Sam Jones stated the obvious this week in the FT – “Bank traders rush to launch spin-offs before rules change”. With the Volker rule and other similar initiative it is clear that proprietary trading is persona non grata inside today’s banks. What is the securities finance angle?
Previously, there was symmetry between those banks with the biggest prime brokerage desks and those with the biggest prop desks. By spinning off, there is more chance that the most suitable prime brokerage offering dovetails with the new independent funds rather than the previous situation where prop desks were forced to single prime with their in house desk.
Then again, two forces are at work to weaken the independence of new spin-offs. Firstly, a bank will often seed its former star proprietary traders with capital and therefore command loyalty. Secondly, in this time of fierce competition to raise assets to manage, the capital introduction team attached to prime services may bind the new fund to that bank in return for raising capital.
Less proprietary trading and more stand alone hedge funds is also good news for other types of service providers like us who can fight for their attention and business. However, unlike yesteryear, prop desks do not rapidly re-emerge on their own two feet stuffed with funds to manage and money to burn on new services.
There is consolidation at the top of the European hedge fund world. GLG and Man group are to combine and F&C recently subsumed Thames River. This masks a more significant trend which is the proliferation of minnows managing $50m or less. In America, various brokers focus only on this sub-strata of funds – Conifer, Merlin etc, but we don’t see an equivalent in Europe. A lack of risk appetite everywhere and the large number of tiny funds is a dual issue for people who survive by lending and borrowing large volumes of securities. Demand to short is increasingly diversified while the supply may not be.
