HFR CA Phalanx Fund is a separately managed trust on the HFR Asset Management, LLC managed accounts platform (“HFR Platform”). Trading manager, Phalanx Capital Management LLC (“Phalanx”) is a Chicago-based hedge fund firm running approximately USD110 million in AUM as of 1 June, 2013.
Christopher McGuire, CEO and CIO of Phalanx, with over 19 years of experience in the Japanese and Asian markets, is also the head trader for the Japanese and Asian portfolio. Prior to establishing Phalanx, McGuire managed the Japanese multi-strategy portfolio for Daiwa Securities America.
According to Daniel Farrell, Managing Director of Marketing and Investor Relations, the strategy “…acquire(s) cheap implied volatility either through convertible bonds and listed or OTC equity options. Predominantly, we express our ideas through Japanese convertibles for three reasons: 1) the Japanese convertible bond market has fewer participants than other markets, 2) relative to western markets, Japan tends to have more volatility, and 3) the unique ability to hedge credit via Asset Swaps.”
As a market neutral strategy, the fund looks to make money regardless of direction by creating a strangle on the market which consists primarily of two types of positions: deep ‘in-the-money’ convertible bonds trading one-for-one with the equity, creating a synthetic put, and deep ‘out-of-the-money’ convertibles with a low premium relative to the equity, acting as a synthetic call.
Given the rebound that Japan has enjoyed in its equity markets, Farrell says that there have been “tremendous opportunities” for the strategy over the last 8 months: “Our synthetic calls have benefited from the rise in valuations and in extreme cases former deep out-of-the-money convertibles are now deep in-the-money; certain stock prices have tripled since November.”
Almost two years ago, Phalanx partnered with Chicago based HFR Asset Management, LLC (“HFRAM”) to launch a fund on the HFR Platform. According to Phalanx, this has resulted in a number of benefits, not least of which has been access to a wider selection of investors who appreciate the platform’s transparency.
“Investors like the liquidity that the fund offers by being on the HFR Platform, that otherwise would not be available to them. They take comfort in that. Partnering with HFRAM has given us access to investors we would not otherwise have,” stated Farrell.
Tom Sass, Managing Director, at HFRAM says that the HFR Phalanx Fund is a perfect example of how the HFR Platform creates mutually beneficial relationships with trading managers and investors.
“Our platform leverages the HFR market leading industry database to give us access to the best managers. By combining the market expertise of trading managers such as Phalanx, our platform’s operational structure and strong risk management results in a compelling investment opportunity,” says Sass.
The HFR Platform provides a number of separately managed accounts and investable indices representative of the broad hedge fund industry. On a daily basis, each portfolio is reconstructed from individual trades. The trade import and reconciliation process provides an operational structure that allows the HFR Platform to monitor investment guidelines and conduct robust risk analysis.
“With position transparency, investors can see the P&L pattern of a fund, understand the drivers of performance and integrate that across the rest of their portfolio, allowing them to aggregate risk as well as performance for the portfolio. The platform’s transparency and liquidity (weekly or monthly) gives investors precision and flexibility.”
Tom Sass and Dan Farrell would like to thank the readers of HedgeWeek for voting the HFR CA Phalanx Fund as the Best Relative Value Convertible Bond Strategy, “it is an honour to be elected by your peers, who understand the challenges markets have provided in the last year.”