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LONDON (Reuters) – Some of the biggest traders to have swapped working at a bank for running their own hedge funds are finding it much tougher on their own, with returns since they launched lagging rivals and disappointing investors.Dozens of top traders have fled banks in recent years, spurred into launching their own funds instead as U.S. regulators seek to ban banks from trading with their own money on so-called “proprietary” desks.
Ex-Goldman Sachs <GS.N> stars Morgan Sze and Pierre-Henri Flamand, as well as traders from Credit Suisse <CSGN.VX>, Morgan Stanley <MS.N> and Deutsche Bank <DBKGn.DE> are among those now playing markets with other people’s money.
Investors rushed to get a piece of their investing know-how in some of the biggest fund launches since the crisis. But many are growing disappointed with their showing.
“The question is: ‘how much can you really rely on the fact they will be able to reproduce what they were producing inside the bank where they had a lot of insights about flows and about what the smart money was doing?’,” said Michele Gesualdi, a London-based partner at fund of funds firm Kairos Partners.
“I am a bit sceptical from what we have seen so far.”
Flamand has seen his $1.8 billion Edoma Partners, which makes bets on corporate news events, fall 3.1 per cent to end-March since inception in November 2010, an investor letter seen by Reuters shows.
Hong Kong-based Sze’s Azentus, the biggest launch in Asia last year – is down 4.8 per cent in the 11 months to end-February, two industry sources said, while Benros Capital Partners, also run by ex-Goldman traders, is down 2.84 per cent to end-March since its June 2011 launch, an investor letter showed.
This leaves the star managers lagging many of their rivals. Since Flamand launched the average fund in his sector, so-called event-driven funds, has grown 0.8 per cent after a rebound in the number of corporate takeovers in the first quarter of the year, according to Hedge Fund Research.
Since Sze launched, the average event-driven fund is down a little over 2 per cent, less than half Azentus’s fall.
Others have fared even worse. Zoe Cruz, the ex-Morgan Stanley co-president, is shutting her Voras Capital hedge fund two years after it opened, a source familiar with the fund said. The fund has struggled to raise capital and last year it fell 8 per cent while the average hedge fund lost 5.
Edoma and Benros declined to comment. Azentus and Voras Capital could not immediately be reached for comment.
RUNNING A BUSINESS
The transition from in-house trader to hedge fund manager can be tough. For a start, managers quickly find themselves spending as much time on the practicalities of running a small business as they do running the investments.
They are also answerable to dozens of investors who demand regular updates on performance, positions and strategy.
Brian Singer, a former Americas CIO at UBS Global Asset Management, launched his own macro hedge fund, Singer Partners, in 2009 but has since taken his team to investment firm William Blair to give them more time to focus on investing.
“Unfortunately, you find when you have your own firm you actually don’t get to focus as much time on investing as you think. We were doing a lot of back office, legal, compliance, marketing, none of which we were any good at,” he told Reuters.
Perhaps more importantly, while bank “prop” traders are tasked with making money in all markets, they can also pull back into cash and wait for better opportunities if they believe markets are too uncertain and volatile for them to place their bets.
This contrasts with life outside a bank where traders must invest across market cycles to justify the fees they charge their clients.
Stay in cash too long and investors grow unhappy.
“I sympathise with managers in their first year as they are trying to establish a track record and may feel the pressure to trade to make a return,” said Dave Matthews, who left Japanese investment bank Nomura <8604.T> to launch commodities hedge fund Avitah Capital last year. Matthews believes that pressure eases once a track record is established.
For investors, separating a trader’s individual skill from success that owes itself to the benefits of working in a large, global bank, is hard.
Bank trading floors can buzz with talk of where “smart” money is headed. ‘Prop’ traders can also enjoy financing and execution costs which are lower than those now set by their prime brokers.
Therefore potential investors often have a tough time trying to figure out the contribution an individual ‘prop’ trader made to returns.
“As information (from former ‘prop’ traders) is not readily available, it definitely takes effort to try and figure out the true story,” Lisa Fridman, head of European Research at fund of funds house Pacific Alternative Asset Management Company, said.
Nevertheless, several of the $2 trillion hedge fund industry’s biggest names once ran money for a bank.
Alan Howard left Credit Suisse <CSGN.VX> in 2003 to start Brevan Howard, now one of Europe’s biggest hedge funds, while Michael Platt has grown BlueCrest into a more than $30 billion firm since leaving JP Morgan to go it alone in 2000.
Investors have also shown a willingness to back big-name traders recently even when performance has not been great.
Ex-Credit Suisse natural gas trader George “Beau” Taylor planned to close his Taylor Woods Capital Management commodity hedge fund to new investment at more than $1 billion, industry sources said in March, despite a difficult time in 2011.
After a year in which even the most experienced managers struggled to break even, Greenwich-based Taylor said in a letter to investors it had turned a corner, with the fund up 3.25 per cent to March 9 this year, partly thanks to a shift towards bullish bets on the price of oil.
And Roger Ganpatsingh, a director at Throgmorton, which provides back-office services like accounting and human resources for hedge funds, including those starting out, said ex-bank traders continued to show an interest in launching on their own.
Where managers had decided to delay a launch it was typically because of a “difficulty in fund raising” rather than concerns about their own ability to produce returns, he said.
But investors are growing increasingly impatient about returns, with the average hedge fund losing money in two of the past four years, so former ‘prop’ traders have little time to prove themselves and live up to their star status.
“This year will be the moment of truth for hedge funds because a lot of managers have just been scared, protecting capital and missing out on the rally … A lot of people from prop desks have not been able to transition to the new model well so they are the ones that are most at risk,” Kairos’ Gesualdi said.
(With additional reporting by Nishant Kumar in Hong Kong and Sinead Cruise and Chris Vellacott in London; Editing by Greg Mahlich)