Bank backs its gambling stars

SIX high-flying City traders at JP Morgan have talked the US investment bank into giving them the cash to set up their own hedge fund. The team, led by David Gorton, is understood to have threatened to walk out if Morgan did not meet their demands for financial backing.

Gorton and his top traders, reputed to have been bringing in up to $1bn (£650m) a year for the bank, will launch their new venture some time next year. In return for the bank's support, the new, still unnamed, fund will give Morgan a share of its profits and perhaps an equity stake.

They will probably be based in their own London offices, but will also have access to JP Morgan's resources and its institutional customers.

Gorton and his colleagues are experts in the complex but potentially profitable branch of trading in which dealers gamble on highly speculative investment strategies. Such is their expertise that the bank trusts them to place 'bets' using its own money - known as proprietary trading.

Proprietary traders are well rewarded for the profits they make for their banks. Details of Gorton's and his colleagues' salaries have not been revealed, but market sources said they could comfortably expect to earn sixfigure sums each year.

Neither JP Morgan nor the six traders would comment on the move, but sources at the bank played down the amount of revenue the team would bring in. They also insisted that the arrangement was a 'partnership' between Morgan and the traders and was good news for the bank. But it is likely to be seen as a coup for Gorton and his team, and further proof of the power of star traders to dictate terms to their employers.

Instead of having total control over the six traders and their revenue, JP Morgan will now have to settle for a portion of the profits they make.

Hedge funds are increasingly seen as an alternative form of investment by traditional fund managers when stock markets are volatile. However, hedge funds and their ability to control a company's share price have also received heavy criticism. David Prosser, chief executive of insurer Legal & General, a big City investor, wrote to the Financial Services Authority last month complaining that hedge funds can worsen stock market falls.