‘Black Swan’ hedge fund plans UCITS vehicle

36 South, the hedge fund whose ‘Black Swan’ vehicle returned 200% in 2008, plans to launch a UCITS version of its long-volatility structure for investors concerned with the current market environment.

36 South CEO and CIO Jerry Haworth said the London-based fund is hoping to launch its first UCITS fund in the third quarter of 2014, in response to what he described as a “burning need” for volatility protection.

Marcus Brookes, head of multi-manager at Schroders, told Investment Week earlier this month that 36 South’s Black Eyrar strategy is the only fund he can find that displays sufficient inverse-correlation with equity markets.

But he added he could not invest in it due to daily dealing requirements.
Speaking to Investment Week, 36 South founder Haworth (pictured) said the group has put the development of a UCITS vehicle “on the front burner”, although the product may differ slightly from the Eyrar fund.

He said the group is still wrestling with the issue of how to incorporate a long-volatility strategy into a UCITS structure, given the more stringent requirements regarding liquidity, transparency, and valuation of derivative positions.

“As our funds stand at the moment, we would not be able to simply migrate them to a UCITS structure. We have got our design caps on and are interested in getting the best possible structure for long-volatility,” he said.

“I do think it is important, and there is a burning need out there. We view volatility on a five-year cycle, and it is certainly in the lowest 20% of that cycle at the moment.”

Although all 36 South funds are long-volatility strategies, the UCITS offering will be most similar to the company’s Kohinoor strategy, which targets both ‘left tail’ and ‘right tail’ volatility: extremely low or extremely high returns respectively.

This is in contrast to the Eyrar and Black Swan strategies, both of which focused on left tail risk. The Black Swan fund returned 204% in 2008 by capitalising on the market ruptures triggered by the financial crisis.

Haworth acknowledged the more generalised strategy would sacrifice some potential return in a downside scenario, but pointed out the bullish environment also carries risks for left tail strategies.

“It is all very well having a left tail fund, but if the market keeps rising, you get a problem called strike relevance.

“If the market moves up 20%, what you bought beforehand may not be so relevant, even in the event of a 20% correction.”