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Morning Coffee: Morgan Stanley’s hatchet man gets the most desirable hedge fund job. Credit Suisse’s “lifeboat” deal is being challenged

If you hear the rattle of wheels and the clank of pistons on Madison Avenue, it could be the sound of the Jain Train building up steam.  The former Credit Suisse banker and Millennium CIO is not just set for a record-breaking hedge fund launch (estimates are now reaching $10bn, compared to a previous all-time best of $8bn for ExodusPoint).  He’s also hiring a very prestigious slate of talent. 

A measure of the kind of galactico that Jain Global is going for is that the founder isn’t going to be the only person there who already has a family office of their own; Paul Enright, formerly of Viking, is going to be the chairman of the fundamental equities unit, with Citadel portfolio manager Townie Wells coming in as CIO of the fundamental equities team.  But there’s an even more interesting name in line to be head of Asia.

Sam Kellie-Smith is described as “a Morgan Stanley veteran”, which is true, but that isn’t the half of it.  He currently has the title of Chairman of Global Markets and was previously best known as Ted Pick’s strong right arm. Kellie-Smith moved out to Singapore at the end of last year, as he went into the Chairman post from his previous role as head of fixed income.

And in that job, he was responsible for one of the biggest rounds of layoffs that the fixed income trading industry has ever seen.  In late 2015 and early 2016, 25% of Morgan Stanley fixed income traders were fired, as Pick reacted to poor conditions, tight spreads and the growth of electronic trading. 

In fairness, it was also one of the most successful rounds of layoffs the industry has ever seen; two years later, Morgan Stanley’s new slimmed-down and hungry franchise overtook Goldman Sachs in fixed income trading revenue for the first time since 2011. It turned out that Morgan Stanley's fixed income business had been genuinely overstaffed and full of dead wood; setting up clearer reporting lines and easier communication actually improved morale once the shock had passed.

So kudos to Kellie-Smith for that. His other big skill as a head of fixed income seems to have been to control “slippage”.  This is the market term for the difference between the price a trader sees on the screen when they make a decision, and the price at which the transaction is actually struck.  It depends on a lot of things – system latency, the size of the trade, market conditions, counterparties and plain luck – but it’s almost never favourable, it’s a cost rather than a benefit. 

And controlling slippage is even more important for a hedge fund than it is for a sell side desk – every basis point saved is a basis point that goes into the fund returns.  Although Kellie-Smith is unlikely to have to show off his talents for firing in an institution that’s hiring, it seems likely that Jain Global will want him to reproduce the same magic he showed at MS.

Elsewhere, in the late stages of the Credit Suisse swan dive, a small number of its highest-rolling bankers found an emergency escape pod.  In an attempt to save regulatory capital and investor confidence, it agreed to sell the business of the Structured Products Group to Apollo.  This involved setting up a venture called Atlas, which initially seemed to hire about half the team, and then continued to pick up a few more.

The terms of the Atlas transaction were agreed at a time when Credit Suisse was pretty desperate to do a deal of any sort, and the market consensus was that this showed.  It was a very favourable deal to Apollo, leaving CS on the hook for a lot of continued financing, and requiring them to pay ongoing fees to manage the assets.  Now that UBS has taken over, they are apparently keen to renegotiate.

It’s not clear what there is to negotiate, and UBS is not necessarily in a position to play hardball, as Apollo is still both a big client of the banking side and a supplier of product to the wealth management franchise.  But the good news for the employees is that it appears that they’re concentrating on the amount of the fees rather than trying to reverse the transaction entirely – the lifeboat is not going to be sent back to the iceberg.

Meanwhile …

It can’t be denied that it’s not been a great year for Swiss bank supervision, and now the chief executive of local regulator FINMA has stepped down, citing “high and permanent levels of stress”.  Saves an awkward performance review conversation, at least. (FT)

A complicated case from quant-land – one employee of prop trading firm DRW had personal ownership of some of his software.  He’s now claiming that another quant employed by the firm stole some of his code; the other quant got fired for it, but the software owner is still suing. (Bloomberg)

You’re a “left wing firebrand” at university, you happen to look at a management consultant’s website and see all the do-gooding nonprofit case studies … one thing leads to another, and at the age of 21 you find yourself in a conference room at Riker’s Island pointing to a flipchart and saying you’re ready to “crack some skulls”.  A former McKinsey consultant gives details of the stress, indoctrination and limericks (?) that mould young minds into the corporate culture. (The Nation)

On a similar theme of “maybe the culture of investment banking isn’t all that weird or dysfunctional when you see what it’s compared to”, the chief executive of Disney refused to let his successor take over the CEO office because he enjoyed using its private shower so much. (NY Post)

It’s an ill wind that doesn’t blow somebody some good, and the law firms dealing with crypto collapses have billed over $700m so far. (NYT)

Peter Hornick has left Brevan Howard, as part of a restructuring which means that the investment teams will be responsible for sourcing and recruiting their own top talent rather than leaving it to the business development team. (Business Insider)

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AUTHORSarah Butcher Global Editor

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