Could you cut it at a sink-or-swim hedge fund?

28 March 2013

3 minute read

Could you cut it at a sink-or-swim hedge fund?

An increasing number of hedge funds are willing to take a punt on former investment banking traders seeking a new sanctuary from the job cuts. However, if you can’t prove yourself in a short period of time, don’t expect to be kept on for long – some hedge funds are cut-throat when it comes to under-performing traders.

Millennium Capital, SAC Capital Advisors and Pine River Capital are all selectively hiring former investment bank traders, as are firms like BlueCrest and Brevan Howard. While this is undoubtedly viewed as a fresh opportunity, experts warn that they should brace themselves for a change of culture.

Stuart McLaren, a partner within the investment management and private equity business at Deloitte, said it’s a “lot more difficult to hide” in a hedge fund than an investment bank.

“If you’re working on a trading desk on an investment bank, it’s very difficult to ascertain how much of the profit was directly attributable to you. This means it’s hard to develop an individual track record,” he said. “If you’re a famous name then fine, but if you’re a regular trader moving to a hedge fund then it’s difficult to gain a level of trust to manage a significant amount of money.”

One hedge fund headhunter in London who declined to be named described it more succinctly: “Traders are given £10m to manage and if they don’t make it work in six months, they’re binned. Then the cycle starts again with another trader.”

Some headhunters believe that the sink-or-swim mentality within some hedge funds doesn’t come as a shock to City or Wall Street traders looking to make the move. “Most traders take these roles with their eyes wide open,” said Charles Morrison, a London-based, hedge fund focused head-hunter at Altus Partners. “It’s something of a gamble to take the role, undoubtedly, but it suits the mentality of some traders who view it as challenge.”

Big name investment banking traders that started their own hedge funds in the past 12 months have also often fared badly. Benros Capital Partners, started by former Goldmanites, Daniele Benatoff and Ariel Roskis, shut down in February, while Edoma Partners, which was set up by former Goldman prop trader Pierre-Henri Flamand, closed in November.

However, the prospect of a short-term job doesn’t appear to be putting traders off the move. Barry Seath, managing director of hedge fund recruitment firm Mirage, said that it’s “one-way traffic” from investment banks to hedge funds.

“The lack of career longevity in some hedge funds, together with some high-profile blow-ups, shows that move from the sell-side isn’t straightforward,” he said.

“Traders in investment banks realise that they can do less under the Volcker rules and this, together with more restrictive remuneration laws from the EU, is likely to accelerate the migration to the buy-side,” added McLaren.