performance: the event-driven fund lost 6.9% of its value in the 24 months from November 2010.
Flamand is not an isolated case of prop traders crashing in hedge funds. Morgan Sze, former global head of prop trading at Goldman Sachs, also left Goldman in 2010, and also set up a hedge fund. A few months ago Sze wasn’t said to be doing too well either: his fund reportedly lost around 5% between April 2011 and February 2012.
The bonfire of prop trading vanities has led to much soul searching about why traders in banks don’t make the transition to hedge funds. Is it because they miss the flow, the infrastructure and the support – or were they just no good to begin with?
Opinions are mixed. Mostly, however, it seems that traders coming out of banks nowadays are simply not the right kind of people.
“Most of the people in banks who wanted to set up a hedge fund will have done so when times were good,” says Stuart Maclaren, a partner in the investment management business at Deloitte. “A lot of the traders who suddenly decide now that they want to join or set up a hedge fund are doing so because their employer is downsizing. They’re probably less entrepreneurial than those that have already set up a fund.”
Rightly or wrongly, the perception in the hedge fund community is that former traders from investment banks are spoilt prima donnas who can trade – but only as long as they have a large entourage to perform the trading of cushion-plumping for them.
“We don’t hire from banks,” explains one hedge fund manager, who (ironically) left a bank several years ago and now runs a fund in Switzerland. “It’s a different mindset. In a bank you’re just one piece of the chain. In a hedge fund you’re responsible for the entire chain – from keeping investors happy to ensuring trades are settled.
“I’ve seen a lot of traders leave banks for hedge funds only to become extremely frustrated and unable to cope with the stress,” he adds.
From a hedge funder’s perspective, traders in banks are heavily mollycoddled. “They often don’t appreciate the extent to which they’re being spoonfed in that corporate structure,” says John Godden at hedge fund consultancy IGS. “If you’re in a hedge fund, it’s not just about turning on the lights and making trades, it’s about the colour of the carpet, business development, cash management and regulatory compliance.”
And yet, some hedge funds are still hiring bankers
It would be wrong to conclude, however, that hedge funds do not hire ex-investment bank traders at all. They do. A senior headhunter at one of the big four international executive search firms in London consistently informs us that he is on the look out for bank traders to fill his hedge fund roles. Brevan Howard hired Wayne Lesley, a credit trader from Goldman Sachs only last week. Omni Partners has just hired Howard Spooner, Barclays’ ex-head of European equities.
Godden says places like Brevan Howard aren’t really pertinent to the argument: “Brevan Howard is a large hedge fund which will replicate the corporate structure of an investment bank,” he says, “everything will still be done for you.”
Investment banking traders who want to make it in hedge funds are therefore advised to join big funds that replicate the environment they’re used to, says Godden. Alternatively, they can join increasingly popular managed account platforms, where a hedge fund manager is employed as a sub-advisor to an existing investment vehicle and is responsible only for advising on investment decisions and not for broader control of the fund.
Disregarding the challenges, traders who remain adamant they are destined for hedge funds will also need to prove that they’re any good. This in itself is a big hurdle: as we’ve noted in the past, hedge funds want an audited track record and banks rarely provide one. “Because of the way prop desks are run, it can be very difficult to get any verifiable information on an individual’s performance compared to the team or the overall book,” says Maclaren.
Greg Coffey, the former Moore Capital trader who retired last month, offers a valuable lesson in how to persuade a hedge fund manager to hire you. According to a detailed profile in Financial News, Coffey interviewed with GLG managing director Philippe Jabre in 2002, but was told there was no position for him. He took an alternative role with Bank of Austria in 2003, and for the first six months he sent Jabre details of every trade he did via his Bloomberg terminal. In November 2003 Jabre invited him for another interview and Coffey was hired.