This story was originally published on Daniel M. Harrison’s Finance blog at BNET Industries on May 1, 2009.
Recessions, it is said, are great times to start new businesses. It seems that’s as true for hedge funds as it is for widget manufacturers or high-tech start-ups.
With banking lay-offs and defections at an all-time high, money managers are seeking greener pastures by going it alone. In most cases, they are happy to take a significant decrease in pay for more autonomy. For while it’s true that the hedge fund industry is constantly abounding with new start-ups and the next wannabe George Soros or James Chanos, this time round even those who are accustomed to running billions of big banks’ funds are beginning with as little as a few million dollars.
Take Hari Kumar, a former partner at $11 billion TPG-Axon Capital, a hedge fund giant which he helped found with three other fellow ex-Goldman Sachs prop traders. Along with Julian Smith, also a TPG-Axon employee, Kumar is now setting up a much more scaled-down Singapore-based fund called LionRock Capital. Rather than have to answer to today’s swelling majority of nervous investors however, Kumar has chosen initially just to manage $75 million of capital provided by him and his partners, according to AsiaHedge, a hedge fund industry publication.
Or there’s Miguel Paredones and Joshua Castillo, who in the peak times were in charge of up to $1.2 billion at Quantek Opportunity Fund in New York. Following some hefty redemptions at the fund late last year when investors sought to withdraw several hundred million dollars, Paredones and Castillo are starting out on their own with a new venture called Clifftop Capital Management. The fund will be a much nimbler version of their former employer: it will oversee just $50 million, according to Absolute Return, another trade rag.
One big-name announcement recently was that of Benjamin Fuchs, once the star prop trader at Lehman Brothers, where he was in control of $1.5 billion of capital at the bank’s internal hedge fund. While Fuchs has chosen to stick with big banking, heads turned in Asia recently when he relocated to Hong Kong from Tokyo to manage $300 million for a new fund under Nomura Bank (NMR). Despite the much smaller size of his new employer’s fund, the venture is as big a leap for Nomura as it is for Fuchs, which like most Japanese banks, is pretty much entirely focused on providing steady fee-based services.
Most recently — and also in Asia — was the announcement that ex-Citigroup Asia institutional client head Robert Morse was resurfacing to run $1 billion of money provided by an unnamed Asian family. Morse, who spent 25 years at Citi and oversaw $5 billion in client funds, hopes to capitalize on distressed valuations for assets, according to an article in Financial Times Thursday.
The same day, three ex-JP Morgan “star traders” said they would go it alone with a new China-focused fund. Lu Jun, Man Wing Chun, and Joseph Tang declined to say how much they would be starting out with, according to Reuters. Still, it’s likely to be a lot less than it would have been had they started last year, when funds saw net inflows of $8.1 billion in the seven weeks to April 22: that number shrank to $1.6 billion in inflows for the same period this year.
In times of recession, it’s common for industries to experience cataclysmic overhauls, with new major industry players rising from the ashes. The bigger message behind these numerous start-ups, of course, is how much the new financial landscape is changing. It’s also notable how many of these players are emerging markets focused: most of the new names come in characters, rather than letters.
In other words, as governments are breathlessly scrambling to bailout their largest institutions, a whole new generation of Gordon Gekkos is being spawned.