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Ex-Lehman Traders' Hedge Fund Had Best Month in May by Shorting

Date: Friday, June 11, 2010
Author: Boston Business Journal

Omnix Multi-Strategy Fund, run by two former Lehman Brothers Holdings Inc. traders, returned 6 percent in May, when hedge funds globally posted the worst month since 2008, by placing more bearish than bullish bets.

The Asia-Pacific-focused fund’s net-short position, the difference between short and long investments, peaked at 50 percent of its almost $25 million assets under management in May, said Paul Penkett, 39, Omnix’s Hong Kong-based co-founder and chief investment officer. The Eurekahedge Asian Hedge Fund Index is estimated to have dropped 4.2 percent during the month.

Omnix expected tightening measures in countries like China, the deepening sovereign debt crisis, and regulatory changes to reverse last year’s stimulus-fueled market rally, Penkett said.

“We felt that the Hong Kong and China markets, equities specifically, would do poorly,” he said in an interview yesterday. “The key beneficiaries of Chinese demand would do poorly as well, specifically the commodity-related names and the Australian market.”

The Omnix fund outperformed in a month when the debt crisis in Europe reduced the appetite for risky assets, pushing the MSCI World Index down 9.9 percent and hurting bonds. The HFRI Fund Weighted Composite Index dropped an estimated 2.3 percent, the worst monthly return since November 2008 when the collapse of Lehman two months earlier led the gauge down 2.7 percent.

The Omnix fund shifted from a neutral net position to having a net-short position in mid-April, building up shorts after market moves confirmed the manager’s views, Penkett said.

‘Act II’

Hedge funds increased short positions, or betting against Lehman’s stock, in the week leading up to the Wall Street firm filing for bankruptcy in September 2008. Lehman’s shares on loan surged 82 percent to 128 million shares as of Sept. 11, 2008, from 70.9 million shares on Sept. 2, Data Explorers said at the time. Lehman filed for bankruptcy protection on Sept. 15.

The world has just entered “Act II” of a crisis that is “far from over” with Europe’s fiscal woes worsening and governments under pressure to cut budget deficits, billionaire investor George Soros said in Vienna yesterday.

Hedge funds managed by Paulson & Co., Viking Global Investors LP and Moore Capital Management LLC, among the best long-term investors in the industry, lost money in May.

“May serves as a reminder that managers that maintain a nimble and flexible balance sheet can expect to outperform in certain periods of heightened uncertainty,” said Alexander Kalis, a managing partner of London-based Think Alternative Advisors LLP, which provides research and consultancy services on Asian alternative investment products.

Short Positions

At the end of April, the fund was devoting 36 percent of its assets to shorting stocks and bonds in Hong Kong and China, compared with 26 percent of long investments, according to its newsletter that month. Shorting typically involves selling borrowed securities expecting their prices to fall.

Short positions in commodity-related stocks and bonds, such as those of Australian resources companies, represented 24 percent of the fund’s assets in late April. It was also bearish on Japan, a major exporter to China.

It shorted stocks and bonds of financial companies, mostly in Australia, in anticipation that their reduced use of leverage and closer regulatory scrutiny will erode their return on equity, Penkett added. The S&P/ASX 200 Finance Index tracking 39 such stocks ended May down 10 percent.

It bought put options on some indexes and single stocks, believing the market underpriced volatility, or price swings, Penkett said. The fund sold some of the options after market volatility increased in May. A put option gives the owner the right to sell a specific amount of a security by a certain date.

The Chicago Board Options Exchange Volatility Index, the benchmark gauge of U.S. stock options better known as the VIX, hit 48.20 on May 21, more than tripling its April 12 low.

Penkett, Cheng

Last month’s best ever gain for the Omnix fund brought its return to 7 percent this year through May. Eurekahedge Asian Hedge Fund Index retreated 1.3 percent in the same period.

The fund ended the month with a 12 percent net long position, after closing some short trades to lock in profit as market volatility picked up and securities prices dropped.

Omnix Capital Ltd., the fund’s management company, was set up in January 2009 by Penkett and Stephen Cheng, 40.

Penkett was until 2008 a Hong Kong-based managing director of Lehman where he led a 15-person team that focused on equity, credit and volatility trading in Asia-Pacific.

Cheng ran UBS AG’s Asia fixed-income research team in Asia- Pacific and led its credit trading team in Asia until 2007. He was a member of Lehman’s Asia equities proprietary trading team before starting Omnix.

“In contrast to previous years, many hedge fund managers are now more mentally prepared for the possibility of severe market turmoil and have adapted their portfolio construction accordingly,” said Kalis.