36 South Readies Tail Risk Strategy

Article in Hedge Fund Alert

36 South Capital, whose [previous left tail fund] famously gained [significantly] during the 2008 market crash, plans to roll out its next tail-risk offering within a couple of months.

The planned vehicle originally was set to launch a year ago, but was put on hold due to the market turmoil in the second half. The volatility made it prohibitively expensive for 36 South to pursue its tail-risk strategy — namely, buying options on a smorgasbord of equity and fixed-income instruments, commodities and currencies. Such a strategy is designed to produce outsized profits when markets crater, just as the [previous fund] did during the financial crisis.

Had 36 South begun trading the Black Eyrar Fund last year, it may well have been profitable. A separate account set up in 2010 to pursue a similar strategy gained [substantially] in 2011.

In recent months, options pricing has stabilized to the point where 36 South now feels comfortable proceeding with the fund launch. It is expected to start out with at least $20 million.

Since 2008, increasing numbers of institutional investors have sought to hedge against extreme market events via tail risk strategies, typically investing 1-5% of their overall assets. Tail-risk funds are designed to lose money when markets function normally, but post triple-digit gains during a crisis. [The new fund], for example, would be expected to drop about 20% annually when asset prices are rising. But in the event of another crash, the fund would return 2-10 times investor capital — something the manager anticipates happening once every five years on average.

36 South shuttered [the previous left tail fund] in early 2009 after investors withdrew their profits amid the financial turmoil.

The London firm had just shy of $500 million under management as of last month — up about $200 million in the past year. Its existing offerings include [the higher risk flagship strategy], which pursues a volatility strategy that has [gained] since its March 2011 launch; an inflation hedge that has [lost] during the same period; and the [lower risk flagship strategy], which launched in 2002 and has produced a [positive] average annual return.

The [lower risk] flagship vehicle maintains a conservative stance, investing about 25% of its assets in options, and the rest in U.S. Treasury bills and cash.

36 South was founded by Jerry Haworth and Richard Hollington in Auckland, New Zealand. They later relocated to the U.K. to be closer to European investors.