Phalanx Capital Management LLC is a Chicago-based hedge fund firm running approximately USD93million in AUM. The firm manages a market neutral volatility multi-strategy fund that invests in Japan, Asia ex-Japan and Australian markets; launched in April 2005, it currently has around USD56million in AUM.
Christopher S McGuire (pictuured), CEO and CIO, manages the trading of the Japanese and Asian portfolio. Prior to establishing Phalanx, McGuire managed the Japanese multi-strategy portfolio for Daiwa Securities America. McGuire has over 17 years experience in the Japanese and Asian markets. Masahide Hoshi is senior portfolio manager and operates out of Phalanx’s Hong Kong office.
The investment strategy aims to generate uncorrelated absolute returns by utilising a variety of volatility and arbitrage trading strategies, at the same maintaining a flexible approach with respect to asset allocation. All strategies are fully integrated to allow the investment team to react quickly to market conditions and dynamically allocate risk capital to an asset class that provides the best risk/return profile at any given time.
This multi-disciplinary approach allows the firm to move quickly to exploit new opportunities as they arise and avoid strategy categories when no advantage is perceived.
The fund is weighted 80% towards Japan, 20% towards Asia ex-Japan. It attempts to extract alpha from convertible bonds, volatility and opportunistic strategies.
Despite various macro events in 2011 like Libya, the tsunami in Japan and the US credit ratings downgrade, McGuire notes that equity market volatility “remained relatively low for most of the year”. “In my opinion, hedge funds should welcome volatility, which often comes from falling equity markets, and produce positive returns for their investors. Dislocations never actually blew out to extreme levels, says McGuire: “The year was, and continues to be, a true ‘traders market’.”
The types of instruments Phalanx trades in convertible arbitrage strategies include asset swaps, CDS, capital structure arbitrage and distressed convertible bonds. For volatility arbitrage it uses correlation/dispersion and classic arbitrage with a CB risk overlay. Opportunistic opportunities include the likes of IPO and equity offerings and event-driven.
With investors paying closer attention to the overall robustness of hedge funds, Phalanx places strong focus on operational risk. At least one independent position tracking system is used to monitor trade execution systems so as to both guard against fat tail events and profit from them.
McGuire confirms that volatility and convertible arbitrage – the fund’s core strategies – both performed positively last year, even though, apart from seven days of volatile trading following the Japanese earthquake, the first half of the year “remained void of volatility”. “The peril that existed in Japan created tremendous opportunities for Phalanx due to heightened volatility. The volatility in August to October produced three months of positive returns which were welcomed by our investors,” confirms McGuire.
Hedge funds continue to use low leverage in response to the risk on/risk off mentality in 2012 but as McGuire states: “We’ve seen spectacular market moves offering tremendous opportunities for the Phalanx market neutral volatility arbitrage strategy. Heightened prices in implied volatility and CDS spreads are presenting extraordinary relative value opportunities in options pricing. We are bullish about our prospects for the second half of the year.”
On winning the award, McGuire comments: “We are grateful to be recognised by the Hedgeweek readership, for three years in a row, for our accomplishments in performance. We attribute our success to the uncorrelated year-on-year returns, extremely low downside volatility, and continual positive performan