Proprietary desk traders who start their own hedge funds,
forced to leave banks by January 1, 2013, when the Volcker Rule
goes into effect, are suddenly being thrust into managing a
business and its operations as they come face-to-face with
Dodd-Frank Act regulations.
Whats happening now mirrors what happened with
star traders with winning strategies ten to 15 years ago when
money, ego and opportunity motivated them to leave to start
hedge funds, says Matt Simon, senior analyst at the TABB
Group. Only now theyre being thrown out of larger
banks, continuing on as stand-alone hedge funds.
The industry has changed since then, when the old saw had it
that all that was needed to start a fund was two guys and a
Today there are more regulations to comply with and
operating requirements to meet, yet former prop traders will no
longer be able to depend on the requisite tools and services
they had available at their former employers.
Its easy to underestimate all the facets that
the bank had taken into account and now they need to
recreate, says Bob Guilbert, managing director at Eze
Castle Integration in Boston, which provides IT systems to
about 600 hedge funds worldwide. Its a shocker;
its cold water in the face.
For starters, former prop desk traders will need to register
with the Securities and Exchange Commission (SEC) when they
have at least $150 million in assets under management. Ten
years ago they could start a fund with just a strategy, but
today Dodd-Frank makes regulatory compliance one of the top
Then there are the sophisticated operating systems,
including voice and data networks and a recovery site, that
hedge funds need to compete in todays wired world. The
systems must be resilient and redundant to minimize downtime,
and this costs money. So does the security that goes with all
In addition, hedge funds today must have
institutional-quality auditors, administrators, execution
partners, attorneys and insurance brokers, plus two or three
prime brokers, whereas lower-level service providers and a
single broker would do before.
We know that for the real money, funds have to dress
themselves up, explains Jason Gerlach, California Hedge
Fund Association (CHFA) president-elect and COO at Sunrise
Capital Partners in San Diego. Any hedge fund today has
to have a real office you cant garage or home
office it. Investors are going to come and look at your back
office. They want to touch it; they want to see the people who
work at your firm. They want to see how you execute a trade,
how you back up your data.