It feels like the trend of bankers leaving the industry to
start hedge funds could be accelerating with two senior figures apparently
leaving to do just that. It’s an interesting time to make a change because
while there are plenty of incentives for traders to leave banks, there are just
as many challenges in the hedge fund world – albeit of a different nature.

The perception is that hedge funds are struggling and losing
assets thanks to that under-performance and that may be the case across the
industry, however I suspect it’s just a few headline big names that are
creating that perception.

I have always had issues with the short-termism that
dominates the investment strategy of some investors that effectively says, “You’ve
had six good months so I’m pulling my money because you’re due a downturn.”

This thinking also extends to investors’ approach to the
industry – some see the headline negative performance and decide against
putting their money there, but as the small print says, “past performance is no
indicator of future returns etc etc”.

In other words, just because a manager is not performing
brilliantly now, look at the longer term track record – it probably paints a
much more positive picture.

I fully understand the benefits of data when making a
decision but at the end of the day I keep coming back to someone with a coin.
They toss it 50 times and 50 times it comes up heads – what are the odds of it
coming up heads again? 50% of course. This simplifies it of course but I think
it is pertinent. The law of averages shouldn’t apply – after all, hedge funds
are about out-performance so they should beat the benchmark.

We see a similar mind set all too often in banking – the
herd instinct sees banks cut staff in, for example, FX, due to low volatility
and low demand for services and this inevitably is followed by a spike in
activity and interest, and lo and behold, the banks are short of staff.

So this is an interesting time for two figures to leave
banking to start up hedge funds. It’s not that surprising they’re doing so
because banks will become more like brokers and more risk-averse in their proprietary
business. This leaves some people that have been in the industry for a long
time frustrated and looking for a solution – and inevitably that solution is
sometimes starting their own hedge fund.

I am told that Citi’s global head of STIRT trading, Michael
Pavnick, is leaving the bank to start up a hedge fund. I cannot get full
confirmation as yet, but if true this is likely to be part of a continuing
trend that can only accelerate. Indeed over the weekend, Bloomberg News reported that Deutsche’s former FX head, Ahmet
Arinc, is starting a fund.

It will be fascinating, as it always is, to see how they go
on the other side of the fence, because trading skill is not everything when it
comes down to having a successful hedge fund. Obviously the track record is
important but so too is successfully attracting and retaining assets – and if
the perception is that hedge fund industry is not going brilliantly, this may
be harder than it seems.

This could leave a generation of excellent traders in
something approaching a state of limbo – they can’t really excel in a bank, but
equally they may struggle to attract sufficient assets to build a successful
hedge fund business. This point is reinforced by the survey we report on in
this issue of Squawkbox from AIMA, which
suggests the average breakeven point for managers is $86 million. It may not
sound like a lot but as any alternative investment manager can tell you, it’s
not easy either!

So hopefully for everyone that is taking the step out of
bank-based trading into the hedge fund world, good luck and I hope the very
negative thinking highlighted in this article changes. I suspect it won’t and
as such there will be a few more private traders in the market, rather than
hedge funds. And this, going back to my piece last week about the retail end of
the FX spectrum only re-doubles the need for better and more uniform oversight
in that sector.

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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