American Express is preparing to launch a pair of hedge funds--with a total target size of USD1.5 billion--that will make heavy use of derivatives. Scott Nelson, alternative investment funds manager in Minneapolis, said it plans a European equity long/short market neutral and a high-yield distressed debt arbitrage fund. The high-yield fund will have a bias toward the U.S. but a global mandate. "The use of derivatives [will be] extensive." The funds will use derivatives, such as longer-dated puts and calls, to manage the risk/return profile. Nelson declined comment on the timing of the move.
Nelson added when possible the funds will opt to use listed derivatives because there is less counterparty credit risk and the options are cheaper than their over-the-counter equivalents. He declined to name counterparties that American Express uses, but noted the firm has relationships with many of the largest and best-known counterparties.
The European fund will close at USD500 million and the high-yield fund will close at USD1 billion, in order to remain sufficiently nimble to take advantage of market opportunities. Nelson predicts these levels will be reached within the next 18 months. Amex will pitch the funds to institutional investors worldwide.
