Volcker Rule May Help Out Hedge Funds
Thanks to regulatory pressure resulting from a new proposal known as the Volcker rule many hedge funds may be recruiting traders away from big U.S. banks. The legislation, proposed by President Obama and named after former Federal Reserve Chairman/present Obama adviser Paul Volcker, would require financial institutions engaged in proprietary trading to disclose more information about their trading activities and to be subjected to additional capital and leverage limits. It would also place limits on how large a firm can grow through acquisitions and ban institutions with commercial banks from owning or sponsoring hedge funds and private-equity funds. The Volcker rule was introduced into new Senate legislation this week.
In the wake of the recent financial crisis, this type of trading has been under close scrutiny. Rather than restricting their activities to simply facilitating transactions for clients, proprietary-trading businesses use the banks’ own capital to trade, which often proves to be a very risky undertaking. Citigroup Chief Executive Vikram Pandit was recently quoted by Bloomberg as saying that banks shouldn’t be using their own capital to speculate.
Uncertainty about banks’ future ability to trade with their own money and operate hedge-fund businesses may be giving independent hedge funds the opportunity to hire more top traders. According to a Wall Street Journal article, a number of proprietary bank traders have already jumped ship:
Citigroup Inc. (C) has lost eight proprietary traders in recent weeks amid uncertainty about possible limits on such activity by financial institutions, people familiar with the moves said Tuesday. Matt Carpenter, head of Citi’s long-short equity trading unit, has left, along with Matt Newton, who was Carpenter’s second in command, according to one of the people. Other Citi proprietary traders J.P. Gravitt, Hunter Horgan, Jay Kim, Susan Lee, Gordon Malin and Sam White have also left, the person added on condition of anonymity. Carpenter, Newton, Gravitt, Horgan and White have joined or are headed to Moore Capital Management LP, a leading global macro hedge-fund firm run by Louis Moore Bacon, Bloomberg News reported Tuesday. Gordon Malin, a financial-company analyst, is joining SAC Capital Advisors, another big hedge-fund firm headed by Steven Cohen, another person familiar with the situation said.
Other traders have left to start their own funds. Pierre-Henri Flamand, head of a big proprietary-trading group at Goldman Sachs Group called Principal Strategies, is leaving to start his own hedge fund. Exactly why Flamand retired from Goldman (specifically whether the proposed Volcker rule may have had anything to do with it) remains unclear.
It’s probable that if the Volcker rule passes, we will see further migration of proprietary traders away from commercial banks. As is, the mere threat seems to be steering some into the grateful arms of independent hedge funds.
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