03/09/2012

Macquarie Sets New Course for Prop Desk

Macquarie Bank is overhauling a team that trades structured products.

The New York division currently operates as a proprietary trading desk, but under its new format would raise capital from outsiders as a Macquarie-run hedge fund. The shift would take place in the next two months or so.

The plan reflects efforts by Macquarie to adjust to the Bank for International Settlements’ Basel 3 rules. Under the directive, which begins phasing in next year, the Sydney bank would have to set aside a considerable amount of additional capital reserves against the holdings of the desk — something it wouldn’t have to do for a hedge fund that runs money for clients.

The word is that Macquarie was far less concerned with the U.S. government’s so-called Volcker Rule. That measure, scheduled to take effect July 21 under the Dodd-Frank Act, places strict limits on banks’ proprietary trading activities in the U.S. and severely curbs their abilities to invest in their own funds.

Macquarie intends to supply some seed capital for the effort. “It’s going to morph into a hedge fund of some sort,” one source said of the Macquarie team.

The group trades a range of structured products. A large chunk of its holdings consists of distressed mortgage bonds with triple-B ratings. It also owns interests in collateralized debt obligations and some paper backed by aircraft leases and other less-common assets. Any funds it launches would employ an opportunistic strategy.

Sources said the unit’s assets reach into the hundreds of millions of dollars. The team apparently used to run more, but saw its portfolio shrink as it took losses in 2008. It then notched gains in 2009 and 2010, and produced flat returns in 2011.

Macquarie is still working out some details of how the fund would operate. It’s possible that the vehicle, which has yet to be named, would fall under the umbrella of a division called Macquarie Funds that includes a number of other hedge funds. It also might receive marketing assistance from a separate “alternative investment services” group that raises capital for hedge funds that the bank manages and vehicles it owns in a joint venture with MD Sass.

The proprietary structured-product trading desk encompasses perhaps a half-dozen professionals led by Michael McLaughlin. It’s unclear if he will move out of his current job, which entails oversight of a broader credit-product sales and trading area. He joined Macquarie in 2008 from Bank of America, where he spent 14 years.

The makeover of McLaughlin’s group appears unrelated to a move in which Macquarie dismissed a five-person prop team focusing on equities. Those cuts, which came two weeks ago, stemmed from cutbacks specific to the bank’s equities business.

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