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Portfolio > Alternative Investments > Hedge Funds

Options-Based Strategy

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BURNSVILLE, Minn. (–You don’t have to be a rocket scientist to build a hedge fund portfolio, but it surely doesn’t hurt–especially when your chosen investment methodology is options-based and reliant on complex quantitatively driven trading models.

That’s according to former aerospace engineer turned portfolio manager Alan Bohlig, who has been running a friends and family fund for six years but only recently formalized his hedge fund efforts with the creation of Alterity Capital Management.

Alterity Capital Management, whose name is an amalgam of the words “alternative” and “integrity” is the brainchild of Mr. Bohlig and his business partner Christopher Shaw, former broker and information technology specialist.

“It was a natural evolution. It really all started with family and personal money, but over time I realized that I had something that really worked well and presented a real business opportunity, which is how Alterity came about,” Mr. Bohlig said.

The firm recently opened its Strategic Investment Fund LP to outside investors. And although the formalized fund structure itself is new, its options-based trading strategy traces its lineage directly to the personal portfolio that Mr. Bohlig has been trading for years. “We think the fact that it’s an options-based strategy makes it distinct. Of the 6,000 or so hedge funds out there, we estimated that there are only about 100 people running options-based hedge fund strategies,” Mr. Shaw said.

Quantitative Focus

That options strategies are a relative rarity among the hedge funds might be explained by the fact that it takes a person with a strong quantitative and technical background to construct an options-based portfolio vs. one that places bets on equities in a long/short format using straight fundamental research. Mr. Bohlig’s multi-disciplinary background in engineering and investing made it possible for Alterity to create its options-trading models, according to Mr. Shaw.

Alterity’s investment style is one that Mr. Bohlig describes as “relative value using options.” The options themselves are targeted at highly liquid U.S. large caps with the derivatives being used to capture alpha on both the upside and downside.

Another advantage of tapping options is their inherent ability to be used to minimize drawdowns for individual positions, a feature that helps keep overall portfolio volatility in check, according to Mr. Bohlig.

And, the firm’s principals say they believe in the strategy enough to have invested all of their liquid assets in the fund alongside that of investors.

The fund’s fee structure is based on the standard 1% and 20% with a sliding scale that favors big allocators. The minimum investment for charter investors is US$250,000, but Alterity anticipates raising the bar in the near future to optimize the number of qualified investors that will be able to participate.

The U.S.-based hedge fund’s prime broker is Bear Stearns and PriceWaterhouseCoopers is the auditor.

A structure for an offshore version of the fund has already been put in place to position Alterity to open to non-U.S. investors in the near future.

“Our initial goal was to raise assets to bring the fund to US$25 million by the end of the year, but we’re running ahead of those projections already,” Mr. Shaw said.

The hedge fund group plans to reassess the fund’s capacity, when it hits the US$100 million mark. In the meantime, interest in the options strategy has come from both high-net-worth and institutional investors.

Mr. Shaw admits there are not a lot of hedge funds being run in and around the Twin Cities “What that means is that the private wealth market here is far from saturated with alternatives. But it also means that our initial efforts have to be focused on investor education to really explain how hedge funds can be used to diversify a portfolio. We had one individual come in with a nine-figure portfolio, for instance, who really didn’t know what a hedge fund was–so you have to start from square one,” Mr. Shaw said.