Bayou City Capital – Best Equity Market Neutral Fund Manager
Robert Hay (pictured) founded Bayou City Capital LP in November 2000. Both Hay and William Monroe, who joined in 2011, represent the fund’s General Partner, Omni Trading LLC, a registered Commodity Pool Operator and Commodity Trading Advisor with the National Futures Association. Both Hay and Monroe share a background in options trading within the highly volatile energy futures markets.
The Fund’s trading origins lie in a natural gas physical storage option-writing strategy. Over the years, Hay experimented with various asset classes including the S&P 500, natural gas, as well as WTI crude oil futures. It was only in 2004 that the Fund adopted its current S&P 500 Option Overwriting Program, trading the S&P 500 futures market at the Chicago Mercantile Exchange.
The Fund is focused on capital appreciation and is based on two key assumptions:
- Equity markets appreciate in the long term.
- Compared to historical volatility in the equity markets, stock options are overvalued based on the current market volatility their prices imply.
Since inception the trading strategy has delivered a monthly return correlation of 0.49 with respect to the S&P 500. Last year the Fund returned 40 per cent but nevertheless Hay says 2013 presented some unique challenges.
“As part of the short-volatility aspect of our strategy, we sell both calls and puts, and with the S&P 500 up over 30% last year maintaining a delta long book required frequent hedging and a modified thought process from previous years. While we outperformed the S&P 500, our alpha was actually less than that of the long-term record of the Fund.”
Most of the money in Bayou remains friends and family but awards such as Hedgeweek are increasingly putting the fund on the radar screen of different types of investors. Consequently, last year saw Bayou hire a nameplate independent third-party “to manage our mid-office and we now have the capability to report real-time risk compliance to investors,” confirms Hay.
“Our back-office has been an independent third-party since 2006. Independence in these areas is important; implementing industry best practices for both risk and reporting is critical to investor confidence and the long-term growth of the Fund.”
Through May 2014 the fund has returned +14.5 per cent; by comparison the S&P 500 Index is up +5.93 per cent.
“The first five months of this year have certainly demonstrated the merits of the short volatility aspect of the Fund. Given the robust market return over the last several years and the US market’s uncertainty near new highs, we’re somewhat more cautious than normal. For our strategy, that means a slightly lower delta and less vega than might otherwise be considered normal for the Fund,” says Monroe.
“During volatility spikes, we take a proactive stance in futures management. During extreme market panics, we will utilise futures on the VIX as a short-term hedge. This allows the Fund to sidestep the re-pricing of “insurance” (options) in the marketplace, after which the strategy can take advantage of the inflated option premiums. Our trading is rules-based with strict portfolio limits for all of the option Greeks on a unit basis, which have been developed through the crises of the last decade,” explains Monroe.
On winning the award for the second year in succession, Monroe comments: “We’re honored to receive the accolade, and are appreciative towards Hedgeweek’s readership.”