By Katrina Dean Allen
Wall Street’s near-collapse a year ago put an end to the high-flying prop desks at a number of investment banks. Where did all that talent go? To hedge funds, naturally.
New funds—or strategies within existing funds—have been started by former high-fliers at the now-defunct Lehman Brothers, the decimated Morgan Stanley and merged-out-of-existence Merrill Lynch. Even relatively strong banks, like Deutsche Bank, have lost prop talent to the hedge fund world.
Despite the excess of talent, fewer new launches are in the works. And those that have been started by the Street’s former stars aren’t raising the kind of money they could just a few years ago, when those with a good pedigree could quickly raise billions.
The biggest of the new ex-Wall Street funds is One William Street Capital Management, founded by David Sherr, who ran Lehman Brothers’ securitization group until he left in the middle of 2007. Luckily for Sherr, One William Street launched the fund before the world changed. It went out the gate in April of 2008 and has managed to amass $1.5 billion, about $400 million of it from Lehman before it went belly-up. Starting over at the bottom of the market has helped One William Street too. The fund, which invests in the same type of credits it was running at Lehman, was up 15% through August after showing only a minor loss (-1.7%) in 2008.
The demise of Lehman Brothers also motivated Robert Millard, who ran Lehman’s main principal investing business for over 25 years, to set up his own shop. Millard launched Realm Partners in the spring and has garnered $500 million for his multistrategy, event-driven hedge fund. Millard has brought on six partners who have worked together an average of 17 years.
Jeffrey Ferrell, who worked for Millard at Lehman, where he was a prop trader, also started his own firm, Athyrium Capital Management, which is gearing up to launch a long/short equity and fixed-income hedge fund January 1 focused on life sciences.
Ferrell has already been able to secure $100 million in seed capital from Neuberger Berman for a private equity fund that he closed in July. Ferrell ran the life sciences and healthcare business for Lehman Global Trading Strategies until his departure a year ago. Before that he was at private equity firm SV Life Sciences where he focused on biotech.
One of the newest prop desk star launches is that of Roc Capital Partners, headed by Arvind Raghunathan, a former managing director and head of global arbitrage at Deutsche Bank. Raghunathan took the firm’s proprietary trading Equitech group and set up shop this summer, launching his quantitative global equity fund on August 1. Deutsche Bank owns a passive minority interest in Roc Capital and also invested a sizeable amount of its balance sheet, which Raghunathan is running in a separately managed account.
Roc declined to say how much money the fund has raised, but it’s definitely tough this year. That’s what Stephen Jamison, a former managing director and senior proprietary trader in macro and commodity strategies at Morgan Stanley, has learned. His new fund, Jamison Capital Partners, began trading in April with $125 million and has now raised more than $200 million—what is considered a relatively large launch in 2009 but puny by historic standards for big-name traders. Jamison took several former Morgan Stanley macro and commodity analysts with him, including senior trader Suketa Mehta, meteorologist Mark Shipman and macro analyst Larry Chen. Jamison trades commodity futures, especially in energy and agriculture as well as some opportunistic positions in foreign exchange, fixed income and equities. The new fund is down 6% through the end of August.
Some prop traders started out on their own but quickly changed gears. Rick Rieder, the former head of Lehman Brothers’ corporate bond trading desk, wasn’t quite as lucky as Sherr. Rieder spun out of Lehman in May 2008 and set up R3 Capital Management, a credit hedge fund, with assets of $2.1 billion. But a year later, after losses crippled the fund and its assets dropped to $1.5 billion, Rieder moved the vehicle to Larry Fink’s BlackRock. Rieder came on as head of BlackRock’s fixed-income alternatives portfolio team where he continues to run the R3 funds.
Joining BlackRock wasn’t such a hard decision, according to Rieder, as it allowed him to take advantage of the multitude of resources available to a world-class money manager—such as access to multiple research analysts, better financing terms, more investment opportunities and information flow—all which may translate into investors feeling more confident about parting with their hard earned money.
“There has been a tangible change in the financial system,” says Rieder. “I would argue that for the next three years there will be opportunities that haven’t manifested themselves in the last 20 years and having scale will enable us to have a front seat on some of those changes and transactions.”
Rieder isn’t the only one to reassess running his own business. Ralph Rosenberg, a Goldman Sachs alumnus, founded R6 Capital Management in the fall of 2006. Rosenberg, who invested $20 million of his own money into his credit focused multistrategy fund, amassed a mere $300 million a year later amid lackluster performance. At the end of 2007, Rosenberg annouced his decision to bring R6 to former Goldman colleague Eric Mindich’s Eton Park Capital Management.
“It’s tough to go out on your own with the same old pitch,” says Richard Leibovitch at Gottex Fund Management, an advisory and alternative investment solutions firm. “Joining a larger group provides the infrastructure that investors are looking for right now.”
And perhaps the most compelling reason for doing so is that these new managers are able to start with cash in hand, especially considering that new funds may still face fierce competition from big names that have shut down existing funds and are planning to restart.
Michael Pohly, the former global head of fixed-income at Morgan Stanley, where he ran more than $1 billion, signed on at Kingdon Capital Management in January to run a credit book within the firm’s flagship equities portfolio. The firm has since decided to have Pohly manage a new strategy, Kingdon Credit, its first new hedge fund in 26 years. (See “Former Morgan Stanley pro to run new Kingdon fund” in Intelligence section.)
Ken Griffin’s Citadel Investment Group has also been scooping up some of the talent sidelined by the crisis last year. Citadel hired Merrill Lynch heavyweights Tobias Gehrke and Anita Nassar as managing directors within its global distribution group. Gehrke was in charge of Merrill Lynch’s government institutions group for equities and alternatives, while Nazzar was the global head of government institutions - including central banks, sovereign wealth funds and sovereign pension funds.
Citadel also snapped up fixed-income veterans from Lehman Brothers’ London office to join the firm’s proprietary trading and securitized products business. The former Lehman pros hired in Citadel’s London office are Timothy Bryan Wilkinson, John Alexander Goodridge and Alex Maddox.
In a sign that hedge funds haven’t lost their ability to offer second chances, Boaz Weinstein, who made headlines last year when he is reputed to have lost more than $1 billion for Deutsche Bank, has rolled out Saba Capital Management. Weinstein, the former co-head of global credit trading, has reportedly raised $160 million for the new hedge fund.
It could start getting easier for new fund launches, reckons Leibovitch. “You are buying into fresh clean portfolios,” he explains. “Naturally investors are scared to invest in existing portfolios because there may be problem positions that were purchased and can’t be sold. New managers have the benefit of hindsight to avoid last year’s pitfalls.”
