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Derivatives

U.S. Hedge Fund Launch Likely To Employ Equity Options

New York-based hedge fund manager L-R Managers will likely purchase puts and calls in its soon-to-be-launched L-R Global Fund, a global value equity hedge fund. The fund, which is expected to launch with approximately USD70-75 million in assets, will operate as an analogue to the firm's L-R Global Partners fund. The latter has over USD115 million in assets, and will continue to be managed separately, explained J. Murray Logan, managing partner. As with the firm's existing fund, L-R Global Fund will primarily use equity derivatives, such as the purchase of out-of-the-money puts and calls with short expiry dates, as protection against any anticipated dramatic market falls. The instruments will also be considered as investments, he added.

L-R Global Partners made significant profits last year by purchasing puts on the Standard & Poor's 500, Logan explained. Last year L-R decided the index had considerable downside risk and between March and April bought five tranches of puts struck at 900 when the index closed at around 1,130. L-R started to sell these when the Chicago Board Options Exchange's volatility index (VIX), which measures the implied volatility of 30-day index options, rose into the high thirtieth percentile. The last tranche of the puts was sold in July, when the VIX hit 57%, with the firm taking strong profits, Logan noted.

The fund uses JPMorgan as its custodian but does not have a prime broker. L-R will select derivatives counterparties according to several criteria, including price and service, Logan said.

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