It's that time of year when weary Wall Street traders take stock of exactly how much they're really valued by their banks. And a time also to cast their eyes towards their hedge fund colleagues, muttering darkly about the grass being greener on the other side. With January bonuses now having been bagged, it's a good talking point to see how they measure up to what's available on the hedge-side of the investment industry.
But of course, the talk usually remains just that - after all, the proprietary equity trader is very much Master of the Universe, with a much greater degree of trading latitude than their hedge fund compatriots. Or rather they were. With Dodd-Frank already taking the shine off of bonuses, and the forthcoming Volker reforms expected to kick proprietary trading hard, many are firming up their inquiries about hedge fund employment.
That's if they're not going to be pushed first. Although the Volker reforms, seeking to lock down proprietary trading within the banks, are still light on detail (and a few years from implementation) they have acted as a real catalyst. Many banks are splitting off their proprietary trading desks, or going for an outright divestment of hedge funds and private equity funds, all in an attempt to get ahead of the regulators.
So what potential is offered to the Wall Street prop trader from employment in the hedge fund sector? Well, the first thing to note is that the past two years have seem a marked improvement in hedge fund returns. According to the Barclay Hedge Fund Index, hedge funds gained 23.74% in 2009 and 10.90% in 2010. However, there were definite clouds on the horizon as insider-trading investigations mushroomed at several hedge funds.
Capital inflows, too, have been good, with assets under management increasing by $23.6 billion in the two year period ending December 31, 2010. With many of the bigger funds closing their doors as capital limits are hit, some see a real boom in 2011 for new small and medium-sized funds. That can only be beneficial for the prospects of hedge fund employment. Not only that, but with Wall Street bonuses plunging under the twin regulatory assault of Dodd-Frank and Volker, the hedge fund sector has posted some tempting numbers for its star performers.
A Reuters survey of Wall Street incomes show that the big-hitting banks have cut back traders' bonuses by 25% to 30%. Compare that to the 9% rise in income for senior equity traders and 10% for fixed income at hedge funds, and you can see why the hedge-hopping buzz is particularly loud this year. A wholesale jump is unlikely any time soon - the hedge industry just doesn't have the capacity to absorb all of the proprietary trading employees of the banks. But a structural shift towards employment in hedge funds is looking to be in the cards. It may be that 2011 will see many traders having to dust off their client-facing sides, as they adapt to the investor-driven focus of the hedge funds.