Alphabet Management LLC, a New York-based hedge fund that uses options to bet on the volatility of stocks and other assets, promoted Nelson Saiers to chief investment officer eight months after he joined the firm.
Saiers, 36, helped the fund post a 26 percent gain last year and increase assets under management to $275 million from $110 million at the start of 2010, according to Jason Adler, the fund’s founder and managing member. Saiers joined from Deutsche Bank AG in July as a head portfolio manager, overseeing a team of eight traders, programmers and quantitative analysts at the 34-person firm.
“He’s made us a much stronger company,” said Adler, 39, who started the firm in October 2007 with $11 million. “He’s enhanced our quantitative modeling, which helps make us more profitable.”
Alphabet’s strategy of betting on stocks’ volatility rather than their direction means that the fund’s results aren’t correlated to moves in other assets, Adler said. Its gain last year compares with a 2 percent loss for the Newedge Volatility Trading Index of 10 options hedge funds. Hedge funds globally gained 9.8 percent last year, according to data compiled by Bloomberg.
“Investors want uncorrelated investments in the alternative asset-management sector and volatility trading is perceived to be inversely correlated with long-only strategies,” said Adam Zoia, founder and CEO of New York-based investment management recruiter Glocap Search LLC. “That makes it more of a true hedge compared to, say, stock-picking hedge fund strategies.”
Saiers and his team use derivatives including exchange-traded options to bet that volatility levels for stocks and other assets worldwide are too high or low in relation to each other. The fund uses its own pricing models to monitor options markets and make trades, according to a letter to investors last month.
“The portfolio could be considered to be market agnostic, with no predetermined directional bias,” Alphabet said in the letter. “Thus, it is expected that the returns generated by the fund will generally be uncorrelated to traditional benchmarks, including stock indices and credit spreads.”
Saiers was a managing director for proprietary derivatives trading at Deutsche Bank before joining Alphabet. He worked at Germany’s biggest lender in New York for three years and previously held trading positions at UBS AG and Susquehanna International Group LLP. He earned his doctorate in math from the University of Virginia, in Charlottesville, at 23.
“Alphabet’s returns for 2010 were the strongest among dedicated volatility funds in what was, in general, a difficult year for these strategies,” said James Skeggs, London-based head of research at Newedge’s prime brokerage business. The Newedge Volatility Trading Index tracks returns for 10 volatility hedge funds, not including Alphabet.
Adler created Alphabet by transforming his former firm, Geronimo LLC, an options market maker that he founded in 2001, into a hedge fund.
Alphabet’s gain last year helped boost returns since its October 2007 inception to 113 percent, according to a marketing document. The S&P 500 peaked on Oct. 9, 2007, then plunged 57 percent through March 2009 as the credit crisis wiped out $37 trillion in stock market capitalization worldwide.
As stocks rallied, some volatility funds closed, merged or lost money. Artradis Fund Management Pte, whose Singapore-based hedge funds made $2.7 billion in profits for investors as markets see-sawed in 2007 and 2008, is closing after losing money from wagers on price swings in the last two years. New York-based Vicis Capital LLC is returning money to investors, according to a person familiar with the matter, who asked . AM Investment Partners LLC and BAM Capital LLC, both New York-based volatility funds, combined a year ago.
Bets on rising volatility lost as the benchmark index for U.S. stock options slumped 18 percent last year and fell to a three-year low in December. The VIX, as the Chicago Board of Options Exchange Volatility Index is known, is down by more than half from a May 2010 peak of 45.79 and has averaged 17.86 this year, 12 percent below its two-decade average. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which this month began the third year of its biggest rally since 1955.