Analysis: Wall St talent aims for hedge funds as rules bite

BOSTON Wed Feb 2, 2011 10:37am EST

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BOSTON (Reuters) - The usual flurry of brokerage firm traders seeking to join hedge funds after the payout of annual bonuses could be more of a blizzard this year, with compensation shrinking on Wall Street and a regulatory crackdown in the offing.

Wall Street's leading banks cut bonuses by an average of 5 percent for all employees, according to a Reuters survey conducted last month. But executive recruiters say the drop for traders was more severe, closer to 25 percent to 30 percent, because of weaker results and the expected implementation of the Volcker rule ending proprietary trading at the banks.

"People on proprietary trading desks are showing a greater level of interest in hedge funds than in the past," said Paul Sorbera, president of executive recruiter Alliance Consulting. "Even if their bank isn't shutting the desk down, the pending rules make people in the seats concerned for their longevity."

Details of the rule, first proposed by former Federal Reserve Chairman Paul Volcker, are expected from U.S. regulators within months. Mandated as part of the Dodd-Frank financial reform law last year, the Volcker rule seeks to ban proprietary trading at banks, but it is not clear how tight the restriction will be.

Last week's headlines about hedge fund star John Paulson's $5 billion 2010 paycheck also certainly got the attention of Wall Street's top traders. Goldman Sachs' recent award of a $2 million annual base salary and $12.6 million in stock to its chief executive officer, Lloyd Blankfein, pales in comparison.

GLORY DAYS OVER?

Hedge fund compensation overall is recovering from a dip during the credit crisis. And after a burst of fund closings and client redemptions, the $1.9 trillion industry is getting an influx of cash again.

"Where we are now, it's certainly much more difficult for the banks to compete for that talent," said Lawrence Lieberman, senior managing director at Orion Group, an executive recruiting firm that focuses on the money management industry.

On average, senior equity professionals at hedge funds -- including portfolio managers, traders and analysts -- made $875,000 last year, up from $800,000 in 2009, according to a survey by compensation consultants at Greenwich Associates and Johnson Associates. The average for fixed income pros rose to $1.1 million from $1.0 million.

While pay for bond traders at the hedge funds slightly exceeded pre-crisis levels, equity market specialists still have a lot of ground to make up before they again reach the 2007 average of $1.7 million.

The Greenwich/Johnson survey found much lower salaries in its "other" category, which includes banks, but the group's data is skewed by the inclusion of much lower pay at insurance companies and government agencies. In equities, senior professionals made $385,000 on average in 2010, up from $350,000 in 2009. On the bond side, the average pay increased to $450,000 from $400,000.

Making comparisons between average pay at hedge fund and Wall Street firms is almost impossible, Johnson Associates Managing Director Alan Johnson said, but people are moving for more money. "It's driven by pay -- that's a lot of it," he said.

On Wall Street, compensation is shrinking for many traders. Profits are down from the glory days, and new rules from Dodd-Frank and the Securities and Exchange Commission have increased pressure to curb pay.

Morgan Stanley not only reduced bonuses, but also increased the portion of the payouts that cannot be spent for up to three years to 60 percent from 40 percent. Senior executives will see 80 percent of their bonuses deferred, the investment bank said.

Even before the figures had leaked out, Morgan Stanley's head of proprietary trading, Peter Muller, had decided to take his group independent.

Top traders at Goldman Sachs, including Morgan Sze, Pierre-Henri Flamand and Daniele Benatoff, have left to open their own funds or are making plans to do so. In October, private equity firm Kohlberg Kravis Roberts & Co grabbed nine Goldman traders led by Bob Howard.

Moving to a hedge fund may not be an option for everyone who wants to leave a Wall Street trading desk, given the smaller size of the fund industry, Johnson noted.

"We are not talking about thousands of people because there aren't enough jobs," Johnson said. "But you will see a lot of the most valuable and most prominent people go."

Beyond 2011, further regulations will probably determine the long-term trend in the sector, according to University of Virginia economics professor Ariell Reshef, who studied the after-effects of Depression-era regulation on Wall Street.

Rules put in place so far pale in comparison to what was done in the 1930s to curb risk-taking, including the Glass-Steagall Act of 1933, which separated banking and underwriting, Reshef said.

"We have not seen any significant regulatory changes," he said. "What has transpired is small cash compared to 1933-34 regulatory reforms -- pun intended."

(Reporting by Aaron Pressman; Editing by Lisa Von Ahn)

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