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Frontrunning the frontrunners: Telling where the market is going by looking at hiring trends

Success in the markets comes from knowing what and whom to follow.  As Professor Seyhun proved in his research on insider trading, investors would do well to follow the buys and sells of corporate insiders, especially high ranking executives.   Wall Street essentially does the same.  Given the intricate, interconnected web of broker/dealer relationships, client feedback, and prop desk perspective, vertically integrated Wall Street firms have a clear view into where the business is headed.

For investors and industry analysts, hiring trends of Wall Street firms should be top of mind to get a feel for where the smart money is headed.  Today’s WSJ article, Wall Street’s Key Hirings, takes a look at who is hiring and where.

Those firms who picked up key hedge fund prime brokerage business during last year’s downturn are turning their sites to do more of the same in 2010 and are hiring key executives to make attracting new business a reality.  Prime brokerage continues to heat up.  We wrote about 4 new entrants in the hotly contested biz last week.

For example, DB has hired two new heads for its Asian prime brokerage business as the firm expects to double headcount to continue wooing Asian hedge fund business.

“We’re going to see a significant flow of startups and spinoffs. We feel like that has hit the bottom and is going to trickle back up, but we don’t really see the acceleration yet,” said Jonathan Hitchon, Deutsche Bank’s co-head of global prime finance.

Beyond custodial, reconciliation and stock lending, brokers provide a suite of profitable services to hedge funds ranging from electronic trading platforms to the writing of complex derivative contracts.

It’s interesting to see that in a post-2008/2009 world, top hedge fund employees are actually migrating back to previous posts inside investment banks.  As much of the asset base of the hedge fund bubble has been lost or flowed elsewhere, many second lieutenants may find the upside more compelling back on Wall Street and not in Stamford.