T&T Capital Finds A New Sweet Spot, Targets Institutions

Nov 17 2006 | 1:36pm ET

Hedge fund firm T&T Capital Management has overhauled its three-year-old Sweet Spot Fund, a volatility arbitrage vehicle, and is now gearing up its marketing effort with the aim of attracting institutional investors.

Teymuraz Eliazov, the fund’s portfolio manager, explains that following three years of high returns that failed to attract many new investors, he decided that in order to attract institutions, he would have to lower the fund’s volatility and raise its capacity.

The fund now makes only index-based investments as opposed to equity investments. According to Eliazov, this keeps volatility low and returns steady, albeit lower than the before.

"At the beginning we were aiming to generate very high returns, like 20% to 30%,” says the Russian-born nuclear physicist, “but risk and return are related to each other, and right now we have changed our approach and are aiming at more moderate, but more stable, returns.” He adds that the fund is shooting to return 1% to 2% each month, and 14% to 18% annually.

Eliazov, who previously served as global head of equity derivatives at Rabobank International, explains that another change he and his team have made is to switch the strategy to be long volatility biased, which makes it, in general, non-correlated to major indices.

“One of the main advantages of volatility as an asset class is that it is negatively correlated to the underlying assets, and as such it could provide diversification to multi-strategy funds,” says Eliazov. “We are now long-volatility and that allows us first of all to meet the demand of the market for the volatility as downside protection… and on the other hand, since we moved toward indices, that increases the consistency of the fund itself.”

Eliazov is no stranger to volatility in his personal or professional life. In 1979, after graduating from the elite Moscow Physical Technical Institute, which then fell under the aegis of the Soviet Union’s defense apparatus, he immigrated to the United States, where he immediately landed a position at City University New York assisting a professor who was working on a project for NASA. Eliazov jokes that the project, which involved creating models to control the solar panels of the space station, was very similar to what he is working on now, developing stochastic models of how volatility evolves in time and space.

“A lot of people compare volatility arbitrage trading to three dimensional chess,” he says. “You have volatility, the underlying instruments and time, and you have to envision how these variables interact.”

Carl Berg, the firm’s business director who joined T&T earlier this year, explained that interest in volatility as an asset class is picking up, and he believes that in time, investors will see that the firm’s volatility arbitrage strategy is a winner.

“Volatility as an asset class is strongly emerging,” says Berg.

Eliazov adds, “A few years ago it would have been very hard to execute a strategy like ours… but in the last few years the explosion of the derivatives markets coupled with trading technologies have made it possible to do this.”

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