In today’s volatile market, the smart thing might be to take advantage of volatility instead of waiting for calmer waters. Mariner Investments Group, a $10 billion alternative asset manager based in New York, recently set up a multi-strategy incubation fund to be managed by leading investment talent. Its strategy is keeping an eye on volatility.
The firm has tapped Eric Pellicciaro, former head of global rates investments at BlackRock, and Richard Rumble, former head of global emerging market equity prop trading at Goldman Sachs. Pellicciaro is managing a global macro portfolio, while Rumble is managing a global emerging market equity portfolio.
The portfolios have initial investments ranging from $50 million to $100 million.
Most recently, the firm tapped Peter van Dooijeweert, the former head of equity relative value trading at Citigroup, to run a global equity volatility portfolio, which launched in late July.
Mariner decided to invest in an equity volatility strategy because it sees benefits from increased volatility without the huge premiums of tail risk hedges. “About two years ago, tail hedging was all the rage, and what we’ve had since then is a very strong rally. And suddenly the tail hedges you thought were nice sure just look like excessive life insurance,” said Van Dooijeweert.
Both Mariner and Van Dooijeweert expect the markets to become more volatile as the U.S. Federal Reserve begins to remove the accommodations it had put in place following the credit crisis of 2008. That will means “no more quantitative easing, no outright stimulus support, no stimulus from the federal government,” Van Dooijeweert said. “There are a lot of forms of supports to the equity market that are going to be going away.”
Equity volatility trading is designed to take advantage of dislocations in the market among options, said Van Dooijeweert. The new fund will look for things that its traders think are either fundamentally mispriced or mispriced from a model. Once this discovery is made, Mariner will pounce. “The more erratic the market is, the more opportunity we see,” he said.
Van Dooijeweert is targeting returns of between 10 to 12 percent that are not correlated to the broader market. That means if some investor has invested in credit and equities and those asset classes suffer a steep drop, if they are also invested in an equity volatility strategy, it delivers a form of hedge without the premium of tail hedge fund, he explained.
When making decisions about portfolio managers and strategies, Mariner is looking for talent that has left the investment banks and to allocate where the banks aren’t allocating capital any longer. “We have seen the investment banks step back from the options market, which means that the dislocations within the options markets should be increasing,” said Van Dooijeweert. “That is consistent with the goal of this platform, which is to look for opportunities not to just hire good teams but to put capital to work in places capital is no longer being put to work.”
The portfolio trades listed options or what the portfolio managers call “extremely liquid” products. There are 3,000 underlyings including stocks and indices, according to Van Dooijeweert. The Mariner portfolio tends to trade the more liquid ones, therefore it may only look at 1,500, he said, adding, “There’s a lot of stuff to look at.”
The new strategy is model-based, with such factors as companies that are more levered, with a bet that it might have trouble in the future. He also looks for earnings stream issues and other macro headwinds such as the possibility of European government bonds collapsing or the Fed tapers. Micro issues like earnings momentum and trends of the companies are other factors, as well as event-driven exposures.
The firm uses a proprietary model for picking single stocks. Van Dooijeweert said that it is not a black box that sits in the corner while he is on vacation and will reveal the results when he returns. Typically, he trades electronically and will often be involved with six or seven stocks at a time. He uses prime broker’s pipe and does some trading with the dealer community.
Van Dooijeweert looks at trading positions in Vega terms when deciding how much to buy or sell, he said. Vega is the measurement of an option’s sensitivity to changes in the volatility of the underlying asset. “Vega is the most relevant metric for what we do,” he said.
