New York Quant Launches Correlation Fund

Marco Avellaneda, director of financial mathematics at New York University, is launching a systematic volatility arbitrage fund in Paris, which is believed to be the first fund set up purely to extract correlation through quantitative techniques. Avellaneda confirmed he is setting up the fund, dubbed Nimbus, for Capital Fund Management, which has some USD900 million under management in managed futures and long/short statistical arbitrage. The fund will launch in July and aims to have over USD50 million under management by year-end.

"You could make a lot of money from doing this," said a market official, noting that "[Wall] Street is massively one-sided in terms of correlation exposure." Equity derivatives professionals started looking at this strategy area earlier this year in an attempt to exploit inefficiencies in the volatility markets (DW, 2/1 www.derivativesweek.com).

Avellaneda is not the kind of quant to stay in an academic ivory tower. He spent two years as a quantitative researcher in the derivatives product group at Morgan Stanley and also worked for Banque Indosuez New York, noted one hedge fund professional. Emanuel Derman, director of the financial engineering program at Columbia University and risk advisor to Prisma Capital Management, said Avellaneda is one of the few top-level academics who has good links with practitioners. He added, "He is a smart guy. He brings intuition and mathematics."

Avellaneda's background is in mathematical modeling of financial markets and econometrics. He has written papers on advanced probability modeling and stock pinning, a technique involving selling options in large quantities which forces market makers on the other side of the trades to sell stock when the market goes up and buy when the market goes down. The end result is the stock becomes range-bound. It is not yet known whether Capital Fund Management will use these techniques.