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October 1, 2013

Mariner Bets on Stormy Seas

A new multi-strategy incubation fund is placing bets on predicted volatility and a tighter, less forgiving investment environment

By By Mary Schroeder

In today's volatile market, the smart thing might be to take advantage of volatility instead of waiting for calmer waters. Mariner Investments Group, a New York hedge fund, recently set up a multi-strategy incubation fund to be managed by leading investment talent. Its strategy is keeping an eye on volatility.

The firm has tapped Eric Pellicciaro, former head of global rates investments at BlackRock, and Richard Rumble, former head of global emerging market equity prop trading at Goldman Sachs. Pellicciaro is managing a global macro portfolio, while Rumble is managing a global emerging market equity portfolio.

The portfolios have initial investments ranging from $50 million to $100 million.

Peter van Dooijeweert

Most recently, the firm, which manages $10 billion with associated advisers, tapped Peter van Dooijeweert, the former head of equity relative value trading at Citigroup, to run a global equity volatility portfolio.

Mariner decided to invest in an equity volatility strategy because it sees benefits from increased volatility without the huge premiums of tail risk hedges. "About two years ago, tail hedging was all the rage, and what we've had since then is a very strong rally. And suddenly the tail hedges you thought were nice sure just look like excessive life insurance," said Van Dooijeweert.

Both Mariner and Van Dooijeweert expect the markets to become more volatile as the U.S. Federal Reserve begins to remove the accommodations it had put in place following the credit crisis of 2008. That will means "no more quantitative easing, no outright stimulus support, no stimulus from the federal government," Van Dooijeweert said. "There are a lot of forms of supports to the equity market that are going to be going away."

Equity volatility trading is designed to take advantage of dislocations in the market among options, said Van Dooijeweert. The new fund will look for things that its traders think are either fundamentally mispriced or mispriced from a model. Once this discovery is made, Mariner will pounce. "The more erratic the market is, the more opportunity we see," he said.

When making decisions about portfolio managers and strategies, Mariner is looking for talent that has left the investment banks and to allocate where the banks aren't allocating capital any longer. "We have seen the investment banks step back from the options market, which means that the dislocations within the options markets should be increasing," said Van Dooijeweert. "That is consistent with the goal of this platform, which is to look for opportunities not to just hire good teams but to put capital to work in places capital is no longer being put to work."