Two traders, among at least 6 traders who left Goldman Sachs' biggest proprietary trading group in the past 2 years have had an unexpected run.  They succeeded in raising more than $4.5 billion for their own hedge funds, helped by the experience of having worked at what once was Wall Street's most profit securities firm.  Goldman has since closed down the prop desk in anticipation of new U.S. regulations. "Past Performance in No Indication of Future Performance." But since then, the traders, Pierre-Henri Flamand and Morgan Sze have made no money for their clients.  Two others, Daniele Benatoff and Ariel Roskis trailed this year’s stock market rally after losing money in 2011.  Elif Aktug, who quit Goldman in 2011, plans to start managing money for outside clients at her Agora Fund Ltd. in May.

"In spite of their pedigree, many ex-Goldman prop traders have found it much harder than they originally thought to make money," said Matias Ringel, who heads research at NY-based EFG Asset Management.

Factors Attributing to the Disappointing Results. First, poor timing led to the slow start for the Goldman Sachs diaspora as the European sovereign-debt crisis and a fragile economic recovery in the U.S. dominated global markets.  Another obstacle relates to the differences between trading at a bank, with its extensive research, technology and compliance operations, and running a hedge fund where clients pay top fees and are less tolerant of risk.

[C-I Note: No doubt, the traders had "less skin in the game," while at Goldman, which probably enabled them to acquire riskier investments while taking on greater leverage - when the markets move in their favor, then their performance numbers soar.  The later markets may not have been as well suited to their investment styles and strategies as in the past.]

Hedge funds as a group have trailed returns of U.S. stocks every year since the end of 2008, making investors more selective where they put their money.

Flamand’s DAX Bet. Take, for example, Flamand, 41, who was the global chief of Goldman Sachs’s principal strategies group before quitting 2 years ago to start Edoma Capital Partners LLP in London.  He's lost about 2.4% through February since his $1.8 billion hedge fund started in November 2010, according to investors.

Edoma is an event-driven fund, which invests in companies undergoing events such as mergers, spinoffs and bankruptcies.  Such funds returned an average 4% in the same 16-month period, while all hedge funds gained 2.6%, according to Chicago-based Hedge Fund Research.  The MSCI World Index of developed-country equities returned 10%, including dividends.

Flamand, who hired former colleagues including Ali Hedayat, struggled in 2011 like other managers over concerns of defaults on Greek debt.  His fund started November betting that the DAX Index of German companies would rise as a result of the European crisis easing, according to a letter sent to clients that month.  The bet failed when European leaders said on 11/2 /11 that Greece may have to leave the euro, leaving Flamand with losses in the first two weeks of the month.

[Note to Readers: To read about the experiences of other traders, click on the below-listed referenced story link.]

'Your Real Friends'. "I’ve spoken to Goldman traders who’ve told me they have a network across the street and the world," said Larry Chiarello, a partner SkyView Investment Advisors LLC in Shrewsbury, NJ, which places money with hedge funds.  "When you are at Goldman sitting on a $10 billion prop desk, everyone is your friend. When you are on your own at a hedge fund, you find out who your real friends are."  And you find out that your name is associated with high expectations - though, how could they not know that investors would expect outsized expectations.

Click to access the referenced story:  [Bloomberg, 3/27/12].