By Simon Kerr, Publisher, Hedge Fund Insight
It is not often that an appointment at a hedge fund management company takes the eye, never mind produces a “Wow!” reaction. I can recall two such appointments readily, for different reasons. They were when Greg Coffey was invited to become the first co-chief investment officer of Moore Capital’s European business, and the second was when Manny Roman left Goldman Sachs to become GLG’s COO.
Yesterday it was announced that J.P. Morgan’s James Staley has quit the bank to become a Managing Partner at BlueMountain Capital Management LLC, one of the world’s premier credit hedge fund managers. Staley was clearly being positioned to assume Jamie Dimon’s role as CEO of J.P. Morgan, to the extent that a new position right at the top of the financial powerhouse was created for him last year to keep him in a warm seat until the due time. So what could have persuaded James Staley leave a bank with assets of $2.27 tn he had been at for 34 years to join a firm not even a decade old yet and which has assets under management of around $12bn?
Well the precedent of Manny Roman may be a good one. Roman, like Staley, joined his firm as a partner but then quickly went on to be a shareholder in a publicly quoted business (through the takeover of a special purpose vehicle), and then one of the most senior executives in a bigger business when GLG merged with Man Group (a public company). It has recently been announced that Manny Roman will shortly succeed Peter Clark as CEO of the whole company.
James Staley, like Manny Roman when he joined GLG Partners, will be part of an organisation engaged in something that he is familiar with, albeit from the other side in Roman’s case. BlueMountain’s business is to assess credit and put investors’ capital at risk in proportion to the perceived mis-pricing of that credit risk. A commercial bank does something of the same with it’s own capital, and J.P.Morgan is still a large commercial bank. The House of Morgan is also one of the world’s pre-eminent investment banks, which “operate like large hedge funds” according to the political classes. Staley ran Capital Markets at the bank, and the proprietary trading part of investment banking has to cease under the Volker Rule.
Then there is the change thing. Banks undertake new lending partly as a function of the adequacy of their own capital. Capital adequacy is under regulatory pressure and standards are being raised on an international and national basis. That is, even for a bank as well ranked as JPM is for Tier 1 capital, it is quite difficult to see a gross expansion of the balance sheet. Lending being done by non-banks is mushrooming, and that is expected to be the case for the forseeable future. Hedge funds are a good part of that non-bank lending, and that is particularly true for lending to business in the United States. Which brings us back to BlueMountain.
One of the scenarios of the future of hedge funds is that their role in the financial sector will grow as they carry out more process-driven strategies and less genius-driven investing. Within the spectrum of credit risk hedge funds the centre of gravity will move from equity, CB and distressed strategies (where they came from) , through high yield, mezzanine financing, asset-backed lending and invoice financing (where they are now) to mortgages, leasing, factoring and …commercial lending. All of which will be very familiar to a banking executive of the calibre of James Staley.
It could well be that the road map John Staley will use at BlueMountain is the one just finished with by Manny Roman – a Managing Partner at a private company to CEO at a much larger public entity. In the case of BlueMountain Capital Management however there may not be a need to merge on the way. Growth in the finance sector for hedge funds will be organic and at a good lick, filling the void left by the capital constrained commercial banks and investment banks.