Algometrics, a London-based hedge fund, is seeking to raise up to USD500 million for a flagship equity fund that will trade over-the-counter equity derivatives. The global statistical arbitrage fund will invest in cash equities as well as exchange and OTC-traded equity derivatives, said Stephen Smith, managing director. The fund, which currently has USD30 million in private capital, will also act as an options market maker. Smith believes this will give investors a unique opportunity to take on exposure to market-making profits. The only other way they could achieve this is through buying shares in securities houses, which typically entails taking on exposure to other businesses.
Smith said the fund's sellside role creates a particularly attractive investment now, as investment banks focus more closely on their risks in the wake of Sept. 11 and spreads remain wide. "Dealers are concerned with taking risk, but our mandate is risk and we are paid to take it," he noted. Because of a reliance on electronic trading, market making will occur mainly in exchange-traded options but he said it will also act as a liquidity provider in the OTC markets.
Smith said roughly 30% of the fund's assets will be used for market making in equity options. He added the fund deals with all the major investment banks and would select counterparties from a pool of 50-60 banks. The fund manager follows the credit default swap market and might get involved at some point as a liquidity provider because of the wide spreads.
