* Goldman trader plans team of up to 30 for HK-based fund
* Launch could be biggest since the credit crisis
* Goldman winding down prop desk in light of Volcker rule
* Sze discouraged from London by tax, regulation - source
(Releads, adds detail, background)
By Laurence Fletcher and Kevin Lim
LONDON/SINGAPORE, Dec 16 (Reuters) - Goldman Sachs GS.N star trader Morgan Sze's plans to raise over $1 billion for an Asia hedge fund could be a sign of things to come as traders who run own-account trading desks prepare for a Wall Street regulatory clampdown.
Hong Kong-based Sze, head of Goldman’s Principal Strategies group, is to quit to form Azentus Capital, likely one of the biggest hedge fund launches since the onset of the credit crisis and which will have a team of close to 30.
Goldman Sachs declined to comment.
The move comes as Goldman and other Wall Street banks wind down their proprietary trading desks in light of the “Volcker rule”, named after the former Federal Reserve Chairman who authored the regulation to limit the extent to which banks can bet with their own capital. [ID:nN04118596]
Banks are considering options such as spinning out desks as separate hedge funds or moving them into their asset management units. Morgan Stanley MS.N is spinning out FrontPoint Capital while JPMorgan JPM.N is reassigning its proprietary traders to its asset management unit.
Other traders, like Sze, are taking matters into their own hands and setting up brand new investment ventures. Sources said Sze is Goldman’s highest-paid trader having in 2006 received a bonus of almost $100 million.
“It’s difficult to think about a proprietary trading desk at a significant investment house that we’ve not had a conversation with (about spinning out). They’re a fully-functioning business from day one,” said one prime broker who asked not to be named.
Goldman’s prop desk has seen a number of departures this year. Earlier this year, Pierre-Henri Flamand, who ran Goldman’s Principal Strategies division before Sze, set up Edoma Partners having raised more than $1 billion, according to media reports.
In October KKR hired nine members of Goldman's prop trading team, while a Credit Suisse CSGN.VX commodity trader departed with a team of proprietary traders in September to set up a hedge fund. Bank of America Corp BAC.N has also cut staff who traded for the bank's account. [ID:nN21290478] [ID:nN04118596]
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For a graphic showing U.S. banks' return on equity: r.reuters.com/tew42r For a Breakingviews column: [ID:nLDE6BF0LL] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
ASIA NOT LONDON
The multi-strategy Azentus fund, which would be one of the biggest in Asia, is expected to take office space in Hong Kong’s ICBC Tower and would start operating in the first quarter of 2011, two people familiar with the matter said.
Sze considered London -- the major centre for hedge fund firms outside of the United States -- as a base but was discouraged by the level of tax and regulation he would face, said a third source, who had knowledge of the situation.
Sze has now begun talking to investors, the third source said. “There will certainly be real interest ... There’s a lot of demand for Asia.”
Azentus’s team would comprise about 12 analysts and the entire trading desk would come from Goldman, three sources said.
The fund may start trading with $1 billion to $1.5 billion and employ a number of strategies, including equity long-short, risk arbitrage and special situation investing, the Financial Times said.
“Sze needs at least $1 billion just to justify the size of operation,” a source familiar with the plan said.
Investor confidence is returning after the financial crisis with some $42 billion of net inflows into the hedge fund industry this year.
Assets in Asian hedge funds surpassed $125 billion for the first time since December 2008, according to consultancy Eurekahedge, boosted by portfolio gains and inflows as the region’s stronger growth prospects attract investors.
The Eurekahedge Asia ex-Japan Index recorded a return of 38.19 percent in 2009 and remains among the best performing hedge fund indexes in 2010, with year-to-date gains of 9.36 percent. (Additional reporting by Nishant Kumar and Stephen Aldred in Hong Kong; Editing by Sinead Cruise and David Holmes)