The so called "Volcker Rule" incorporated into the US Dodd-Frank Act, designed to curb or stop banks' proprietary trading operations, is seen by many offshore hedge funds as a step in the right direction as it will cause banks to scale back their trading operations, reduce leverage and, as such, create less crowded trades for hedge funds.
The Financial Times recently reported Australian Michael Hintze, chief executive of London-based hedge fund CQS which manages $6.8 billion, welcoming the introduction of the rule, and predicting that opportunities will again favour hedge funds as highly leveraged bank prop desks withdraw from the market. Hedge fund leverage has reduced dramatically since the GFC, as has some of the leverage previously used by prop desks. Hintze estimated leverage of 15 to 20 times was normal for bank prop desks. Other sources have estimated that some banks were leveraged 40 to 50 times leading into the GFC.
However it is unlikely to be a one-way street, as the Volcker rule only applies to US banks, and many European banks such as Societe Generale, which already operate significant prop trading operations, were likely to fill the space left by their US counterparts. In addition other elements of the Dodd-Frank Act contains tighter restrictions on hedge funds which have yet to be fully factored into the market.
The House approved the Dodd-Frank financial reform bill last Wednesday, but Senate leaders postponed a vote on the bill, preventing it from reaching President Obama's desk until at least mid-July, according to The Washington Post.
The Volcker Rules curbing banks' investments in their own funds was amended; last-minute congressional negotiations aimed at winning Republican support led to a compromise that allows banks to invest up to 3% of their capital in private equity and hedge funds; Volcker was said to be disappointed with the rule's final version.
