Lion Capital Group plans to launch a long/short equity hedge fund that will use over-the-counter derivatives. Markus Jordi-da Costa, managing partner in Zurich, said the fund will use calls, puts and basket options when it launches in February. It will typically use derivatives to short a stock or a basket of stocks. For example, if it thinks the share price of a sector of stocks is going to fall it will buy a put on a basket of stocks in that sector.
The fund will have a maximum leverage of 2:1 and aims to return 7.5-10% over the Standard & Poor's 500 a year. The hedge fund will invest in U.S. blue chip stocks. It expects to make a profit even if the index goes down because it can short sell as well as buy stocks.
Jordi-da Costa said that when possible it will opt for listed options because there is no counterparty risk. But if there are no liquid listed markets for options on a stock, it will use the OTC market. He noted that it will only trade OTC options with counterparties rated single-A or above.
