The proposals would stop banks owning or sponsoring a hedge fund or private equity fund, as well as so-called “prop trading,” where banks trade on their own account, forcing them to spin-off such operations into stand-alone boutiques.
“For some strategies, particularly many arbitrage-related and quantitative strategies, fewer parties chasing the same trades will improve margins and hence profits,” said Odi Lahav, vice president at Moody’s alternative investment group.
An exodus of talent from banks, and cut-backs in proprietary trading have boosted the hedge fund industry in recent years, and the trend is likely to accelerate if Obama’s plans are implemented in the United States and Europe, commentators say.
Equally, many leading private equity firms were born in banks and then spun out — such as CVC out of Citi — and industry insiders expect the same could happen to remaining bank-controlled firms, such as Barclays Private Equity and Lloyds Development Capital.
“For those players that are captives and still part of banking groups, the writing appears to be on the wall,” said Paul Cooper, a partner at accountants Grant Thornton.
According to consultancy firm Preqin, all of the 19 funds-of-hedge-funds units of major U.S. banks that it monitors, which have more than $180 billion in assets and which back hundreds of hedge funds, could be affected.
Banks account for about 9 percent of capital invested in private equity — $85 billion to $100 billion worldwide.
LACK OF CAPITAL
Whilst the full details of the plans remain hazy, talented traders in banks are likely to be already looking at starting up on their own, Andrew Clare, chair in asset management at Cass Business School, said.
Not everyone will find it easy, however.
Start-ups have already been struggling as investors favour the big funds they perceive as safer, and less capital at banks could further hurt smaller players.
“Some people will just disappear from the field if banks don’t give them capital to run. A lot of hedge funds relied on banks seeding when they left prop desks and it may not be so easy for some people,” said David Stewart, chief executive of Odey Asset Management.
In the short term, the exit of banks would remove some of the capital available in the buy-out pool, and there could be unintended — negative — consequences.
“Does it mean recovery teams can’t do a debt-for-equity swap on loans because they would suddenly own equity in a private company?” said a private equity partner who declined to be named.
But there could also be positive effects. Any conflict of interest that would exist if a bank was both a financier of a deal, and an investor in a buy-out fund, would be removed, HarbourVest managing director Peter Wilson said.