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Big Banks Could Face Trader Exodus

Financial reform may eventually drive top traders to defect from the big banks to hedge funds.
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) -- Big Wall Street banks forced by new legislation to rethink their proprietary trading and private equity businesses may find it harder to retain top talent, headhunters say, though they are not exactly seeing a rush for the exits yet.

The so-called Volcker rule, part of the Dodd-Frank financial reform legislation signed by President Obama last month, bars banks from investing more than 3% of Tier 1 capital in private equity and hedge funds.

The rule mainly affects a handful of banks, including

Goldman Sachs

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Morgan Stanley

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JPMorgan Chase

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Bank of America

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though there is far more at stake for Goldman than any of the others


Goldman has two large proprietary trading desks that manage about $9 billion, according to an article in

The Wall Street Journal

that cites Citigroup analyst Keith Horowitz. Goldman is considering moving the desks to its asset management arm, or winding down the positions,

The Journal


But working for Goldman Sachs Asset Management may not be as attractive a job as working as a proprietary trader for the investment banking side, according to Adam Zoia, CEO of Glocap Search, which specializes in recruiting for hedge funds and other investment managers.

Zoia says there is a belief that proprietary traders get better information than their counterparts in the asset management unit--a belief supported by the fact that Goldman's results have tended to show better performance in areas like fixed income currencies and commodities than in asset management.

"Many people believe the reason these prop trading desks do so well despite all the Chinese walls is that the traders, being that they're attached directly to the bank, have better information--not insider information but insightful information--and when they go into the asset management arm there's a little bit of a higher wall."

While that doesn't necessarily mean they'll get better information by going to a hedge fund, it evens the playing field, meaning the right hedge fund may have a better shot at hiring the traders it wants than it did when that trader had the opportunity to work on a prop desk.

"It's just going to be the relative attractiveness of being at Goldman Sachs Asset Management, to take an example, versus hedge fund A," that traders will have to weigh, Zoia says.

If Goldman or other firms simply wind down certain businesses, transferring talented executives into other areas is unlikely, in the view of Leslie Gordon, recruiter at Korn/Ferry International.

"It doesn't really work that way. People are pretty specialized," she says.

Gordon says she is "starting to get inquiries from people who are in proprietary trading areas who want to poke their head up and think about other things because of the changes."

Michael Karp, managing partner of executive search firm Options Group, says that while he hasn't heard from any bank executives looking to leave, he has been hearing from hedge funds hoping the changes will make it easier to lure away top talent. Karp thinks things could heat up after Labor Day, since many Wall Street executives are away on summer vacation.

Still, Glocap's Zoia believes banks that want to keep top talent should be able to do so, and finding a way around the legislation to allow businesses to function very similarly to the way they did previously shouldn't be that difficult.


Written by Dan Freed in New York


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