The hedge fund industry is set to attract bankers and traders from an exodus of high-flyers leaving troubled investment banks in search of bigger bonuses and better job security.
Bankers joining hedge funds is not a new phenomenon, but the trend has usually been for one or two people to leave the relative comfort of an investment bank for the risky but potentially much more rewarding option of a new hedge fund.
As investment banks, hit by huge subprime-related writedowns and a tough business environment, cut back staff and slash bonuses, however, the $2.6 trillion hedge fund industry has begun to look far more appealing — even to very senior bankers.
Hedge funds have suffered comparatively little damage from the credit crisis, and the sector now boasts an increasing number of large-scale players managing tens of billion of dollars.
Now, more investment bankers are looking to follow the example of Osman Semerci, former global head of fixed income at Merrill Lynch who recently went to run to run UK hedge fund and private equity firm Duet Group.
"Bankers right up to the most senior level are now answering our calls, if not actively soliciting us," said Chris Gaunt, a principal at headhunter Heidrick & Struggles. "I've been hearing from people out of the blue who I last spoke to three years ago."
More and more bankers are looking to move from the glass towers of Canary Wharf and the City to St James's, the exclusive enclave of London's West End where many hedge funds are based, partly out of fear for their own jobs, but also on the realisation that the next few years are likely to be very tough for the banks.
"What's interesting isn't just that people are moving, but their whole risk appetite in their careers is changing," said Gaunt.
"In a world where Bear Stearns can blow up there's almost a feeling that nobody is safe, so why not take that big career risk now?" said Gaunt. "That is a big, big difference from just a year ago."
Flood of Talent
The decline in investment banks' fortunes is also providing a fresh supply of talented traders to hedge funds. For those funds able to take on staff, there is now plenty of choice.
"There are a lot of traders whose capital has been taken away in the last couple of months who are looking to do something, or people who have lost their jobs on Wall Street who have tremendous experience in investing and want to set up their hedge fund," said Anita Nemes, Global Head of Capital Introductions at Merrill Lynch.
Earlier this month, hedge fund firm Greylock Capitalsaid it had hired several former Bear Stearns senior executives, while Tudor Investment , a hedge fund with $18 billion under management, said it hired Gregory Hanley and Alan Mintz, two former senior Bear executives, to build a new operation trading distressed debt.
The hedge fund industry's case has been helped by its ability to bounce back in the face of the credit crisis.
Although performance was poor in the first quarter, the average fund is now in positive territory for the first five months of 2008 after returns of 2 percent in May, according to Credit Suisse/Tremont.
Despite the high-profile departure of Greg Coffey, GLG's star performer who looks likely to set up his own hedge fund after forfeiting a bonus reportedly worth around $250 million, few traders from banks' proprietary desks are set to follow his particular career path as the credit crunch continues to bite.
"I just don't see investors being willing to take a chance on a start-up in the current climate, it's just not the right time," said Odi Lahav, head of Moody's European Alternative Investment Group.
A year or two ago, when credit was cheap and the economy was hot, setting up a hedge fund would be the first choice of new career for entrepreneurial bankers.
"Now people are saying that would be crazy. They have pretty fundamental concerns about new businesses' ability to get any funding in this environment," Gaunt added.