Prop traders' hedge fund spin-offs are beginning to expand

Investment banks' star traders are leaving to set up hedge funds. Last week it was Todd Edgar and his team from BarCap and this week Citigroup's Sutesh Sharma unveiled plans to go it alone as the bank winds down its prop trading activities.

These are high profile examples, but this trend is nothing new. The Volcker rule crackdown on prop trading activities has seen a steady stream of people make the switch across to hedge funds over the last 12 months. In December last year, corporate finance firm Imas revealed that 25 new hedge funds had registered with the FSA in Q3 2010; a sizable figure that was expected to increase.

After the initial stages of seeding capital and ensuring the trading team is up to scratch, it's only now, a year down the line, that these new launches are considering hiring externally. By their nature, these are boutique operations, so opportunities are never going to be plentiful, but they are emerging.

"Traders and portfolio managers are usually recruited directly via word-of-mouth and the owners' contacts, but we're seeing increasing numbers of jobs for analysts and sales staff," says Barry Heath, managing director of hedge fund specialist Mirage Recruitment. "We're also working with a number of funds in the process of launching in the next three to four months; there's a lot of work in the pipeline."

Recent data released by EuroHedge showed that size and quality of new hedge fund launches in Europe this year was improving, which may have been driven by the increase in prop trading desks being spun out by banks.

Taking on a role in a start-up is not without its risks, of course, but Heath suggests that many are willing to take a chance on a firm in the belief they could become a significant member of the team should the venture succeed.

One specialist headhunter remains slightly sceptical of the employment opportunities coming out of these hedge fund start-ups, however.

"If prop trading desks have spun out of the banks, it's generally the bank providing the operational and infrastructure support to allow the traders to focus on trading. There are some opportunities, but it's usually a year or two before any funds are willing to risk recruiting to any significant degree," he says.