- Happy Birthday Dodd-Frank

The Dodd - Frank finance reform bill is a year old today. And rather than relate a bunch of policy on it (that you can get probably anywhere), I thought I'd tell you how my personal experience has been effected by these new regs.

As you probably know, I'm a hedge fund portfolio manager. There are plenty of people out there who are bigger than me, and just as many who are more important. But given my professional credentials and capital under management, I think most people would consider me a 'senior' manager.

I was, until very recently, affiliated with one of the largest and most prestigious hedge funds in the world that would be well known even to many outside the industry. Since we continue to discuss a working relationship, I'm afraid I can't name them here at this time. But it's a firm on the order of my last 2 employers, Caxton Associates, and Moore Capital.

Dodd-Frank didn't play a direct role in my hiatus last April, rather it came from the same source. The broader culture in Washington right now is to demonize success, particularly success in finance, and that led both to Dodd-Frank, and my situation.

My strategy was profitable and the firm's management was happy both with me and my performance. But a compliance issue arose with another manager whose contract was structured similar to mine. I had no connection to him at all, in fact I didn't even know of his existence. But the firm's legal team reviewed the compliance issue, and given the prevalent culture in Washington, decided it would be better to terminate all 'outside managers', rather than run the risk of some vague association being inferred later on by someone trying to score political points.

They made a choice to throw out the bathwater, the baby, and the sink they washed up in.

So in recent weeks I've found myself either looking for a new position in a hedge fund, a prop trading desk, or seeking capital to run my fund on my own. And this has put me in a unique position to poll the industry and to see trends in how the regulation is affecting things. Here's what I'm seeing:

The US banks are all divesting their proprietary trading operations, and the people who ran them are setting up new operations as hedge funds. Hedge funds were in no way responsible for the 2008 credit crisis but Washington has seized upon the opportunity to regulate them in Dodd-Frank anyway, So as a result, many of the new funds are being started overseas in an effort to remain competitive. Singapore seems to be the premier destination, followed by the European tax havens like Jersey and the Isle of Man. I haven't seen anyone move their physical operations to the Caribbean yet, but it remains the most popular location for legal domicile of the corporations.

The foreign owned banks have consulted their legal teams and come to the conclusion that they are not affected by Dodd-Frank. So while they are not eliminating their prop trading, Washington's support of the 'too big to fail' banks have left them at a competitive disadvantage. So they are trimming staff in the states in order to cut other costs. One bank who I spoke to is leaving the option open to move their New York trading operations to Toronto, just in case the vague rules of Dodd-Frank are later judged to apply to them after all.

As for the hedge funds that remain in greater NY, I've noticed an interesting trend. Very few funds continue in the classic model of a single company with multiple employees. Instead, many are opting for a much larger number of legal entities, and a much more complex internal legal structure. In summary, they're trying to use international law to insulate themselves from capricious or unexpected regulatory changes. No one is specifically saying so, but it's obvious that they are most concerned with hedging themselves against further capriciousness in Washington and the various 'big blue' states.

Anyway - that's the 50K foot view. Dodd-Frank, and more broadly, Washington's new regulatory culture, has seriously diminished employment options in New York and CT, improved them in Singapore, and reduced fairness and competition in the investment banking industry as a whole. It's caused the US banks to move some businesses offshore, caused others begin their operations there in the first place, and made 'regulatory arbitrage' an important global business. Its stacked the deck in favor of the largest US banks, and hurt all the rest. The net of all that is fewer jobs at every level of finance, in the USA at least.

As for me, I'll be fine. I have a lot of interest and am being meaningfully courted by several firms. It takes some time to resolve at my level, but that's not unexpected. Even my past employer continues to try to find a way to renew our relationship, so I think I'll be OK. But while I can't see a lot of good coming from Dodd-Frank yet, the bad parts have all arrived already. It won't stop the things it wants to stop (systemic risk) and it will stop the things it doesn't want to (hiring and tax revenue). So in that way, I guess it's like everything else that liberals do. It's long on good intentions, painfully short on results.

Happy Birthday Dodd-Frank. Or I guess I should say:

"shēngrì kuàilè" ( 生日快樂 [生日快乐] ).