Wall Street Firms Faced With Thousands of Layoffs, Actively Recruit For Hedge Funds

Wall Street banks, currently facing tens of thousands of layoffs, have a new line of business: they are fast becoming full-time headhunters for some of their biggest hedge fund clients, according to an article in the New York Times.

Since the financial crisis, big banks like Goldman Sachs, Morgan Stanley, Deutsche Bank and Bank of America have been struggling to make up for the loss of profit they suffered due to new regulations and a jittery economy.

This year, banks are planning to cut 100,000 jobs. Bank of America alone said it would shed as many as 30,000 jobs as part of a multi-billion dollar cost reduction plan.

But despite the gloomy outlook for their own staff, it turns out that Wall Street firms have now turned into active recruiters for hedge funds, in a bid to secure profitable brokerage and trading businesses.

Still, this new role comes rife with a series of problems: namely, potential conflicts of interest, particularly if banks fail to properly disclose their services to their clients. From the New York Times:

"For one, Wall Street firms risk provoking the ire of a client if they poach hedge fund talent or compete for the same potential employees. It also raises a question of loyalty; hedge fund executives may be swayed to direct business to the Wall Street firm that hired them rather than the bank that makes the best sense for investors.

"We get put in this situation every day," said Stuart Hendel, global head of prime brokerage at Bank of America Merrill Lynch, which offers recruiting as part of its hedge fund services. The banks, he said, have "to walk a tight rope."

Banks say they have strict rules to prevent conflicts. Bank of America says it will not poach active employees of a current client.

"All we're doing is providing a clearinghouse for managers to meet prospective employees," Mr. Hendel said. "We don't go looking for people, people seem to find us. And we make it very clear we're not providing recommendations."

Goldman said it disclosed its consulting services to clients and had "robust policies and procedures" to prevent conflicts of interest. "We are not in the headhunting business," a spokeswoman for the firm, Andrea Raphael, said. "We do not solicit employees of one client to work at another client."

Deutsche Bank and Morgan Stanley declined to comment.

The practice renews concerns about how hedge funds indirectly pay for such secondary services. Government regulators have cracked down on these "soft dollar" arrangements -- where a money manager steers business to a bank in exchange for perks. The deals can come at the expense of investors, who may be unaware of the relationship.

Several years ago, Massachusetts's chief financial regulator, William Galvin, took aim at so-called hedge fund hotels. At the time, Wall Street firms provided office space to up-and-coming money managers at below market rates in return for their trading business. As part of a settlement with UBS, investment advisers that leased real estate from the bank in the state had to provide written disclosure to current and prospective clients about the arrangement."

It is unclear if hedge funds report their use of Wall Street staffing services, but they have become an increasingly important source of revenue for banks, the Times reports. According to Brad Hintz, an analyst at Sanford C. Bernstein & Company, they account for an estimated 35 percent of trading commissions. While they acted like informal recruiters for years, many investment banks have now formalized the process, creating databases that track hedge fund openings and potential candidates. Many even have a small staff dedicated to the service, the Times points out.

The appeal for hedge funds lies principally in the fact that while traditional recruiters take as much as 25 percent of the hire's first-year compensation, Wall Street doesn't charge anything.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio