Wed, 01/12/2004 - 06:07
Magnum Global Investments Ltd. and GP Asset Management LLC are sponsoring a long/short US equity fund which launches on 1 December.
The fund, which uses diversification and options hedging to enhance its risk management, will be available to non-U.S. investors and U.S. tax-exempt investors.
The Chaparral Offshore Fund seeks to profit by identifying both the strongest and weakest industries and then taking long and short positions in those industries based on extensive fundamental analysis. Diversification and liquidity are emphasized, with more than 50 positions in the portfolio when fully invested, the vast majority of which trade in excess of 1 million shares a day. On the short side, the fund focuses on exchange traded funds (ETFs), also providing liquidity and diversifying against risk.
The fund utilises an options strategy aimed at reducing volatility and smoothing the equity curve for investors. It uses covered calls and puts, with typically one-month expiration, to capture premium, while using naked puts and calls as a hedge, leaving the fund 65-70% delta neutral.
This strategy, which is up 28% in its 24 months since inception with an annualized standard deviation of 5.75%, has been profitable in 83% of the months, compared to the S&P 500, which had losses in 33% of the months during the same period.
"Due to our low standard deviation, our Value at Risk suggests there is a 1% chance that a monthly drawdown will be equal to or be greater than 2.75%," said co-manager Thomas E. Hayden. "We use our VaR as a stop loss mechanism for the portfolio. If we experience a drawdown that exceeds 3% in a month we would begin to dramatically lessen our market exposure and raise cash levels."
Hayden has been a Nasdaq market maker for 12 years. He co-manages the fund with Bruce Schmidt, a chartered financial analyst (CFA) who was part of the investment management teams for several American Century funds (including the Ultra Fund with current assets in excess USD 25 billion) from 1990 to 1997. Dr. Thomas L. Hayden, who has been a professor of mathematics at the University of Kentucky since 1962 and the recipient of four National Science Foundation grants, provides the quantitative analytics and risk management for the fund.
On the long side, the fund looks for companies with both value and growth characteristics. These include companies with income statements leveraged so that a majority of incremental revenue growth falls to the bottom line; with P/E multiples at a discount to the growth of the company; and with products that hold their margins as they mature through their cycle.
On the short side, the fund looks at negative operating leverage, event risk, poor industry comparables/positions, lacking of pricing power, and negative earnings per share revisions. In addition, the fund applies a "torpedo ratio," actively searching for companies whose receivables and inventories are accelerating at a rate greater than revenues.
Proprietary technical models help pinpoint entry and exit points.
The fund is sponsored by Magnum Global Investments, which was founded in April 1994 by its chairman, Dion Friedland, past president of the Hedge Fund Association, and specializes in identifying and partnering with leading hedge fund managers and strategies.
GP Asset Management, which jointly sponsors the fund, aims to create and distributes "best-in-class" alternative investment products that deliver consistent risk-adjusted returns across all market conditions. Since 1987 GPAM has worked on recognizing and cultivating exceptional trading talent, allowing the company today to serve as a bridge between seasoned and start-up hedge fund managers and new sources of investment capital.
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