Hedge funds rush to $108 billion, trading where big banks once tread

Some firms on hiring spree

Falling Salaries

The New York-based firm, run by Israel “Izzy” Englander, accelerated its expansion into fixed income in October 2008, when it hired Michael Gelband, a former global head of capital markets at Lehman Brothers Holdings Inc., less than a month after that company collapsed. Millennium Partners LP, the multistrategy fund that the firm uses to invest all of its $18 billion in net assets, formed a Cayman Islands subsidiary in June 2010 called Millennium Fixed Income Ltd.

Tripp Kyle, a spokesman for Millennium, declined to comment about the expansion, as did Patrick Clifford, who represents Pine River in New York, and Ed Orlebar for BlueCrest.

Bankers and traders are departing as average investment- banking salaries fell 14 percent last year compared with a 3 percent decline in salaries at alternative-asset managers, according to eFinancialCareers.com. They’re seeking to deploy skills learned at the biggest banks to capture business that those same firms now can’t afford to maintain.

“Business strategies are moving out of the banks and into the hedge funds,” said Constance Melrose, managing director of eFinancialCareers.com in the Americas. “You do need some of the people to deliver those strategies, and you have the opportunities to get those people.”

Bankruptcy Claims

One of those opportunities is in bankruptcy claims and other forms of distressed debt. O’Malley Hayes, who sourced and traded illiquid loans at Bank of America, departed in 2010 to become a principal at Bayside Capital, an affiliate of H.I.G. Capital, a $12 billion private investment firm.

Fixed-income arbitrage business also is flowing to hedge- fund managers from banks poised to lose $17 billion of revenue in fixed income, currencies and commodities by 2016 because of levies and regulation, according to an April 22 report by Deutsche Bank analysts.

“We’ve seen some banks publicly pull back from activities that would require them to commit their balance sheet in a big way to fixed income,” said Shubh Saumya, a New York-based partner at Boston Consulting Group. “A hedge-fund balance sheet is a different type of balance sheet.”

Regulatory Assets

UBS, Switzerland’s largest bank, said in October that it plans to cut 10,000 jobs and exit some of the most capital- intensive trading businesses, chopping about 80 billion Swiss francs ($85 billion) from the 110 billion francs of risk- weighted assets in its fixed-income business.

Firms including Millennium and BlueCrest reported an increase last year in what are known as regulatory assets under management, signaling an increase in fixed-income arbitrage strategies that usually use borrowed money and repurchase agreements to boost returns.

Because fixed-income arbitrage involves buying some bonds and betting against others through short sales, practitioners enter into reverse repurchase agreements to obtain securities they need to sell short. One example: If Japanese sovereign debt has higher yields relative to Treasuries than historically has been the case, a fixed-income arbitrage trader might buy the Japanese bonds and sell short U.S. government debt to profit when the spreads between the two reverted to customary levels.

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