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Dodd-Frank is forcing banks to disband their lucrative prop trading desks and ship them off to hedge funds, or deposit them somewhere else within the firm.And its not just the banks that are going to be sad about the departures of these money making machines; the traders themselves are going to have a tough time in their new workplace, Reuters argues.
Here’s why: hedge funds have way less freedom than prop trading desks.
The main reasons for this are:
- Senior hedge fund managers have to devote way more time to issues like marketing and managing non-trading staff, which senior prop traders, because of the infrastructure of their bank, have to spend less time on.
- Prop traders have one boss — the bank. Hedge funders have a zillion bosses — their investors. Plus their actual boss.
- Banks are way more lenient in terms of changing strategy and pursuing unusual opportunities, on a whim. “I’ve interviewed traders from Goldman before and they say, ‘I can try anything I want,'” one exec says. At hedge funds on the other hand, investors expect a particular strategy to be adhered to, because it’s the reason they invested in the first place. “I might see an opportunity in Asian equities, but my investors don’t pay me to invest there,” said a former Goldman trader turned hedgie.
- Hedge fund managers have to keep a stash of cash on hand in case investors request redemptions. That can really diminish returns.
- Speaking of returns: strategies like fixed income arbitrage, which require a ton of borrowed capital, will probably see less profitability in a hedge fund than in a prop desk unit, because independent funds have higher capital costs.
Yep, there are prop traders sulking all over this city.
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