First New York Securities LLC, a proprietary trading firm that manages about $350 million, plans to start its first hedge fund, according to a person with knowledge of the matter.
The New York-based firm, whose more than 200 traders make bets using partners’ capital, is set to begin raising money from investors in the first quarter, said the person, who asked not to be identified because the information is private. First New York may hire as many as 40 traders in the next six months, the person said.
First New York is seeking outside money after returning an annual average of about 20 percent in the past five years, said the person. Industry-wide, the number of hedge-fund startups has dropped 25 percent to 340 this year through September, as investors gravitated toward established managers, according to data compiled by Bloomberg.
“It’s a tremendously difficult fundraising environment at the moment, but if you have a demonstrable track record and you’re investing alongside clients, then it shouldn’t be a problem,” said Michael Gray, an attorney at Chicago-based Neal Gerber Eisenberg LLP, whose clients include hedge funds.
About 75 percent of the $19 billion of net deposits in the industry in the third quarter went to managers overseeing $5 billion or more, data from Chicago-based Hedge Fund Research Inc. show.
Russell Sherman, a spokesman for the closely held firm, declined to comment.
First New York is planning to open a multistrategy hedge fund, an approach used by firms such as SAC Capital Advisors LLC, Diamondback Capital Management LCC and Balyasny Asset Management LP.
First New York, founded in 1986 by Don Erenberg, 70, and Michael Friedman, 77, trades globally in a range of assets, including stocks, bonds, currencies and interest rates. Its traders hold positions for an average of three to 30 days.
The firm, which in the past has invested in managers who left to start their own hedge funds, is run by Joseph Schenk, 51, who became chief executive officer last month. Schenk, a former executive vice president and chief financial officer of Jefferies Group Inc., joined in March 2009.
The company is seeking to hire traders as banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. are disbanding proprietary-trading teams to comply with new U.S. rules aimed at curbing risk. A provision of the Dodd-Frank financial-overhaul act prohibits banks from risking capital by betting for their own accounts.
First New York last month sold its prime-brokerage unit, which provides hedge funds and other clients with services such as stock lending and trade clearing, to Direct Access Partners LLC, a New York-based brokerage firm, more than seven months after starting the business.