Morning Coffee: Top hedge fund’s HQ isn't necessarily where you think it is. Signs that the BNP/Deutsche deal is turning sour before it even happens

“Investors do now generally consider us to be London-headquartered”, states the most recent letter from Caxton Associates. Which might have come as a bit of a surprise to long-term clients, as once upon a time Caxton was as Noo Yawk as they come – nobody who remembers meeting their star portfolio managers of the 00s, Jake and Abe Eisenstat, who later left to found a fund called Dabroes (Da Bros, get it?), could have thought of them as in any way English.

But Bruce Kovner, who founded the fund in 1983, retired eight years ago, which is forever in hedge fund terms. And his successor as chairman and CEO is a Brit, Andrew Law, who runs the flagship macro fund from Caxton’s offices in London. And so, wherever its funds are domiciled for tax purposes, no matter how much of the back office is run out of Princeton, and whichever regulator gets the reporting, that means Caxton’s a UK fund now.

Caxton is being a bit unusual in being so frank about it, but it’s a straightforward organisational fact about the financial industry: wherever the boss is located, that’s head office. In fact, these days the London investment management operation of Caxton is much bigger than the New York front office, with 85 employees after a recent hiring program. But even if this wasn’t the case – for example, if it had been like Brevan Howard during the period when Alan Howard was in Geneva while the majority of the business was in London – the rule still holds. Physical proximity to the person who makes the decisions – particularly the decisions about promotion, hiring and pay at the top levels – is what matters.

The reason it matters is that financial services is, and always will be, a people business and people still need to be physically close to each other in order to have really strong relationships. The people who are present in the same building as the CEO every day, walking into the office and exchanging mumbled small talk in the doorway are also present in his or her mind; they’re just more real than those who dial in to conference calls or videocalls, no matter how successful. That’s one of the key reasons why really profitable subsidiaries and branch offices often try to negotiate separate bonus pools like the famous “Kangaroo Deal” for UBS Australia – they’re aware that it’s much more difficult to get credit for your revenue generation when your rivals are sharing umbrellas and taxi rides with the decision maker. Home is where the boss is.

Elsewhere, it’s increasingly seeming that the deal between BNP Paribas and Deutsche Bank to transfer technology and clients of the prime brokerage business, potentially saving 300 jobs, might have less to it than meets the eye. On the conference call for Deutsche’s Q2 earnings it was made clear that things were unlikely to close this year, and BNPP is making it clear to investors that it doesn’t intend to take over more than a fraction of the $200bn of balance sheet exposure. Now it appears that Barclays has snatched $20bn of client balances, including $10bn from a single client, for its own prime brokerage. Deutsche is trying to put a brave face on things, calling it “perfectly natural that some clients may wish to move balances to other providers as a temporary measure while our discussions with BNP Paribas are ongoing”. But this looks like whistling in the dark; it’s unlikely that Barclays regards it as a temporary business win.

The trouble always was that as soon as any doubts over the franchise were raised, the business became vulnerable. Jes Staley was pretty blatant in making it clear that Deutsche’s misfortune could be Barclays’ opportunity, but it’s highly unlikely that they were the only team on the Street calling Deutsche’s prime brokerage clients. And the market share losses could potentially be quite damaging to the deal, because not all prime brokerage clients are equal, and the ones that are being chased by the competition are usually the ones that you’d rather keep. Presumably some degree of attrition was built into the planning numbers for both Deutsche and BNPP – and some of the comments made suggest that the technology might be the real focus rather than the clients per se – but it surely can’t be seen as good news.

Meanwhile:

A very strange situation which is clearly being reported very cautiously due to a live investigation, but it appears that the latest Euribor-rigging trial might itself have been compromised. Apparently one juror has complained about the behaviour of another, and police are trying to speak to the whole jury in the case of former Barclays traders Colin Bermingham and Carlo Polombo, and something might have gone on that could affect their appeals. (Bloomberg)

Cryptocurrency entrepreneur Justin Sun has apologised profusely for “vulgar hype and marketing” of the dinner he won with Warren Buffet in the annual charity auction, as Chinese media speculation has gone into overdrive with rumours that his firms had been raided by the government. (Business Insider)

It’s just not the same without your biggest rival – more generational change in Aussie investment banking as John Knox of Credit Suisse follows Matthew Grounds of UBS into retirement. (AFR)

David Zervos of Jefferies has been telling his clients that it’s “no haircut until a rate cut” for a while now, and as a result has grown quite a fine mane. Now it’s looking like he’s going to be getting a number 2 buzz. (Twitter)

Who’s the best risk taker – real hedge fund guys or fake hedge fund guys? It might be harder to answer that question than you think, as a scriptwriter from “Billions” won out against David Einhorn and Marc Lasry in a poker tournament. (Bloomberg)

Peter Schmid, Deutsche Bank’s head of wealth management in Northern and Central Europe, has quit. This looks unlikely to be related to Deutsche’s strategic troubles given the amount of wealth management hiring they’ve bee doing and perhaps more of a case of “face didn’t fit” in Claudio de Sanctis’s new operation. (Finews)

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