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May 15, 2019  

First New York Building Hedge Fund Business

Proprietary-trading shop First New York is taking another stab at launching a hedge fund.

The firm, whose 125 internal and external portfolio managers run a little more than $3 billion of gross assets, envisions a multi-strategy vehicle that largely would mirror its prop-trading portfolio. Since the 1980s, First New York has earned mostly double-digit returns, with low net exposure and little volatility.

The New York firm plans to begin trading the FNY Total Return Fund in the second half, seeding it with $200 million of gross assets. It then would spend some time developing a track record while marketing the vehicle to outside investors.

Concurrently, First New York is working on an unusual plan to raise fresh investment capital by issuing about $50 million of corporate bonds. It obtained a “BBB-” corporate rating from Kroll last year, and recently discussed the deal with prospective underwriters. The proceeds, with leverage, would be used in part to stake additional portfolio managers.

First New York currently allocates to about 100 in-house portfolio managers, while also deploying capital to about 25 external managers via separate accounts. The prop-trading operation invests globally in stocks and equity indexes; government and corporate bonds; and macro instruments including commodity futures, currencies and interest-rate derivatives.

First New York has long sought to diversify its business by starting a fund-management operation. In 2011, it lined up $500 million of outside capital for a hedge fund that it planned to launch with an equal amount of proprietary capital, Hedge Fund Alert reported at the time. But the fund never got off the ground, and the firm’s chief executive left shortly thereafter.

One problem with the earlier attempt, a source said, was that First New York tried to raise the capital in its capacity as a broker-dealer. It is now registered with the SEC as an investment advisor under the name FNY Asset Management.

Assuming First New York pulls the trigger on its planned fund launch this time around, it would follow in the footsteps of Schonfeld Group, a prop-trading operation that in 2015 launched a multi-strategy vehicle via its Schonfeld Strategic Advisors unit. The initiative has paid off for Schonfeld, which now runs $2.3 billion of outside capital in the multi-strategy fund and a separate equity-trading vehicle.

First New York has helped several portfolio managers spin off as free-standing operations in recent years. They include David Nguyen and Nancy Oh, who were running $104 million of gross assets at yearend via their One68 Global; Brook Bennett and Faraz Noorani, whose Aecor Capital had $101 million of gross assets at yearend; and a team led by Lawrence Fox and Ross Jackman, who launched Old Orchard Capital in 2014 and now run about $1.3 billion of gross assets.

First New York is led by chief executive Donald Motschwiller, who has been with the firm since 2004 save for a three-year hiatus ending in 2013. The firm was founded in 1986 by Donald Erenberg and Michael “Mickey” Friedman, who no longer are involved in day-to-day operations.

Motschwiller has been talking to outside investors that might want to acquire a minority stake in First New York, which rejected an offer earlier this year.