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July 2, 2013

Seeking Alpha

New York hedge fund creates value trading index options

By Mary Schroeder

Time marches on.

As the financial crisis of 2008 recedes into memory, the market surges upward and volatility subsides, investor demand for options as protection fades. While clients are still concerned about risk, they are also interested in making money in the current low-interest-rate environment.

One hedge fund manager, which offers both an alpha fund and a tail-risk strategy designed to protect against crisis periods, is finding that clients are opting for the alpha strategy after comparing the two. A fund's alpha is the excess return of the fund relative to the return of the benchmark index.

Justin Golden

"When interest rates are as low as they are, investors have to reach a little further to find absolute return. So any positive alpha businesses are attractive right now," said Justin Golden, chief operating officer of Lake Hill Capital Management, a hedge fund specializing in quantitative strategies using exchange-traded derivatives.

Lake Hill was founded in 2005 by Zem Sternberg, the firm's CEO and a former managing director at Salomon Brothers, and Scott Kovarik, a former partner at George Weiss Associates and head of quantitative research at Lake Hill.

The money manager has $100 million in assets under management and offers three strategies: the tail-risk program and two alpha strategies. One invests in equity index options, and the other also includes energy, metals and other commodity futures and options.

Zem Sternberg

The hedge fund, which makes money via electronic trading in support of its strategies, first made the strategies available to the public in late 2011. Clients, who invest in the firm's strategies or have separately managed accounts, include institutional investors and high-net-worth individuals. The firm, which is paid via performance fees, can also run its strategies inside client accounts.

Potential clients often come to Lake Hill with an interest in the tail-risk strategy. But after comparing it with the alpha program, they usually opt for the latter, Sternberg said.

The decision they must make: Would they rather have alpha, or would they rather pay to protect their beta, or market exposure? The cost of hedging that beta can be expensive and can degrade returns, Golden said.

However, in choosing one of Lake Hill's alpha programs, which are relative value volatility funds, these clients are not necessarily embracing risk. That's because the fact that the alpha strategy's performance is not correlated with the S&P 500 Index helps clients achieve diversification, Golden said.