Morning Coffee: The hedge fund giving traders $1bn. Compulsory leisure time at Nomura

For the last few years, the biggest trend in the hedge fund labour market has been the dominance of the big multistrategy firms like Citadel, Millennium and Balyasny, which seem to have been scooping up all the available talent. More recently, however, we have been seeing the beginnings of an “unpodding” phenomenon, where people who have enjoyed success at a multistrat have set off to open up single strategy funds of their own.  The latest moves by Millennium Management, though, might be taken to show a whole new possible direction.

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Robert Tau (a former Goldman Sachs MD who managed money for BFAM and Balyasny) is going to start his own macro trading firm, but all of its $1.5bn assets under management will come from Millennium.  Former Marshall Wace trader Daniel Engel-Hall is also being given $1.75bn to manage by Millennium, under its Andora Partners sub-brand.

It’s not clear what we should call this.  On one hand, with over a billion dollars in each, these operations are too big to be called “pods” – they don’t fit into the classic multistrat business model of diversified alpha.  But on the other hand, if all the money is coming from one big client, they’re not exactly independent hedge funds either.  

Whatever you call them, these arrangements might be the way of the future.  The big problem for the multistrats, as Ken Griffin has said, is a problem of success. So much money has flowed into them that it’s no longer practical to divide it up into the typical pod-based units favored by the likes of Millennium. As Dimitri Balyasny recently said, rather than wanting portfolio managers who can manage a few hundred million dollars, the biggest funds now need people who can manage a few billion. 

People who possess this rare skill tend to be aware of their own value and might not be open to the extremely strict approach that Millennium takes to withdrawing capital after comparatively small losses.  Therefore, “seeding” deals by giving star traders/portfolio managers $1bn+ to set up their own fund, is all the rage.  The big firm provides the assets under management, in return for an “exclusivity” period and an ownership stake.  

These seeding structures aren’t universally popular in the industry – managers have described them as “only really one step removed from being an internal portfolio manager”.  But for investment geniuses who want to concentrate on managing money rather than raising it, they might be an attractive option.  After all, “pod” is also the collective noun for a group of whales.

Elsewhere, Nomura has experienced the all too common industry phenomenon of a strong year’s profit growth, marred by compliance scandals.  The most dramatic such scandal is obviously the case in which an employee is alleged to have murdered and robbed some wealth management clients, but there have also been market manipulation cases in the recent past; the chief executive is getting used to announcing that he is accepting a pay cut by way of apology.

Nomura has embarked upon some professional ethics training to avoid this in the future. It's also trying “supervision of employees when visiting client homes” and compulsory block leave.  Some of these seem faintly comical as solutions to the problem they’re meant to address; will there really be a compulsory online course with a multiple choice test on whether it’s appropriate to drug clients and set fire to their house?

But the block leave idea might be more effective.  It’s already standard in trading businesses, just in order to ensure that at least once a year, someone’s trading book and settlement practices are looked over by a knowledgeable and independent party.  A similar arrangement for retail brokers might give clients an opportunity to complain about strange behaviour, and head off very serious problems before they arrive.

Meanwhile …

Jane Street traders have been mocking Millennium for being "dumb". (Bloomberg) 

Hot chocolate, anyone? The price of cocoa was up 37% for the month of November (due to poor West African harvests) and this apparently contributed significantly to a 23% return for Pierre Andurand’s notoriously high-volatility commodities fund. (Bloomberg)

Bob Diamond claims that UK banks suffered “biblical justice” after the LIBOR scandal which separated him from the Barclays CEO job.  Now owner of Panmure Liberum, he’s arguing that regulators ought to be a bit more accommodating and that their past “get the f----rs” attitude has damaged the British economy. (Daily Telegraph)

Cliff Asness of AQR, having been a sceptic of “big data” in the past, is now admitting that for some portfolio weighting problems on which he used to have the last word, “AI is annoyingly better than me”.  When they invent a computer that can punch its own monitor screen, he’ll be able to retire. (Bloomberg)

Warren Stephens, CEO of Stephens investment bank (a midwestern regional owned by his family), is going to be the next US Ambassador to London. (Financial News)

The Paris branch of UBS is seeing more courts than Roland Garros at the moment; as well as a money laundering case, it’s involved in another prosecution relating to cutting the bonus and reducing the job responsibilities of the whistleblowers. (Bloomberg)

Becoming an elite sperm donor in New York seems to have almost as many interview stages as Goldman Sachs, although the money isn’t quite so good (apparently $15,000).  They even go through your social media to check for guns and hate speech. (VICE)

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