Discovery Capital Management, with USD900 million under management, is considering launching a second hedge fund, which would be a multi-strategy product and use more derivatives than its existing fund. Harry Krensky, co-manager of the Discovery Global Opportunity Fund, said the new fund may include strategies such as long/short equity, macro, model and discretionary trading as well as invest in emerging markets.
The existing USD450 million emerging market macro hedge fund uses interest-rate futures and options, foreign exchange forwards and credit-default swaps, Krensky said, adding that the new fund would have the mandate to use those instruments as well. Where it would differ, however, is that the existing fund only buys equity options, whereas in the new vehicle Discovery would consider selling volatility as well.
Krensky said the second fund will look at buying out-of-the money equity puts when the fund managers believe volatility is mispriced. Although company blowups are not typical or frequent, the fund will try to identify companies where there is a credit risk, but the options are not pricing-in that risk. Another strategy would be selling single-stock call options on a basket of correlated individual stocks while buying puts on the same stock index. In this case, Krensky said a manager can get paid some volatility without taking on much more additional risk.
The firm is looking seriously at the idea of launching the new fund within the next three to four months. He added that it is too early to talk about the size of the fund or any other specific details.
