Job Cuts, Regulation Push Bankers Toward Hedge Funds

The hedge fund industry is expected to see a wave of new launches in the next year by traders who have lost their jobs at investment banks or who have left in search of better pay.

expected to see a wave of new launches in the next year by traders who have lost their jobs at investment banks or who have left in search of better pay.

The start-ups are expected despite the unimpressive performance of other new ventures and questions about where they will find new capital to finance them.

New rules banning U.S. banks or those with U.S. subsidiaries from risky but potentially profitable proprietary trading are also encouraging some traders to make the move.

Mitt Romney's U.S. presidential election defeat means little chance of the wider regulatory bill being repealed, as he had promised.

"If you consider what's going on for (banks) at the moment from a compensation point of view, plus the increase in regulation and impediments to expressing risk...then working at a hedge fund looks like a compelling option at the moment," said

David Barenborg, a portfolio manager at BlackRock Alternative Advisors.

Among the most prominent names who have tried to launch this year are JP Morgan's Mike Stewart and Deepak Gulati, Citi's former head of proprietary trading Sutesh Sharma, and Nomura's Borut Miklavcic, who gained approval from Britain's Financial Services Authority for his LindenGrove Capital this month.

Other traders away from the proprietary businesses, such as so-called "flow" traders, who engage in market-making transactions for clients, are also leaving banks.

Antoine Cornut, a former head of flow-credit trading for Deutsche Bank, is setting up his own credit-focused hedge fund Camares Capital, two people familiar with the launch said.

Investment banks across the globe have slashed hundreds of thousands of jobs since a market peak in 2007, as tougher regulations and weak dealmaking force them to cut costs. UBS said last month it was winding down its fixed income business and cut 10,000 jobs.

Banks are also under pressure to cut bonuses and benefits, reducing the incentive to stay on at a bank with the promise of a more lucrative job elsewhere.