Leverage, Note Facility Add Sparkle To Diamond Arbitrage Fund

Apr 28 2006 | 2:58pm ET

OBEX Parity Arbitrage Fund Limited has recently launched a new fund--the Government Arbitrage Diamond Fund--which will mirror the firm's existing fixed-income arbitrage fund, but will also employ greater leverage and a note facility.

"The main difference between the Government Arbitrage Enhanced Fund and the Government Arbitrage Diamond Fund is that Diamond has two-and-a-half times the leverage of Enhanced, but what is also pretty neat about Diamond is that it has a borrowing facility by way of a note issued by the shareholders to the fund," said Randall Katzenstein, president and ceo of OBEX Investments, the investment manager. He explained that investors in the Diamond Fund, which officially launched in January, only needed to put down 30% of their committed capital.

"Since we are so efficient with our use of capital, we issue calls to our clients in Diamond only when we require the capital, so it is almost like private equity in the old days when people would commit money when they subscribed to the fund," he said. "On day one, we were requiring 30% of the initial investment. So, if an investor subscribed to invest $1 million in the fund, he had to put in $300,000, but thereafter, if we create more cash through profitable trading--say in month four that cash has been built up to $400,000--then a new investor will have to come in at $400,000 so everybody is on the same playing field."

The note facility is only open to offshore investors, but the firm's custodian is helping to create a swap mechanism that will allow onshore investors to utilize it as well.

The new fund is being managed by Andrew Saideman, who also serves as portfolio manager of the firm's first fund. "We are looking to only take arbitrage spreads," Saideman said. "Periods of intense volatility are normally good for us."

The new fund currently has $12 million in assets under management, which has come from one large hedge fund. The total assets under management in the strategy is $25 million.

In addition to its money management arm, OBEX has an affiliated registered broker-dealer. "We are looking to grow the broker/dealer business with smaller hedge funds with $10 million minimum AUM," Katzenstein said, adding he does not take on day traders or very small funds, such as those managing $1-2 million.

"We are a mini-Merrill Lynch," Katzenstein chuckled. "We can offer [our clients] futures clearing, foreign exchange ability through our various clearing relationships, and what's really nice is we can give them leverage--both in fixed-income and in equities-- pretty much as much as they would require, subject to our due diligence and risk control."

OBEX Group employs eight people, including a compliance officer, and the firm is looking to hire savvy commodity relative value traders and more marketers. "For our Investment Manager, we are looking for junior traders in the interest rate space," Katzenstein said. The firm also has a third party marketing business, which has raised about $600 million for outside money managers.

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