BNP Paribas is looking to offload its single-stock event exposure by setting up a hedge fund. In turn it is seeking to lure traditional asset managers to invest in the fund.
Hedge funds buy up single stock volatility and sell index volatility. This is known as dispersion trading. But the universe of funds running this strategy is limited and every dealer on the Street with a retail structured products business is looking to sell to the same funds. The French firm is looking to get around this by setting up a dispersion-trading fund in Paris.
BNP dominates the U.S. equity dispersion market, with rivals estimating it is behind 80% of trades. Pascal Leyo, head of equities and derivatives trading in New York, declined all comment.
"This seems to be really just another way of organizing the trading book," sniffed one volatility hedge fund manager. He warned dispersion is a tough strategy to run on its own--most hedge funds run it as part of a broader strategy.
The implicit short-correlation position of the trade--it benefits when single-stock event risk is high and index volatility is low--also means it has not been successful in the last few months.
A BNP official in New York said the fund will target double-digit returns. A rival senior equity volatility trader said BNP Paribas' idea is a clever one, but he questioned whether the firm will find institutional buyers.