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.
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.
The long/short fund will be launched with USD10 million. Jordi-da Costa expects the fund to close when it reaches USD100 million.
Jordi-da Costa said that 50% of Lion Capital Group's clients are high-net-worth individuals and the other half are asset managers. After the poor performance of the equity markets last year, asset managers are seeking better returns, and streaming into hedge funds, he added. High-net-worth investors are growing increasingly dissatisfied with the standardized products offered by banks and are looking at smaller investment vehicles.
