Bloomberg News

Fortress Hires Ex-Artradis Managers for Tail-Risk Strategies

October 25, 2011

(Adds VIX index performance in ninth paragraph.)

Oct. 25 (Bloomberg) -- Fortress Investment Group LLC hired former hedge-fund managers from Artradis Fund Management Pte to head a new strategy that seeks to produce payoffs when there are unlikely occurrences that may prove disastrous for investors.

David Dredge and Andrew Wong joined as co-chief investment officers of Fortress’s Convex Strategies Group, while Julian Ings-Chambers is its head of business development and investor relations, Gordon Runte, a spokesman for the New York-based firm, said in response to queries. The team, based in Singapore, is part of Fortress’s liquid-markets business, he said.

Demand for protection against so-called tail risks, or low- probability events, is increasing as the contagion from the European debt crisis has spread to banks. Pacific Investment Management Co., manager of the world’s largest bond fund, Deutsche Bank AG and Citigroup Inc. are among firms offering clients tail-risk protection, either through funds or traded instruments that act as hedges.

Europe is “destined for a significant recession,” whether it steers through the debt crisis “in a modestly positive construct or a complete mess,” Adam Levinson, Singapore-based co-chief investment officer of the firm’s macro funds, said at a hedge fund conference in Singapore on Oct. 21.

Dredge, 46, and Wong, 40, were former portfolio managers at Artradis, the Singapore-based hedge fund which closed in March. Julian Ings-Chambers, 44, was an ex-Artradis managing director.

Fortress plans to start a volatility-based convexity fund next year, Levinson said last week, without providing details.

New Fund

The Convex Strategies Group may set up more than one fund and will work with clients to design tail-risk strategies that protect them against results that fall outside normal statistical distribution, three people with knowledge of its plan said, asking not to be identified because the information is private. Runte declined to comment about the group’s strategy.

Traders stand to win more than they can lose in trades with “positive convexity.” The strategy works best in volatile markets.

U.S. stocks posted unprecedented swings in the third quarter on concern Europe’s debt crisis will spur the second global recession in three years. The Chicago Board Options Exchange Volatility Index, derived from prices paid for options to protect equities from losses, averaged 30.6 during the quarter, the highest since 2009, according to data compiled by Bloomberg.

The term long-tail risk is derived from the outlying points on bell-shaped curves that forecasters use to plot the probability of losses or gains in a given market. The most probable outcomes lie at the center. The least probable, such as a decline of 5 percent in an index that most days rises or falls by less than 0.25 percent, are plotted at the “tails” of the curve. The greater the deviation, the longer the tail.

Trading on Volatility

The Convex Strategies Group seeks to produce returns that aren’t correlated with the market by trading instruments that thrive on volatility, such as options, the people said. Options give investors the right to buy or sell securities at a predetermined price.

The strategies will be driven by client demand and will trade various assets worldwide, the people said.

Michael Novogratz, a principal and co-chief investment officer of Fortress’s macro funds, said in August the firm expects to add two more hedge funds within 12 months. Growth outlooks have deteriorated globally as nervous investors lose confidence amid “political gridlock,” and fiscal and debt issues in the U.S. and Europe, he said then.

Fortress, the buyout and hedge-fund firm run by Daniel Mudd, started an Asia-focused macro hedge fund in March after Levinson moved to Singapore from New York in January.

Artradis, founded by Stephen Diggle and Richard Magides in 2001, closed down in March after giving investors in the firm’s volatility funds their money. Once Singapore’s biggest hedge- fund manager, it made $2.7 billion for investors as markets see- sawed in 2007 and 2008, and lost $700 million for clients as volatility declined the following two years, Diggle said in May.

--Editors: Linus Chua, Andreea Papuc

To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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