Malachite Capital Returns 14.47% in Debut Year

Jan 28 2015 | 6:02am ET

Hedge fund Malachite Capital Partners had a solid first year, returning 14.47% net in 2014.

In a down-year for hedge funds, Malachite significantly outpaced the NewEdge Volatility Trading Index, which dropped  0.72%.

Co-founders Joe Aiken and Jacob Weinig described the new vehicle as “a derivatives relative-value fund.”

“Joe and I are pleased with this year,” Weinig said. “2014 was quite an interesting year in the volatility space. It started out with a decent amount of volatility, which declined dramatically mid-year, and then rebounded with a vengeance into October and December.”

In a conversation with FINalternatives earlier this month, the Malachite founders discussed their first year as hedge fund portfolio managers since departing Goldman Sachs and why they think their volatility strategy differentiates them from traditional funds and other volatility managers.

The Great Diversifier

Last week, Mohamed El-Erian, chief economic adviser for Allianz, told CNBC to brace for increased volatility in 2015. Citing risks from a stronger dollar and the move by the Swiss bank, to problems in Russia and other emerging markets, El-Erian warned, “We're going to see a lot more volatility.”

The term “volatility” has taken center stage in the markets over the last few years after it was largely absent from the media lexicon before the financial crisis.

“Prior to 2008, volatility was not necessarily an asset that was commonly traded within an investment portfolio,” said Weinig. “Now, whether it’s the VIX or pundits discussing market volatility on CNBC, it is front and center on everyone’s mind. And this has become the norm both when volatility is high and when it’s low. If you look back to last summer, volatility across all asset classes was at remarkably low levels, yet was still something that market participants were discussing.”

When Weinig and Aiken founded Malachite in 2013, they focused on ways to trade on volatility in different market environments. One of the fund’s central arguments is that certain derivative products are mispriced and misunderstood by the market. “To us, the strategy is more derivatives relative-value as opposed to a volatility-arbitrage fund,” Aiken said.

“Our goal was to build an uncorrelated, market-neural, absolute return derivatives portfolio with the ability to profit through any market environment,” said Weinig. “However, we appreciate the particular significance of using volatility to make money in times of market stress.”

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