Why bank traders fail when they move to hedge funds. And what they can do about it

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The move from being a trader in a bank to a portfolio manager in a hedge fund is one that's been taken by many, and has equally proven extremely challenging for many. For every bank trader who's made the leap successfully, there are many more who've made the leap and failed.

Why? Because the leap from being a trader in a bank to being a trader in a hedge fund is often far more challenging than many people think. This is why many bank traders move to hedge funds for a few years and then move back again.

There are a number of reasons for this. Firstly, the pressure in a hedge fund is far higher. Hedge fund portfolio managers are under pressure to achieve consistent returns form the start. When the market environment isn't right at a bank, traders with a strong reputation and track record can often take a back seat as they wait for a more productive risk environment. However, this approach is a rarity in the hedge fund world, where investors are constantly checking the performance of their investments and where portfolio managers are expected to trade a lot more actively. Traders from banking backgrounds can find it hard to make sound and rational decisions under these new conditions, and can become anxious as a result.

Secondly, traders from banks can find it hard to adapt to the social environment at hedge funds. The traders who move across are often high-performers who were the big fish in the big investment banking pond. In a hedge fund, they find themselves in a smaller pond with some far bigger fish. Our research suggests that people are heavily affected by this aspect of the transition. Subconsciously, it has an invisible pull on their trading strategy, biasing their decision-making, and adding extra pressure on them to perform.

Thirdly, when you move from a bank to a hedge fund, you lose the 'noise.' When you're sitting on a large trading floor in an investment bank with hundreds of other traders, there's a buzz which you pick up on and which in itself is quite revealing. A lot of people don't even realize they're trading off this noise - until it's gone. In a hedge fund, there are far fewer traders and they will quite often be trading completely different markets. You therefore miss the hum, the buzz, the chatter, the talk and seeing and feeling how people react. These are all little signals that you pick up subconsciously, and which it can be hard to do without.

Fourthly, traders often find that hedge funds have a very different approach to risk to investment banks: they're far stricter. Because hedge funds are dealing with investors' money, their investments are often scrutinized in fine detail. They therefore pay far more attention to risk limits and are far less tolerant of people who break them. Historically, banks were far less stringent, although this may be changing. Ideally, you want to find a firm that fits with your 'risk DNA.' We worked with one high quality bank trader recently who had a great track record, and excellent credentials and qualifications, including an engineering degree from MIT. However, our analysis suggested he had the wrong risk profile for the hedge fund thinking of hiring him. This proved correct, the individual was released by the firm after less than three months: his performance had been very poor and they quickly cut their losses.

Fifthly, ex-bank traders who move to hedge funds can simply become lonely. They lose the camaraderie and support network offered by colleagues and salespeople on a bank's trading floor. Trading in a bank can feel like a team effort, whereas trading in a hedge fund is often more individualistic. Hedge funds can be serious places and people can become lonely as a result.

Lastly, traders who move to hedge funds may simply not fit in with the fund's DNA. Each hedge fund is different - one might be serious, one might be more prone to banter, some may be full of introverts and others may be more outgoing. Some are full of diverse characters and others aren't. Ideally you should pick up on this during an interview, but it's not always obvious.

How can you avoid these pitfalls? Coaching helps, especially when it's undertaken with the cooperation of your hedge fund line manager. However, the main answer is to be aware that they exist and to prepare for them as best you can. Hedge funds can be exciting places to work: they are smaller, flatter, and more democratic organizations than banks and this is one of their strengths. However, they are also very different to the banking sector. The more that you go in with your eyes open, the greater your chances of success.

Steven Goldstein is a former senior rates and FX trader at Credit Suisse, an associate director at Commerzbank and a senior prop trader in the rates group at American Express. He's now a trading coach with Alpha R Cubed and Chrysalis Performance Coaching. 

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