Another day, another handful of traders fleeing large investment banks for hedge funds. This time, Bloomberg News reports, it is two Goldman Sachs (GS) managing directors joining Citadel, Kenneth Griffin’s giant hedge fund, which is based in Chicago.
Uberto Palomba, co-head of Goldman’s emerging markets trading, and Jonathan Tipermans, Goldman’s head of dollar-swaps trading, will be working for Citadel’s Global Fixed Income Fund, a unit that was started in 2008 and has been picking off seasoned bank veterans ever since.
Some observers have attributed this sort of thing to the 2008 Dodd Frank financial reform legislation—specifically, the Volcker Rule, which mandates that banks stop speculating with their own money. As banks have begun winding down their in-house trading desks to comply with the rule, many traders have headed to places like Citadel. But the trend was under way well before Dodd Frank and will surely continue for one big reason: The moneymaking possibilities at hedge funds are much, much greater than they are almost anywhere else.
As the largest hedge funds have become multibillion-dollar investment behemoths with high fixed fees—generally 2 percent of assets under management and 20 percent of the annual profit—the potential for enormous fortunes to be made has increased exponentially—even, in some cases, when the fund’s performance isn’t so great. Suddenly, the prospect of making millions at a big bank might not seem terribly attractive to a trader, compared with the prospect of hundreds of millions at a hedge fund.
In a somewhat awkward interview with Bloomberg Television’s Stephanie Ruhle and Eric Shatzker not long ago, Morgan Stanley’s (MS) Gregory Fleming, president of the firm’s wealth management unit, defended his industry on the issue during a discussion with Wall Street head hunter Ilana Weinstein of IDW Group.
“The chasm between compensation on the sell side and on the buy side—and by the buy side, I mean the hedge funds that control the majority of AUM [assets under management], is enormous,” Weinstein said. “It has never been bigger, that divide.”
Fleming tried to counter her arguments, pointing out that this was true only at the top 5 percent of hedge funds, a small slice of the overall industry. And money isn’t everything, anyway. “If you want to make more income potentially in the next year or two, you may make that decision,” Fleming said. “If you want to have a career at a great firm, where it’s not just about the income, it’s about the work that you’re doing, the clients that you’re serving, you’re a key part of the financial services industry … then you might very well say, ‘I’m going to spend 20 or 30 years doing this at Morgan Stanley.’”
For traders, however, this kind of calculus may be a tad too intangible. Which leaves the major Wall Street firms on the same side of the argument as the rest of corporate America, academia, and the public sector, which have had to sit by for years as increasing numbers of the country’s top college graduates look for work at hedge funds.
“Look, I think a lot of things factor into the decision,” Weinstein, the recruiter, said. “Money is usually paramount.”