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AM Investment, BAM Capital Merge as Volatility Funds Suffer

Date: Tuesday, March 30, 2010
Author: Bloomberg

AM Investment Partners LLC, a $300 million hedge-fund firm, will combine with BAM Capital LLC as managers that bet on price swings seek to shore up assets eroded by the financial market rebound.

“This is a merger of equals,” Mickey Mandelbaum, a spokesman for AM Investment, said in an interview yesterday. BAM Capital founders Ross Berman and Hal Mintz will become equal partners with Mark Friedman and Adam Stern, who started AM Investment. Both firms are based in New York.

BAM Capital’s assets have shrunk to about $300 million from a peak of about $1 billion in 2008 because of investment losses and investor withdrawals. The firm, set up in 2002, last year created a separate fund for hard-to-sell assets, a so-called side pocket, which would be liquidated over time, according to a November investor letter.

“I expect to see more combinations in the hedge fund industry,” said Michael Gray, an attorney at Chicago-based Neal Gerber Eisenberg LLP, whose clients include hedge funds. “Especially in this environment, a larger asset base attracts the larger investors.”

Volatility hedge funds have underperformed this year as price swings moderated with the financial market recovery. JD Capital Management LLC, a $350 million fund based in Greenwich, Connecticut, this month hired Denny Wong and Achal Agarwal, who shut down their volatility hedge fund Volathon Capital Management LLC, a year after starting it.

Lagging Behind

The Chicago Board Options Exchange Volatility Index, or VIX, the benchmark gauge for U.S. options prices, closed at 16.35 on March 23, the lowest since May 15, 2008, and below the 20.29 average over its two-decade history. The index slumped 1 percent to 17.59 yesterday.

The VIX had its biggest annual drop ever in 2009, falling 46 percent, as the smallest stock-market swings in almost two years reduced the value of equity derivatives. The gauge is still down 78 percent from a record 80.86 in November 2008.

Volatility funds have lost 3.16 percent in the first two months of the year, according to the Newedge Volatility Trading Index. Hedge funds globally have returned an average 0.85 percent in the first two months of the year, according to the Credit Suisse Tremont Index.

Friedman and Stern, two former Deutsche Bank AG executives, started New York-based AM Investment in 2001. Stern will remain chief executive officer, while Friedman, Berman and Mintz will be co-chief investment officers.

Volatility Arbitrage

No money is changing hands in the deal, which provides for BAM Capital to be absorbed in AM Investment, according to a person with knowledge of the transaction who asked not to be identified because the information is private.

AM Investments onshore volatility-arbitrage fund has lost 2.1 percent in the first two months while its leveraged volatility-arbitrage fund has declined 3.2 percent, according to an investor letter. AM Investment also trades convertible bonds, which are securities that can be converted into shares at a preset price.

Options are derivatives that give the right to buy or sell assets at a set price by a specific date. Investors use the contracts to guard against fluctuations in the price of securities they own, or speculate that volatility, or price swings, will increase or decrease.