Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

There was a time when successful traders saw a much brighter future at hedge funds than at big Wall Street banks.

That doesn’t seem to be the case so much anymore, and more of these traders are leaving hedge funds to return to big financial institutions.

Jihan Bowes-Little, for example, a former Goldman Sachs credit-derivatives trader who had joined BlueCrest Capital several years ago, just left the shrinking, London-based hedge-fund firm, according to Bloomberg News reporter Nishant Kumar. While Bowes-Little had previously taken time away from the financial industry to work on his music career after being dubbed “Goldman Sachs’ secret rapper” by one publication, he is this time heading to JPMorgan Private Bank in Los Angeles, he told Bloomberg News in a LinkedIn message.

He’s not alone in seeing promise at a too-big-to-fail financial institution. Mark Melchiorre, founder of credit hedge fund Taurasi Capital Management, joined JPMorgan last year. And, of course, there’s Jes Staley, who ran JPMorgan’s investment bank before absconding to credit-focused hedge-fund firm BlueMountain Capital in 2013. At the time, he said he was looking forward to fresh opportunities. In December, he returned to the big-bank fold as Barclays's chief executive officer.

Why would these traders and bankers return to embattled large institutions after sampling the sweet hedge-fund life? Well, banks became more stable and hedge funds have turned a littler sour over the past few years. Their returns have lagged behind market benchmarks, and last year’s losses among some hedge funds were so severe that they either went out of business or returned all outside capital, as BlueCrest said it would in December.

Of course, returns don’t ultimately determine whether credit traders stay at or leave a particular firm. Compensation does (though returns do play a big role in pay). And compensation went down significantly in 2015 -- a 15 percent drop or more for many hedge fund employees -- as a greater degree of pessimism overtook the industry, according to a November report by recruitment firm Johnson Associates. Hedge funds were “challenged” heading into this year, as were their fundamental compensation models, the report said.

That’s probably putting it mildly. Those who still had a hedge-fund job at the end of the year were perhaps the lucky ones; many hedge firms were either firing staff or closing down entirely in response to the worst distressed-debt losses since 2008 and unpredictable macroeconomic trends. Investors gave the least amount of new capital to these funds in the third quarter of 2015 in six years and were poised to withdraw money from the funds in the period ended Dec. 31.

Losing Luster
Credit hedge funds' assets under management are declining for the first time since 2008.
Source: Hedge Fund Research Inc.

Big banks, on the other hand, have steadily sold off speculative debt in the face of new banking rules, assets that they previously would have held on their books. The buyers were investment firms of all types. This was exactly what regulators intended -- a migration of risk from banks to investors. Indeed, the banks are still standing without needing a government bailout even as an escalating number of hedge funds disappear.

In contrast, any declines in Wall Street compensation were entirely expected, and there were some bright spots. Banks cater to a broader range of client needs, and some could offset losses in trading with fees generated by corporate-banking activity. While outrageous paydays may be limited at big banks going forward, there's something to be said for steady paychecks. 

It's not all a return to the grind of gray flannel and 30-year watches. Banking may be a more fertile ground for creativity than hedge funds right now. Everyone’s trying to work out how to cater to millennial investors who would rather secure a loan in their pajamas using their phones than talk in person to someone in a leather chair. People are trying to figure out the modern role of an investment bank and how to lay the groundwork for greater electronic trading in over-the-counter markets.

The sheen is off hedge funds after some trying years, and while some will undoubtedly wager successfully in this deteriorating credit cycle, more of them will fail to survive. In contrast, a big-bank job doesn’t look so bad anymore.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net