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Prop Traders Move To Hedge Funds

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If Wall Street is getting "boring" in response to new regulations, the traders themselves are resisting that trend.

Bloomberg News reports that "dozens" of proprietary traders at banks worldwide are planning on starting hedge funds, according to a Stuart Hendel a UBS executive who said he spoke with the traders. "In the next 12 months, there is going to be much more of a startup phase than there has been in the last couple of years," Hendel said.

The July financial reform legislation placed future limits on banks' ability to bet with their own accounts. It didn't prohibit proprietary trading entirely -- former Federal Reserve chairman Paul Volcker, for whom the rule was named, was "disappointed" with the weakened final version -- but banks have taken action apparently intended to help them adapt. As big banks, such as JPMorgan, Goldman Sachs and Bank of America, said they would eliminate or trim their prop trading units, Wall Street seems to be returning, as the Wall Street Journal reported, to its traditional, "boring" ways.

But the prop traders will have none of it. In addition to starting hedge funds, some will be hired at existing funds. The WSJ reports that Graham Capital Management, a $7 billion Connecticut hedge fund, plans to hire up to 12 proprietary traders in the coming months. What makes these traders attractive, the WSJ notes, is that they use their brains to make decisions, rather than computer algorithms, which have lately been in vogue.

Former prop traders are in demand worldwide. In Japan, Bloomberg reports in another story, up to 27 new hedge funds will open for business in the coming year, and those funds want prop traders to work for them. "Experiences and track records that ex-prop traders have will be especially significant in a market like Japan," Hideki Hashiguchi, a managing director at ABN Amro Fund Services, told Bloomberg.

Earlier this week, Bloomberg reported that Goldman Sachs prop traders, who are leaving the bank to start a hedge fund in Hong Kong, hired another Goldman employee, who will also leave the firm.

In his Bloomberg column last month, author Michael Lewis speculated that banks are winding down prop trading not because they need to but because they've realized other business practices are more lucrative. Prop traders, he said, are "fleeing for the privacy of hedge funds."

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