On Thursday, January 21, 2010, US President Barack Obama vowed American taxpayers would never again foot the bill for the risky activities of commercial banks. At a White House press conference, flanked by a council of high-powered economic advisers, Obama unveiled the Volcker Rule, named after the former chairman of the US Federal Reserve, Paul Volcker, who was towering over the President's right shoulder."
Banks will no longer be able to own, invest, or sponsor hedge funds, private equity funds or proprietary trading operations for their own profit, unrelated to serving their customers," Obama said.
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At UBS's Australian office, one of local head Matthew Grounds's most trusted lieutenants, Gerard Satur, who ran the Sydney dealing desk at the ripe age of 29, had assembled a team of macro traders in 2011. The unit, housed within UBS, aimed to profit from trading opportunities thrown up by the exit of US banks from prop trading. But after the Adoboli trading blow-up, UBS issued a global directive banning prop trading. Satur's fund was forced out, leading to the formation of MST Capital.
While the banks are no longer taking proprietary risks onto their own balance sheets, they can still back their former stars with seed capital. None have done so yet. With the new Basel III capital requirements, the economics hardly stack up. There are, however, other ways to support their former traders. MST is on the UBS Australia wealth management platform, so UBS financial advisers can direct their clients to invest in the fund.
MST is off to a good start. Since setting out on their own in July, the fund has returned 3.17 per cent net of fees in a soft market, and it has already secured a $100 million investment from a superannuation fund. The challenge for MST - and the other hedge funds run by former prop traders - is reproducing the goods outside of the banking system. Working inside a bank is vastly different to managing capital for third parties, which involves fund raising and client pressures, and a less fluid flow of information.
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