Investment bank or hedge fund?
Investment bank versus hedge fund? Proprietary trading at an investment bank or an independent hedge fund are very different. The track record is NOT portable. Recently there have been several multibillion dollar startups by people with NO experience of managing a hedge fund. Good traders no doubt, terrific "references" and past "returns" provided by their former employers eyeing future commissions. But prospective investors would be better served if the hedge fund neophytes started off LEARNING the business by managing MUCH smaller amounts.
Bank traders have access to flows and information they would NEVER see as a hedge fund client. They often have first refusal on taking the other side of large customer trades, stock borrow locates and distressed asset sales. Stealing client ideas and strategies and front running orders never happens? What "commissions" and stock loan fees were they charged while at the bank? Same as an outside client? Leverage is basically an unknown; their trades are backed by the balance sheet and credit rating NOT investor cash. Percentage returns cannot be calculated; at best just the "profits" generated, a number which the trader AND former bank have a vested interest in making look as "high" as plausible.
Recently in the news is a fund that raised over $3 billion on the back of "never having a losing year" while at a big bank. Since the founder's past performance was ENTIRELY due to being inside a bank I suspect that now he is on the outside with no edge, he will have steeply negative years and lose most of it. Another "star trader" apparently produced $700 million for his global bulge bracket firm using $10 billion of capital - 7% from all those internal flows and information! Deduct 2% and 20% and apply realistic external commission and leverage costs and there is not a lot left for investors. A real star?
A seasoned trader with a good reputation leaving to set up their own hedge fund will lose many advantages and edges and be cut off from information flows that were likely crucial to their PAST, unverifiable track record. Let them learn to run a hedge fund on their nickel NOT yours. There will be plenty of time to get in later. And if they threaten to "close" to new investors it is even better since you can focus on superior funds that ARE open and run by more experienced fund managers.
Bank traders have access to flows and information they would NEVER see as a hedge fund client. They often have first refusal on taking the other side of large customer trades, stock borrow locates and distressed asset sales. Stealing client ideas and strategies and front running orders never happens? What "commissions" and stock loan fees were they charged while at the bank? Same as an outside client? Leverage is basically an unknown; their trades are backed by the balance sheet and credit rating NOT investor cash. Percentage returns cannot be calculated; at best just the "profits" generated, a number which the trader AND former bank have a vested interest in making look as "high" as plausible.
Recently in the news is a fund that raised over $3 billion on the back of "never having a losing year" while at a big bank. Since the founder's past performance was ENTIRELY due to being inside a bank I suspect that now he is on the outside with no edge, he will have steeply negative years and lose most of it. Another "star trader" apparently produced $700 million for his global bulge bracket firm using $10 billion of capital - 7% from all those internal flows and information! Deduct 2% and 20% and apply realistic external commission and leverage costs and there is not a lot left for investors. A real star?
A seasoned trader with a good reputation leaving to set up their own hedge fund will lose many advantages and edges and be cut off from information flows that were likely crucial to their PAST, unverifiable track record. Let them learn to run a hedge fund on their nickel NOT yours. There will be plenty of time to get in later. And if they threaten to "close" to new investors it is even better since you can focus on superior funds that ARE open and run by more experienced fund managers.
© posted by Veryan Allen on 4.8.06
by Veryan Allen 
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