Options portfolio that gained 234% during 2008 financial crisis saw no bump up from calamity in Nippon
36 South Capital Advisors LLP, which closed its Black Swan Fund after it gained 234 percent in 2008, plans a new fund to replicate a strategy that seeks to profit from unforeseen high-impact events.
The London-based hedge fund plans to start the Black Eyrar Fund within the next three months, said Jerry Haworth, co- founder of 36 South. The fund will buy long-dated options it considers cheap in global currency, fixed-income, equities and commodity markets, betting that rare and unforeseen events will generate unusually large profits, Haworth said in an interview.
Option prices soared on concerns that Japan's nuclear crisis after the nation's strongest earthquake, and uprisings in the Middle East and northern Africa will restrain global growth, pushing the Standard & Poor's 500 Index down the most in four months. The crisis in Japan had a “neutral” impact on 36 South's funds, Haworth said.
“It wasn't big enough for all the correlations across asset classes, the volatility of all asset classes, to rise in concert but it was a risk aversion event,” said Haworth, who is based in London. “It certainly wasn't a global black swan event. It didn't contaminate all the financial markets, but certainly it remains a black swan event for Japan.”
A gauge that measures the cost of using options to protect against losses in the S&P 500 surged 22 percent last week, after the biggest three-day jump since May on March 16. The Chicago Board Options Exchange Volatility Index, or VIX, fell 5.2 percent to 19.17 yesterday, compared with a record 80.86 in November 2008 after the collapse of Lehman Brothers Holdings Inc. sent stocks plunging worldwide. The decline in volatility has made it cheaper to buy protection.
Black Eyrar
“Option prices have come back down to the point where we believe it is worthwhile starting a fund,” said Haworth.
Similar to the firm's Black Swan Fund, which bet on risk- aversion events, the Black Eyrar Fund will wager on a decline in equity and commodity prices, interest rates and increased currency volatility, Haworth said. Eyrar is the collective noun for swans.
The firm seeks to raise money for the new fund from mainly family offices, fund of funds and ultra-high-net-worth individuals, he said.
36 South closed the Black Swan Fund in 2009 and returned money to investors after profiting from the global markets rout in 2008.
The funds, whose names refer to a theory developed by Nassim Nicholas Taleb, a professor of risk engineering at New York University, will seek to protect client investments against “black swans,” those highly improbable events that can cause havoc. Taleb wrote a book called “Black Swan: The Impact of the Highly Improbable,” published in May 2007.
More Instability
“There is probably more financial instability in the world than we've ever seen simply because it's so interconnected,” Haworth said.
Assets under management at 36 South have grown by more than six times to about $250 million after the firm moved to London from Auckland in 2009, including $100 million from Reinet Fund SCA, Haworth said.
36 South formed a venture in December with Reinet Fund, wholly owned by Reinet Investments SCA, the investment firm that was spun off in 2008 from Cie. Financiere Richemont SA, owner of the Cartier and Montblanc brands. Reinet has a 49 percent stake in the venture, he said.
36 South's flagship Kohinoor Fund gained about 0.1 percent this month through March 21, he said. Its Cullinan Fund, which bets on “significant inflation” after government efforts to pump money into economies, rose about 4 percent during the same period, Haworth said.
“The stage has been set and inflation is creeping in,” he said. “There are already signs of it in soft commodities.”
Finance ministers from the Group of 20 nations signaled their concern in February that surging commodity costs are driving global inflationary pressures.
--Bloomberg News--
