U.S. hedge funds Pine River Capital Management LP, Millennium Management LLC and SAC Capital Advisors LLC are taking advantage of the struggle of European startup funds to grab their pick of the region’s traders.
The three firms, which manage a combined $46 billion, have over the past year all hired employees from hedge funds started by former European bankers, according to regulatory records and people with knowledge of the matter. They joined from firms including Edoma Partners LLP, Occitan Capital Partners LLP and Portman Square Capital LLP, London hedge funds that have either shut down, posted losses or failed to meet their fundraising goals, said the people, who declined to be identified because the companies are private.
Rather than betting that Europe’s sovereign debt crisis is over, the U.S. funds are selectively hiring top traders, some who quit their jobs at banks last year as their employers cut back on risk-taking and bonuses. The search has been made easier as the crisis forced lenders to cut jobs, pushed funds into losses and prompted investors to pull money from unprofitable managers, recruiters and executives said.
“It’s a story of the haves and the have-nots,” said Charles Morrison at Altus Partners Ltd. in London who helps hedge funds hire traders and analysts. “Some very promising launches in Europe have floundered. While we’ve seen a bit of an uptick in hiring since the latter half of last year, there are still a hell of a lot more candidates than jobs.”
Hedge funds don’t collect performance fees, usually 20 percent of investment profits, when they fail to make winning trades. That leaves a shrinking base of management fees, typically 2 percent of assets, to pay for retaining talent, trading systems and compliance costs. Poor returns and difficulty raising money caused an estimated 873 hedge funds to liquidate globally last year, the most since 1,023 closed in 2009, according to Chicago-based Hedge Fund Research Inc.
Pierre-Henri Flamand, the former head of Goldman Sachs’s No. 1 proprietary-trading unit who started Edoma in 2010, decided to liquidate the fund in November and return money to clients after losses. Edoma’s assets had fallen to about $850 million from a peak of more than $2 billion.
Portman Square, started by ex-Citigroup Inc. proprietary-trading unit head Sutesh Sharma in 2011, has scaled back after it failed to raise the $500 million it had originally sought from investors, according to two people familiar with the matter. Sharma, 49, oversaw about $2 billion at Citigroup that was managed by more than three dozen traders and analysts, many of whom had planned to join him at Portman Square before the hedge fund reduced its fundraising target, the people said. The firm hasn’t started trading money for clients, they said. Zoe Watt, a spokeswoman for Portman Square, declined to comment.
“The smaller firms and the startups are really quite exposed,” said John Purcell, CEO of Purcell & Co., a London-based executive-search firm. “If they lose assets, they really struggle to raise them again -- that’s the risk of going to a smaller firm. In a time of nervousness, there is often what we call a flight to quality both for employees and investors.”
Pine River, a $12.8 billion firm based in Minnetonka, Minnesota, in the past month added Evan Pearce, a former Edoma partner focused on capital-structure arbitrage, which involves going long on one security issued by a company while shorting another, and Mustafa Akay, an analyst who worked under Pearce, said the people.
Paul Godfrey, a former Citigroup equities trader who moved to Portman Square, also joined Pine River in the U.K. in February, the people said. Renos Dimitriou, Royal Bank of Scotland Group Plc’s former European government bond trading head, joined eight months ago, one of the people said.
Pine River, founded in 2002 by Brian Taylor, is known for relative-value investing, in which traders spot instances when the broader market has mispriced securities. Its hedge funds gained as much as 35 percent last year after buying U.S. mortgage bonds in 2011 that had plunged in value, according to a person with knowledge of the matter.
The firm has had an office in London since 2004. Its recent European hires are part of an effort to increase its global trading presence, and don’t reflect a particular view that assets in the region will outperform other markets this year, said a person with knowledge of the matter. The hedge fund was also seeking to take advantage of the number of experienced traders in Europe seeking jobs, the person said.
Former Edoma partner Oliver Haslam this month joined Millennium, the $17.9 billion New York-based hedge fund founded by Israel Englander, according to his registration with the U.K.’s Financial Services Authority. Haslam, who trades stocks, departed Edoma in October as part of the London-based hedge fund’s efforts to cut costs in response to client redemptions, two people familiar with the matter said at the time.
Steven A. Cohen’s SAC, with $15 billion of assets under management, hired Louis Villa, a former Edoma equity analyst, and Paul Selvey-Clinton, an analyst who worked at London-based Occitan until December, FSA records show.
Other firms that have added staff from struggling startups include Kenneth Griffin’s Citadel LLC, which added Aaron Ezgar, an analyst at Benros Capital Partners LLP, and London-based Arrowgrass Capital Partners LLP, which hired former Occitan analyst Inigo Edsberg. Benros, a London-based firm started by two ex-Goldman Sachs Group Inc. traders, is shutting after its biggest backer, Brummer & Partners AB, pulled its investment as the pool shrank 7 percent since it opened in June 2011.
Officials at the hedge funds declined to comment.
Saleem Siddiqi, the London-based managing partner of Musst Investments LLP, said hedge funds managing billions of dollars are taking advantage as firms with dwindling assets are unable to keep traders and analysts.
“At the end of the day, these are usually smart guys and talented traders,” said Siddiqi, whose company advises clients on hedge-fund investments and provides seed capital for new firms. “For a big shop, it’s a great opportunity to bring them in, provide them with capital and an atmosphere where they can potentially perform.”
One reason why traders sometimes still fail to make the transition to hedge funds from banks is the focus on short-term performance, Siddiqi said. On a lender’s proprietary trading desk, the objective is typically to make a certain amount of money by year-end, without the prying eyes of outside clients scrutinizing monthly losses. At a hedge fund, a down month can weigh on money managers, affecting their risk appetite and their conviction behind a trade, he said.
“Their numbers are going out in print every month, so they are feeling the pressure of investors watching them,” Siddiqi said. “It’s a different way of trading that can really affect the psychology of a trader.”
The experience of Occitan underscores the difficulty of hedge funds in Europe. Herve Gallo, a former equity-derivatives trader at Nomura Holdings Inc., started Occitan in 2010 with Thomas de Garidel-Thoron. The firm raised more than $800 million from clients, including a seed investment from New York-based Reservoir Capital Group LLC, which provides capital to startup hedge funds in return for an ownership stake and a share of fees, said two people with knowledge of the matter. Jesse McCormick, Occitan’s chief operating officer, didn’t return an e-mail seeking comment.
The fund fell about 2 percent in 2011 when financial markets were roiled by concerns that the debt loads of Greece, Italy and Spain might force one of them to drop the euro, an investor said. It decreased a further 14 percent in the first nine months of 2012 after betting that swings in stock prices would increase, a trade that went wrong when European Central Bank President Mario Draghi pledged in July to defend the euro at all costs.
“We underestimated the impact of policy makers and governments to damp the crisis, not only on equity prices but also on the regime of volatility” Gallo and de Garidel-Thoron wrote in an October note to clients obtained by Bloomberg News. “Our timing has been very off, making these positions painful.”