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Morning Coffee: Millennium founder has got an idea for cutting hedge fund pay. Deutsche Bank tells traders it’s time to do something for the shareholders

You wouldn’t necessarily think that multistrategy hedge fund “pod shops” had much in common with the characters from “Sex and the City”. But Millennium’s Izzy Englander is lamenting that successful portfolio managers are like New York men over the age of 30 - all the good ones have been taken.

Specifically, the pod shops have grown in market share, and locked up their best performing managers with long and binding non-compete agreements.  That means that the talent pool is artificially restricted, and firms like Millennium are faced with a choice between settling for second best, making financial sacrifices or going through a sequence of exciting but ultimately disappointing relationships in the hope of finding The One.

Although it might enliven a quiet Friday afternoon on the trading floor to decide which of Millennium, Citadel, Balyasny and Point72 are most like Carrie, Charlotte, Miranda or Samantha, the most interesting point here is the idea that non-compete agreements are pushing hedge fund compensation up.  Most employees would instinctively believe that they would work the other way.

But the paradox is more apparent than real.  If non-compete agreements are causing a “talent bubble” and pushing up salaries for new hires, then that would imply that they’re holding compensation down for existing employees to a similar extent.  The hiring premium for the small number of proven portfolio managers who are free to move is mainly a reflection of the inability of much of the labour market to take advantage of their relative scarcity.  It’s enough to give you a fear of commitment.

That’s why lots of places like New York and California (and London) are legislating to ban or restrict non-compete clauses. However, the hedge fund industry is, on the whole, not welcoming these bans as a possible cure for the talent bubble.  The good thing about a liquid labour market for an employer is that you can hire people from your competitors, but that’s more than offset by the disadvantage that they can do the same thing to you.

Even though Izzy doesn't like them, lawyers therefore say that hedge funds are likely to try to replicate the effect of non-competes if they're banned.  The simplest way to do so might be to include a very long notice period in everyone’s contract; a gardening leave period which puts someone out of the market for 180 days or more is quite like a non-compete in its effect.  Unfortunately, hedge fund pay is likely to stay high for a while. 

Meanwhile, the best form of employee retention, as most employers know deep down, is to keep the staff happy.  It’s quite rare for people to leave a job just because of the money – usually, people start looking for alternatives because they feel scared or disrespected.  As Carrie might have put it, maybe the best non-compete of all is a little bit of love.

Elsewhere, Deutsche Bank’s Christian Sewing has been an unusually popular CEO for the last couple of years, keeping his shareholders happy with dividends and returns, and keeping the bankers – particularly the fixed income traders – happy with successive strong bonus years and no big layoffs.  Now that might change; Sewing has suggested that after announcing 800 senior redundancies in April, Deutsche Bank's cost-cutting program is likely to expand. 

That would be quite a change from recent trends.  Deutsche Bank added nearly 50 senior dealmakers in the first half of this year, although broader hiring seems more limited. The underlying number of Deutsche Bankers seems to be pretty flat over the last two years – media reports on the quarterly results suggest 4000 additions since April, but this is likely to be distorted by IT projects and consulting staff.  Looking at the numbers for front office employees in the investment bank, they’re up by 270 in the third quarter, which is about the size of the graduate intake.

If and when layoffs arrive at Deutsche, it feels more likely that they will affect the swollen M&A advisory franchise (where revenue is down 46% year to date) rather than the trading businesses.  But the traders won’t be totally unaffected; Sewing has confirmed that he will reduce bonuses if necessary to make his cost targets.

Deutsche bankers shouldn’t be too upset by this.  There’s always a tension between the CEO’s two duties to look after the staff and the shareholders, and Sewing has considerable goodwill stored up from the last few years.  And far-sighted traders know that going into a bear market, it’s a good idea to keep the shareholders happy; it stops them getting nervous and demanding redundancies.

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Meanwhile …

A bad result for Neal Phillips of Glen Point Capital – he’s been found guilty of commodities fraud.  And possibly a few other FX traders will sleep a little bit less easily as a result, because this is the first court case to have established that the practice of “barrier chasing” (trading with the objective of moving the price to trigger a barrier option) is illegal.  It came out in the case that some people think it’s standard market practice, and others (like Morgan Stanley) forbid their employees from doing it.  As the LIBOR cases show, verdicts like this don’t always hold up on appeal, but the precedent is important for anyone in that market. (FT)

UBS have extended a $9bn line of credit to Sheikh Hamad, the former prime minister of Qatar.  That will mean that Aladdin Hangari (the former relationship manager for the Qatari royal family at CS) will have his work cut out in his new job at HSBC. (Bloomberg)

Market strategist Matt King has launched his new boutique Satori Insights with a “media citations” section on the website that currently just has the story about him being made redundant from Citi. (Twitter)

Be gentle with how you ask young colleagues how it went – the CFA pass rate was only 47.4% this time, below the historic average. (Bloomberg)

Evercore has confirmed that its big “hiring surge” is now complete, and it’s looking to its new recruits of the last year to start producing revenue (Financial News)

Are Indian sell-side analysts just too polite? (Bloomberg)

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AUTHORDaniel Davies Insider Comment

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