A large number of hedge fund seeders and allocators – who are not as comfortable with options-centric strategies – may be unaware that the large funds they are invested in have positions in options-centric strategies.
Vincent Au, the portfolio manager at New York-based hedge fund Gondor Capital Management, an emerging fund management company that has consistently delivered strong returns since inception, said that just looking at its 13Fs fillings will prove many big brand hedge funds actually use options.
“The use of options is the exact definition of real hedging device,” Au said. “People today still think options are a device for casino players or WMD, which is not true.”
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specific strike price on a specified date, depending on the form of the option. The strike price may be set by reference to the spot price (market price) of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount to a premium. Options are a type of derivative security. They are a derivative because the price of an option is intrinsically linked to the price of something else.
Au said there are times the use of options limits his upside and downside versus the open market purchase of the equities, however. He explained people look at options as a device for casino player or WMD because some investors think of options only as a leveraged directional instrument.
At the same time, Au stressed that many hedge funds short as a hedge against their longs. He said that “while one can short equities, one can also use options as a natural hedge as well.”
He revealed options provide several advantages and he credits their use for the stellar performances of his two hedge funds.
Gondor Capital’s onshore Gondor Partners LP closed 2016 up 26.53% (up 1.64% in December) while the offshore Gondor Funds LTD gained 26.85% during the same period (up 1.78% in December), which earned both hedge funds the distinction of being included in Preqin’s Top Performing Relative Value Strategies Hedge Funds for 2016.
Through April, Gondor Partners LP gained 8.32% (up 0.36% month to date) while Gondor Funds LTD generated strong 7.75% returns during the same period (up 0.43% month to date).
“Options and risk management can hedge underlying positions and limit losses though it can also limit gains, that is a trade-off I am willing to accept,” Au said.
In the near term, Au is expecting periods of sudden volatility, which he will embrace with his shopping list.
