Tuesday, March 15, 2011

Proprietary Traders and Hedge Funds

As a result of the Volcker rule, banks have begun divesting themselves of their proprietary trading desks.  Goldman Sachs has led the way.  Two superstar traders have raised $1.6 and $1 billion dollars for their own hedge funds.  JP Morgan will move its traders to the asset management division and Morgan Stanley will spin-off its quantitative team - Process Driven Trading.

The Reuters article believes that 10%-15% of the trading desks will become hedge funds.  However, investors are cautious about committing capital to them.  A Credit Suisse survey has only 52% of investors would seed a fund if it had a three year history.  Not enough is known about a prop trader's performance.  How much can be attributed to the trader and how much can be attributed to the bank's assets - name, balance sheet, execution platform, etc.?

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