Hedge fund moves into market-making

Many equity hedge funds have taken a battering on the stock markets over the past year. Algometrics' global fund was soft-launched around a year ago, but market conditions have not been conducive to obtaining good returns. “We trade cash, exchange-traded and over-the-counter options, and made the decision, at the start of 2002, to shift the emphasis towards becoming a liquidity provider,” said Stephen Smith, managing director of Algometrics.

The global fund plans to exploit stock and index option markets where there are inefficiencies and large spreads. The focus will be on Europe and the US, said Smith, but activity in Asian markets would also be a natural development, given that Algometrics is part-owned by GK Goh – a large Singapore stock brokerage.

The fund could have an edge in market-making because of its expertise in modelling short-term price and volatility behaviour, said Smith. “Most of us here have a background in statistical arbitrage. Having proprietary short-term price forecasting allows us to obtain a weak price determinism - giving us an advantage,” he claimed.

The fund has a market capitalisation of $33 million and is seeking investors to bring it up to around the $500 million mark.