Market-making hedge fund ups size and mulls credit debut

London-based hedge fund Algometrics is aiming to raise a further $100 million by October 2002 for its existing equity fund and is eyeing a move into credit derivatives.

The $30 million fund acts as a liquidity provider in cash and derivatives equity markets. The global fund seeks to exploit stock and index option markets where there are inefficiencies and large spreads.

Algometrics' global fund was soft-launched early in 2001, but market conditions were not 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 hedge fund is seeking the further investment from institutional investors, funds-of-funds and ultra-high-net-worth individuals. Smith declined to comment explicitly on the fund’s returns, but said performance has been relatively good.

Algometrics claims to 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," he said. "Having proprietary short-term price forecasting allows us to obtain a weak price determinism - giving us an advantage.”

Meanwhile, Algometrics is hoping to launch a credit fund by the end of 2002, Smith said. The fund will follow a credit arbitrage strategy, with 40% of its allocation in credit derivatives. “It’s unlikely we will launch with less than $100 million of capital," he added. "This will give us a book size of around $1 billion."