Prop desk spin-outs face tough road ahead - AIMA CEO

Date: Tuesday, April 12, 2011
Author: Nishant Kumar, Reuters

* Says capital raising environemt remains challenging
* Expects fewer $1 billion hedge fund launches
* Only those with track record, infrastructure could make it

HONG KONG, April 12 (Reuters) - Only a small number of proprietary desk traders scrambling to make a career in hedge funds will succeed as the capital raising environment remains tough, said a top executive of industry body the Alternative Investment Management Association (AIMA).

AIMA Chief Executive Andrew Baker said the days of one man and a dog running a hedge fund were over and only those with an "unimpeachable track record", who could build an infrastructure team around them and who could attract service providers to support them were going to make it.

"Some have tried and some have failed already. I think it's a tough environment," London-based Baker told Reuters during a visit to Hong Kong. "The number of people who have the credentials to make it properly with a decent launch of $250 million or above is very small," said Baker, who left Schroder Investment in 2007 to join the AIMA.

Wall Street firms are preparing for a provision known as the Volcker Rule, part of the U.S. financial reform bill, that limits the risks banks can take with their own capital in the wake of the global financial crisis.

This means well-paid proprietary desk traders will have to find new jobs, hedge funds being the most likely place to use their expertise to continue earning millions of dollars.

Many are inspired by the success of former Goldman Sachs Group Inc star traders Pierre-Henri Flamand and Morgan Sze who launched $1 billion-plus hedge funds, putting them among the most successful fundraisers since the financial crisis.

Baker said that while it was a noticeable trend, not everyone who was a prop trader would be able to set up shop and attract $1 billion, adding that that was only for a select few.

"There will be fewer $1 billion launches rather than more," said Baker, who has a degree in mathematics from Imperial College, London. "Unless those people are known to the prime brokers, the accountants, the auditors, the administrations, people are going to say, who is he? Why would I back that person?"

Due diligence was a demanding process and trying to build a business by hiring people, finding facilities, building the system and at the same time attending endless due diligence meetings would be tough, he said.

A hedge fund survey by Credit Suisse showed that 52 percent of investors might be prepared to back a prop desk spin-out from day one but only if it had a three-year track record.

"It's different trading in an investment bank compared with being on your own and having to build, hire people and impress investors," Baker said.