Of all the Wall Street tribes rendered extinct by the financial crisis, few were as symbolic as the Goldman Sachs proprietary trader.
While many financial institutions employed traders to make bets using their own capital, the prop traders of Goldman managed to attain a near-mythological status for their ability to make the bank, and themselves, vast amounts of money.
Goldman traders seemed close to that modern-day financial archetype, “Masters of the Universe”. They were revered inside the bank for the billions of dollars in profits they generated, and eyed suspiciously by outsiders for their pay packets and their potential to generate conflicts of interest with the bank’s regular clients.
But the party was brought to an end by the post-crisis “Volcker rule” in the US, which in effect banned banks from speculating using their own capital. Scores of these residents of the prop desk – often young, predominantly male – were shown the door.
The logical next career step was to continue trading by launching their own hedge funds. Helped by the legend, many of the highest-earning former Goldman prop traders raised billions in capital from investors who were confident they could replicate their success at the bank.
A few years on, several of the highest-profile hedge fund launches of the alumni of the Goldman prop desk, referred to inside the bank as its principal strategies unit, have not gone to plan, however.
Last week KKR, the private equity group, shut a $510m internal hedge fund that Bob Howard, ex-head of Goldman’s US equities and credit prop unit, was hired to run in 2010 along with a team of traders from the bank.
Industry observers are asking why traders who managed to make consistent returns while at Goldman have struggled when operating in their own hedge funds.
There is a long tradition of bank traders graduating to become fund managers in their own right, but investors in hedge funds are quick to point out that running an investment business requires very different skills from working on a prop desk.
“When you are prop trading you only have one client: your boss at the bank. That is very different to running a hedge fund where investors will scrutinise everything you do,” says Troy Gayeski, partner and senior portfolio manager at SkyBridge Capital, a $10.5bn fund of hedge funds investor.
“When you add in regulatory and compliance, and the need to raise money, it is a daunting task.”
Mr Howard’s KKR hedge fund was the latest in a string of post-crisis hedge fund ventures by esteemed former Goldman traders to have closed.
Edoma Partners, which was founded in 2010 by Pierre-Henri Flamand, a former co-head of Goldman’s prop desk, closed just two years after raising $2bn in one of the most hyped hedge fund launches to date. Mr Flamand, who lost his investors 7 per cent of their capital, cited “unprecedented market conditions” as a reason for the closure.
Four months later Benros, a fund in London co-founded by Daniele Benatoff and Ariel Roskis, both ex-Goldman prop traders, closed after its largest investor pulled out its money.
According to hedge fund investors, one potential disadvantage for former prop traders who go it alone is the absence of the same quality of information as when they were working in large banks. Although so-called Chinese walls are in place to stop a bank trader receiving non-public information, more general information relating to trading flows can give them a good idea of the direction of markets.
“We always ask them if they will be as ‘in the flow’ as they used to be when running proprietary capital,” says Alper Ince, managing director at Paamco, a California fund of hedge funds that selects emerging managers.
Similarly, when they were bank prop traders they were allowed to run books with high leverage multiples – which means small profits or losses were vastly amplified – but few investors in hedge funds will permit their managers to borrow at a similar level.
According to a veteran hedge fund manager in London who has never worked on a bank prop desk, this difference means traders may be unable to make the same returns once they are on their own.
However, most investors agree that the struggles of prop traders who set up hedge funds simply reflect a brutally competitive industry where any mistake is quickly made public and few stay in business long. “Whether a new hedge fund will work well is idiosyncratic to each manager,” says Mr Ince. “There are many examples of very successful prop desk spin-offs which have strong track records.”
Not all of Goldman’s post-Volcker generation of former prop traders have failed at launching hedge funds.
Morgan Sze, another former co-head of the principal strategies group, raised $1bn in the launch of his Azentus fund in Hong Kong in 2011 and has increased its assets since.
Yet investors argue that the main difference that has worked against the last generation of graduates of Goldman’s famous prop desk is a perception that they may have launched hedge funds out of necessity as much as desire.
Mr Gayeski, of SkyBridge, says: “What else are they going to do? What are their options? Stay in a dying business or set up on their own.”
“自营交易只有一个客户：银行上司。这与经营对冲基金不同，投资者会检视你的一举一动，”SkyBridge Capital合伙人兼高级投资组合经理特罗伊?加耶斯基(Troy Gayeski)表示。SkyBridge Capital是一家拥有105亿美元资产、投资于对冲基金的基金。
曾任高盛自营交易部门联席主管的皮埃尔-亨利?弗拉蒙(Pierre-Henri Flamand)于2010年成立了Edoma Partners，募资20亿美元，声势之浩大迄今罕见，但仅仅两年后就关闭。弗拉蒙亏损掉投资者7%的资本，称关闭原因是“前所未有的市场状况”。
四个月之后，高盛前自营交易员达尼埃莱?贝纳托夫(Daniele Benatoff)和阿里埃尔?罗斯基斯(Ariel Roskis)在伦敦创立的Benros基金关闭，之前该基金最大的投资者撤资。
同样曾任高盛Principal Strategies部门联席主管的施家文(Morgan Sze) 2011年在香港成立了Azentus基金，募得10亿美元，之后基金资产还在增加。