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Portfolio > Alternative Investments > Hedge Funds

Options Volatility Fund Ready to Emerge from Cocoon

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SAN FRANCISCO ( – A California investment advisory firm will launch two new hedge funds with an options-volatility arbitrage strategy on June 1.

The funds, Trilogy Investment Partners LP (onshore) and Trilogy Investment Fund Ltd. (offshore) are expected to have between US$5 million and US$10 million in seed capital from outside investors by July 1, according to the management firm Trilogy Investment Advisors LP.

“What we’re looking to do is find situations in the marketplace where the implied volatility of an option is either underpriced or overpriced relative to historical volatility,” said Matt Hegarty, a partner in TIA. The difference between historic and implied volatility will be the first screen, although of course it won’t be the end of inquiry. Trilogy will then look for factors that might warrant that difference. If the difference isn’t warranted, then the volatility implied in the present price is too high or too low.

Citco Fund Services will be the administrator of the new fund, Rothstein, Kass & Co., the accountants, and Howard, Rice, Nemerovski, Canady, Falk & Rabin the legal counsel. Its prime broker is Spear, Leeds, Kellogg, New York, a unit of the Goldman Sachs Group. TIA is a registered investment adviser both with the Securities and Exchange Commission and with the state of California.

The funds will launch with US$1 million of the general partners’ money for seed. The partners expect to have between US$5 million and $10 million more from outside investors within a month of launch.

Two of the founders, Mr. Hegarty and Peter Eberle, worked together at Oppenheimer, Noonan, Weiss LLC, a lead market maker of the Pacific Stock Exchange and a specialist in more than 120 securities on the Philadelphia Exchange, until Goldman Sachs acquired Oppenheimer Noonan in 2001. After that, Mr. Eberle as a partner was contractually obligated to remain with Goldman for two years. Mr. Hegarty, without such an obligation, went out on his own.

By February 2003, Mr. Eberle had completed his contractual obligations and was trading his own account. Six months later, Messrs. Eberle and Hegarty and others had begun planning Trilogy and its option-volatility arb strategy. For liquidity reasons, its universe will consist entirely of options on stocks within the S&P 500 stock index or the Nasdaq-100 Index. Allowing for overlap, that amounts to options on 540 stocks.

By way of explaining one of the types of hedging strategies they contemplate, Mr. Hegarty described the “butterfly”–Trilogy might sell call options at a price of US$25, while buying call options at both US$30 and US$20, the wings.

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Contact Robert F. Keane with questions or comments at:

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