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Portfolio > Economy & Markets > Fixed Income

Appleton Plans Fixed-Income Arb Fund

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DUBLIN, Ireland (–Appleton Capital Management is planning to launch a fixed-income arbitrage fund on Sept. 2, the first non-futures hedge fund strategy to be open to outside investors at the firm, which until now has focused primarily on currency programs.

The Cayman-based Appleton Fixed-Income Opportunities Fund will run by Stephen Lane, formerly a fixed-income prop-desk trader at ABN AMRO. A discretionary trading fund, it will aim for mild double-digit returns combined with intensive risk management to keep portfolio volatility firmly in check. It will be U.S. Dollar denominated with a standard fee structure of 1% and 20% with a minimum investment of US$500,000.

“This may be the first hedge fund of its kind from Appleton, but what we can bring to the strategy is risk-management expertise from a portfolio perspective,” said Appleton’s Jeremy O’Friel. “Of course, fixed-income is not the same as our systematic currencies program so the actual approach will be different. But the goal is to bring the same high-level of risk management that we’ve become known for,” he said. He thinks the new fund will have the strongest appeal among high-net-worth investors and funds of funds.

David Walsh, managing director at Appleton, will be providing general risk management oversight.

In order to make the strategy more appealing to conservative investors, the new Appleton arb fund likely will be steering clear of the junk bond and high-yield area entirely. Portfolio picks are expected to be made from investment-grade names. The fund will focus on pairs trading based on a relative value.

Appleton, which currently oversees assets of about US$105 million, is expecting to raise a modest US$15 million to seed the fund. The firm is expecting a gradual build up of assets that would hit the US$50 million mark sometime next year. The eventual goal would be to bring the fund to the US$300 million range before possibly capping it.

Relatively high levels of liquidity within the investment-grade sector of the fixed-income market would make capacity less of an issue than it might for other types of hedge funds, according to Mr. O’Friel.

Funds on the Horizon

The new hedge fund strategy comes as Appleton is looking to broaden the number of alternative products it runs. “Over the last two years, we’ve fielded only two new funds as compared to other shops that have started funds much more frequently. In our case, we are looking to grow strategically and not just put a new strategy out there for its own sake. I think investors are able to recognize the difference,” Mr. O’Friel said.

Still, Appleton is looking to gradually grow its menu of alternatives open to outside investors. Mr. O’Friel said as many as three new funds could be in the pipeline at Appleton.

Appleton Capital Management was formed in late 2000 with the acquisition of the currencies-focused Gaiacorp by South Africa’s Appleton Group. The Appleton alternative group is registered with the Central Bank of Ireland.


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