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December 1, 2004

Trading for the Hedge Funds

By Ben Mattlin

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  • Trading for the Hedge Funds

In the last week of October, as the Securities and Exchange Commission

voted to introduce new rules for hedge funds in the U.S., trading veteran Michel Debiche in Princeton, New Jersey, is explaining how these private partnerships can successfully trade where others fear to tread.

"If you throw a bowling ball into the bathtub," says Debiche, "you'll get one big wave moving outward, followed by a second wave back in and then a lot of sloshing back and forth. That's where we make our money. We trade the sloshes."

Debiche, a scholarly fellow with a PhD., is the president, CEO and founder of two-year-old Quantia Capital Management, a small equity-based statistical arbitrage hedge fund.

Debiche learned about index and statistical arbitrage on the proprietary trading desks of CIBC World Markets, Daiwa Securities America, and Credit Suisse First Boston. He worked for these firms for about a decade before coming to Quantia.

Wealthy Investors

Debiche, along with hundreds of other trading professionals, departed long-only investing for the hedge fund industry over the last few years. These private investment partnerships cater to institutions and wealthy investors. They are free to take long and short positions in equities, fixed-income securities, currencies, options, futures and other derivatives. Hedge fund assets have more than doubled in the past four years to an estimated $1 trillion.

For some institutional professionals, part of the allure until recently was that hedge funds were seen as freewheeling and lightly-regulated entities. For traders who toiled at traditional long-only funds, the hedgies also offered the tantalizing promise of better compensation.

It is now more common for buyside traders at traditional long-only funds, as well as pros on the sellside, to make the jump to hedge funds. For example, Matt Andressen, the former Island ECN hotshot and head trader at Sanford C. Bernstein, moved to Citadel Investment Group, one of the world's largest hedge funds. Andressen is president of Citadel Execution Services.

To be sure, the variety of hedge fund operations is diverse. In part, that's because the investment opportunities are dynamic. Citadel, which has some $10 billion in assets under management, has expanded its derivatives operations. It recently announced plans to make markets in equity options on the Pacific Exchange (PCX). Citadel also makes markets on the International Securities Exchange, the Boston Options Exchange and the Chicago Board Options Exchange. Citadel said it will open its PCX operations as a Remote Market Maker (RMM) on PCX Plus, the Pacific's new electronic trading system. Andressen noted that Citadel planned to follow that as a Lead Market Maker (LMM) on the PCX trading floor.