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Will the JOBS Act Lead Employees From Goldman, Merrill, and Morgan to Launch New Funds?


The answer seems clear, but it's not always smooth sailing.

Many Wall Street experts think that the JOBS Act will change the hedge fund industry. According to Daniel Strachman, a financial expert who serves as the Director of Research and Strategy for the GAIM Conference Series, it could also lead to the consolidation of existing funds -- and the creation of others.

"It would not surprise me if you saw consolidation in the industry, meaning large mutual fund or asset management companies acquiring independent firms," Strachman told StreetID. "It wouldn't surprise me to see mergers of independent firms together. I expect that you'll see a number of funds growing, both independent funds -- guys (prop traders) who come out of big houses, whether it's Goldman Sachs (GS), Morgan Stanley (MS), Merrill Lynch (BAC), wherever -- they're gonna launch funds."

Certainly there is precedent. for traders to leave the big guys and put out their own shingle. Last year Bennet Grau and Mark Mallon left Golcman Sachs to start a new global macro hedge fund with fellow Goldman alumn Marc Mezvinsky. Daniele Benatoff left Goldman to launch Benros Capital. Pierre-Henri Flamand left to start Edoma Capital Partners. Morgan Sze left to start Azentus Capital Management.

As far as Morgan Stanley, Peter Muller left last year and is expected to launch a new hedge fund (although it's rumored it will be seeded by Morgan).

Last year over 1100 new funds were launched compared to a 10-year low of 659 in 2008. On the other hand, 775 funds called it quits last year.

It's not all rainbows and unicorns for these new funds, however. Regarding Goldman traders who left to start their own funds, Businessweek writes, "While former Goldman Sachs traders have raised $4.5 billion for their hedge funds, they have not yet earned money for their investors." Indeed, Flamand's Edoma lost about 2.4% from its November 2010 launch through this February and Sze's Azentus lost about 4.8% from its April 2011 launch through February according to Businessweek.

Still, Strachman believes that the industry is "poised for another growth spurt."

"We saw a big growth spurt in the late '80s," he said. "We saw another in the '90s, and then another in the post-crash bubble of 2000. I think you're gonna see that also going forward. Our research here is showing that all signs are pointing to new fund launches in 2013, new asset flows in 2013."

Overall, Strachman thinks that the JOBS Act could be "something along the lines of the great equalizer into the hedge fund industry and the asset management industry."

"It could really blur the lines between what are investment vehicles for the masses," he said. "There's a potential that the SEC comes out and says that hedge funds can advertise openly on billboards, in Times Square, or put an ad in the Super Bowl, or buy a full-page ad in The Wall Street Journal."

Still, Strachman said that with the way the hedge fund industry is today, it is already open. "If you look at what's going on within the major news networks, if you look at the major financial newspapers, as well as the major financial publications, the hedge fund industry is covered with some regularity," Strachman explained. "I'm not sure that [the JOBS Act] affects it as much as people think it does and what people are talking about."

That won't stop the JOBS Act from serving a greater purpose, however. "When the rules do finally come out about what is and what is not allowed, I think what this will do is really open up an opportunity for the hedge fund industry to experience massive growth," said Strachman.

"I think that you've seen over the last few years, in the wake of the credit crisis, in the wake of the poor economy, in the wake of the economic uncertainty and volatility in the markets, hedge funds have sort of been all to themselves in terms of asset flows. I think once the JOBS Act [and] the rules are put into place, and people understand how the game needs to be played, then you will see growth in the industry."

Further, Strachman said that there are two things that everyone knows: Markets don't always rise, and investors must protect themselves and continue making money when the markets go south.

"The only vehicles that allow you to do that are funds that are operating on both sides of the market," said Strachman. "That's why we'll see what I think will happen, which is more fund launches in 2013, more asset flows from investors -- not only just the pension plans and endowments and family offices -- but high net worth investors and others will be driving to these products because now there will be a better understanding of how these products work, and there will be a better understanding of how they can affect your portfolio. I think that's significant."

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